Precision Castparts Deal Targets Airbus, Boeing Output Gain
Precision Castparts Corp. (PCP)’s $900 million purchase of aerospace supplier Primus International may yield higher earnings growth as customers Boeing Co. (BA) and Airbus SAS ramp up production of commercial jets.
Primus makes parts for jets including Airbus’s A320 family and Boeing’s 737, which compete in the biggest commercial plane market. Both Airbus and Boeing said they are boosting output this year to work off high order backlogs.
“Similar deals will be seen down the road for Precision and its peers as airframers continue efforts to reduce the number of vendors dealt with,” Stephen Levenson, a New York- based analyst with Stifel Nicolaus, said today in a note to clients. He has a “buy” rating on Precision Castparts’ stock.
The purchase of Primus from private-equity firm Oak Hill Capital Partners, announced yesterday, is the fifth deal from Portland, Oregon-based Precision Castparts this year.
“Precision Castparts has been looking to broaden its business opportunities in its core markets,” Howard Rubel, a New York-based analyst with Jefferies & Co., said in a note to clients today. “The company has found a significant opportunity with the acquisition of Primus.”
Precision Castparts agreed in June to buy both the rings operation unit of General Electric Co.’s Unison Engine Components, which makes equipment for jet engines and gas turbines, and PB Fasteners, which supplies parts for planes including Boeing’s composite-plastic 787 Dreamliner.
Any acquisition must be an “expansion of what our product offering is,” Precision Castparts Chief Executive Officer Mark Donegan said in May.
The deal comes as Chicago-based Boeing plans to boost output of the narrow-body 737 by 33 percent, to 42 a month, and Toulouse, France-based Airbus ramps up production of the rival A320 to 42 a month from 36.
Precision Castparts announced the acquisition nine months after an unsuccessful attempt to buy aircraft-parts supplier McKechnie Aerospace Holdings Inc., which was purchased by TransDigm Group Inc. for about $1.27 billion in December.
Primus’ production of components, passenger and exit doors and flight-control assemblies will expand Precision Castparts’ existing airframe business, reaching a market similar to the one the company attempted to gain with McKechnie.
“These products move PCP in to several new areas within commercial aerospace, many of which are expected to grow faster than the industry on average and have a favorable competitive landscape which would allow for share gain,” Noah Poponak, a New York-based analyst with Goldman Sachs Group Inc., said in a note to clients. He recommends buying the shares.
The $900 million cash purchase of Bellevue, Washington- based Primus, expected to be completed in the third quarter of 2011, will add to earnings immediately, Precision Castparts said in a statement yesterday.
Based on similar transactions, Precision Castparts may have paid more than ten times earnings before interest, taxes, depreciation and amortization, Rubel said.
Primus’s yearly sales may be about $350 million and are likely to grow faster than 10 percent per year, said Rubel, who has a “hold” rating on the shares.
Precision Castparts fell 99 cents to $161.80 at 4:15 p.m. in New York Stock Exchange composite trading, compared with a decline of 1.2 percent by the Dow Jones Industrial Average and 1.8 percent by the Standard & Poor’s 500 Index.
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