PCP has Another Year

We finally have some good clarity on the 787 program from PCP. After another good quarter, PCP was able to shed light on the 787 Program and their involvement in the current aerospace cycle. To cut to the chase, yesterday's conference call told me that I will be seeing long term capital gains on my stock - this uptrend in the cycle has at least a year or more to go for PCP.

I love listening to Mark Donegan. This is a guy that seems to talk straight. Not a lot of mumbo jumbo on the call, just the facts and PCP once again delivered a great quarter. As advertised going into Q2, the primary story was the overall continued growth and 31% increase in revenue. Margins expanded to 21.4% from 17.6% year over year and earnings were $1.67 (better than the expected $1.64) and better than last year’s $1.03 (a 62% change year over year).

Their Investment Cast Products group saw sales growth of 25% (year over year) with heightened OEM demand and growth in the replacement market. They expect no push out from 787 program schedule delays and that this will be an extremely solid contributor going into the future for the company. They are seeing an expanded customer base and are planning to add additional capacity which includes four airfoil furnaces installed over the next six months, and a new IGT facility for PCC airfoils in the next 12-15 months.

Their Forged Products group saw sales growth of 38.5% year over year with strong aerospace volumes and also strong volume in non-traditional customers (e.g. Chinese natural gas wells, etc.). They also continued to build in seamless pipe with a backlog that now exceeds $500 million (no signs of easing demand here). This group did, however, also have more than $600 million of negative impacts including a six week outage of their 50-ton press (this was planned) and production inefficiencies during the Houston Strike (unplanned).

Their Fastener Products Group had sales growth year over year of more than 25% with huge improvements in operating income (47%) and continued big increase in aerospace sales. Their fastener acquisitions have allowed PCP to gain market share by more than 2X with certain customers and they are still looking for more market share gains in the near future.

Other items of note is that their cash flow allowed the company to pay for the Caledonian Alloys acquisition entirely within the quarter. They are also expecting more than $30-34 million in Capex within the short term. Finally, they are expecting to have five less manufacturing days in Q3 than Q2 due to holidays, etc.

During the Q&A session, Mark Donegan was asked about whether the company saw any titanium cost of sales adjustments in Q3. He believed that materials have pretty much leveled out and they expect material pass through to come down year over year going into next year.

When asked about the possibility of tuck-in or game changing M&A, Mark stated that they are very active looking at tuck-ins. This is changing in that tuck-ins are getting bigger and could be as large $1 billion. PCP would be disappointed if they were not active in the tuck-in world over the next 6-8 months.

Some key facts that will be helpful for further analysis is that 787 shortage situations are something that PCP is trying to take advantage of and that PCP is doing about $5 million in business per 787 aircraft on average. They also expect the aerospace cycle to cause demand in the short haul to exceed their capacity during the next 12 months. In addition, what the customer is wanting tends to be a better mix than in the past.

Also the 787, from a design standpoint, did not seem to have any big re-tools and the company sees no changes in the planned ramp up. All the companies capacity is fully sold out in the next year and they expect organic growth in 2009 to be larger than 2008.

Finally, and most importantly, Donegan expects the peak of their cycle to be moving well past 2011. This tells me that I have some time yet continue to ride this horse. They also discussed LIFO improvements that may slightly juice EPS over the next year if materials stay under control as expected. This was a great quarter and still a long term hold.

I did sell PCP calls today (I still have some Dec calls) to move from overweight to proportional within my portfolio. Today's tape was a gift allowing me to sell into strength this afternoon. I am now in great cash position if the market goes south.

One other note is that I bought some puts for TIE. I also basically rolled over some AAPL calls when the intraday low allowed me to buy the dip and then sell existing calls later in the day at a higher price. Great trading day!