Precision Castparts Upgraded - Analyst Blog

International credit rating agency Standard & Poor's has upgraded the rating on Precision Castparts Corp’s(PCP) long-term corporate debt to ‘A-“ from “BBB+” with a stable outlook. The agency has upgraded its rating on the company’s short-term debt by a notch from “A-2” to “A-1”.

 

The rating action comes in response to robust funds from operations, which is a direct result of strong cash flow from operating activities. Besides, the company had extremely low debt to capitalization ratio of 3.9% at the end of the most recently completed quarter.

 

The company had $286.4 million of cash at the end of the first quarter of 2011, with debt balance of $251.0 million and shareowners’ equity of $6.15 billion. It paid off all the debt incurred to acquire two businesses in fiscal 2010.

 

Because of the complexity of the manufacturing process and the application of proprietary technologies, PCP is currently one of the few manufacturers that can consistently produce the largest, complex, structural investment castings in quantities sufficient to meet customers’ quality and delivery requirements.

 

Its emphasis on low-cost, high-quality products with a timely delivery has enabled it to become the leading supplier of structural and airfoil castings for jet aircraft and IGT engines and to expand into the structural airframe and armament markets. The commercial aerospace market cycle is a critical determinant of demand for precision investment casting products.

 

Large jet aircraft engines are manufactured by a small number of suppliers, including General Electric (GE), Pratt & Whitney (a division of United Technologies Co., UTX) , Rolls-Royce and several joint ventures. As a result, it is believed that a high level of customer service and strong as well as long-term customer relationships will continue to be important for achieving corporate goals.

 

PCP has been supplying castings for jet engines to GE for more than 40 years, and has been supplying Pratt & Whitney with castings for more than 30 years for its military and commercial jet engines. In addition, PCP has supplied small structural investment castings to Rolls-Royce for approximately 25 years and large structural castings for approximately 20 years, most recently for use in its Trent series of jet aircraft engines. As PCP has been able to cast larger and more complex parts, manufacturers of large jet aircraft engines have made increasing use of its structural castings.

 

We currently have a Neutral recommendation on Precision Castparts Corporation.