Small-Cap Success Stories: Precision Castparts Inc. (PCP)

Michael Teague  |

The path that a company must travel in order to realize its growth aspirations is an arduous one, and success is by no means a given. Unlike the caterpillar (who for the sake of this analogy is more or less guaranteed to make the transition to butterfly), a fledgling company seeking to climb the market-cap scale to a spot at the top of its industry faces incredible odds. Furthermore, in the event that success is attained, it must also be maintained.

Companies operating in the industrial goods sector are no more exempt from this rule than any other. But this is by no means to suggest that there aren’t success stories to speak; there are plenty, even if these make up a statistically small portion of the total number of companies whose shares can be bought and sold on the stock exchanges.

A perfect example in this context would have to be Portland, Oregon’s metal fabricating giant Precision Castparts Corp. (PCP) .

Today a $35.44 billion dollar company by market-cap, Precision is the largest publicly traded company in its sector. As a diversified manufacturer of complex metal components and products, the company has a global clientele composed drawn primarily from aerospace, power, and industrial sectors. It has raked in $1.5 billion in income on nearly $9 billion in sales over the last twelve months alone, with shares currently trading for some $242 after having gained nearly 30 percent in 2013. With a price target just north of $260 per share, it looks as though continued growth is where the company is headed in the near future.

Given the magnitude of the company, it would be fair to say that its trek to large-cap status has been rather quick. At the turn of the millennium, Castparts was trading for under $7. At the end of the aughts, the stock had advanced some 1,580 percent to just over $110 per share, and has more than doubled in price since then. By any metric, this is certainly an impressive success story, but how did it happen?


From Chainsaws to Airplanes

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Precision Castparts origins are indeed humble. In 1949, it set out as a small investment casting business whose purpose was manufacturing parts for chainsaws. But the company quickly realized that it had a special knack for metal-working, which lead to the creation of a casting division that did work for all manner of local businesses. The casting venture was a quick success, and one that necessitated its own business that was eventually incorporated in 1956.

By 1962, the company was able to dwarf competitors when it translated its early gains into the purchase of a 1,000 pound vacuum furnace with the capacity necessary to manufacture castings for aircraft. This led to a contract with General Electric (GE) , who in turn sold the company’s products to the US Air Force, as well as Boeing (BA) and Airbus. It was not long before Castparts was a major player in aerospace, and also not long before it began trading shares publicly, in 1968.


Industry Woes Present Opportunities

This gave the company the ability to further diversify its operations, and at the same time expand them to a global customer-base. A downturn in the aerospace industry in the mid-1980’s put the hurt on profits, as airlines cancelled or drastically reduced their orders, but it also prompted Castparts to diversify its operations to an even greater degree. By the mid-1990’s, the company was making acquisitions to this end, particularly in the industrial gas turbine industry, an industry it would eventually come to dominate when fuel efficiency and reducing emissions became important objectives.

But the addition of an aggressive acquisitions strategy also provided the company valuable experience in managing finances. Casparts would come to acquire a broadly distributed array of end-market metal-working businesses, which necessitated a system of metrics that could simplify the process of determining if its disparate components were performing to expectation, and that could furthermore provide for judicious cost-cutting when necessary.


Rebounding off the Financial Crisis

The financial crash wiped out two-thirds of the stock's value between late 2007 and early 2009, when shares dropped $100, nearly dipping below $50 each. But it was not long before Precision Castparts would recover and continue to grow much faster than it had been prior to the calamity. At present, the company dominates the metal working industry, through expertise, as well as its ownership and skillful integration of most of its different segments, and of course maintains an enormous presence in aerospace.

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