“America’s Hidden Resource: Poised to hand you generous profits”

By Travis Johnson, Stock Gumshoe, July 20, 2009

This teaser ad comes in for a newsletter I’ve written about many, many times over the past couple years, the Motley Fool Stock Advisor.

And this is a good ‘ol patriotic “stand up and cheer” ad — all about how the Chinese can’t beat us when we’ve got some of the most critical technology and brains in the world on our side. Here’s how the ad begins:

“America’s Hidden Resource

“Why China’s ‘Bargain Basement’ factories just can’t cut it…

“Why do Boeing, GE, and Rolls-Royce pay billions for one U.S. company’s “mission critical” technology? Simple, China can’t be trusted to build it!

“Discover the one U.S. company rich in this ‘hidden resource’ — poised to hand you generous profits in the coming recovery…”

Sounds nice, right? The author of the ad goes on to complain that his US flag was made in China … and to bemoan the death of the Pittsburgh steel industry that built the world’s greatest skyscrapers in the 20th century … but then he goes on the optimism offensive, laying out an argument for the fact that the US has the human capital and the technological expertise to control the industries of the future, even if the high-pollution manufacturing jobs are all moving to China.

“Cities are reinventing themselves — thanks to a “hidden resource” that will keep the U.S. on top for a long, long time. And it’s not something you can buy or build.

“It takes decades, sometimes generations, to cultivate…

“America’s “Hidden Resource”

“The U.S. is rich in a precious commodity that you can’t grow or buy.

“One All-American company is particularly flush with this resource. In fact, it’s used it to build a vast high-tech empire. Its products are found in the world’s most extreme environments from 1,000 megawatt nuclear power plants to the engines of an F-22 Raptor.

“I’m talking mission-critical parts here. Especially during a meltdown or war. That’s why the world’s most advanced companies would never consider outsourcing this important work to the lowest bidder (aka China).

“That’s why the world’s most advanced manufacturers pay top dollar to one U.S. company whose engineers and hardworking employees produce unmatched quality and precision. And that’s why YOU should…

“Own this stock before August 8, 2009”

So why August 8? It’s all about the Obama stimulus plan …

“Listen, I wouldn’t waste your time with a company that didn’t have a lot of room to run. Or without a specific catalyst to get it moving. Well, this company’s potential is threefold…

“First, its technology is light-years ahead of the Chinese… Second, it’s swimming in the resource that gives America a huge advantage over foreign competitors… Third, it’s sitting quietly in front of the billion-dollar tsunami The Wall Street Journal calls “a major win for the high-tech industry.”

“In fact, every one of the industries that rely on this company’s technology — energy, aerospace, and construction — is projected to see demand for its products skyrocket in the coming years. Thanks to a phenomenon that will play out by August 8, 2009.

“So what’s this ‘economic force’ that’s driving all this new business?

“It’s none other than President Obama’s stimulus. Now, whether you support the president’s policies or not… there is a ton of money to be made from playing the $787 billion stimulus the right way.”

This company apparently plays off of three “high-tech trends” …

“High-tech Trend No. 1 — The Next Great Jet Age: United Airlines, British Airways, and all the world’s largest carriers are racing to place orders for Boeing’s 787 Dreamliner and Airbus’s mega-jet, the 380. These new, state-of-the-art jets will transform air travel — cutting travel times and using less fuel (lowering ticket prices for you and me.) And this company profits no matter what. Because it owns the technology that BOTH of these planes use to fly faster and more efficiently….

“High-tech Trend No. 2 — The Coming Energy Spike: President Obama is pouring an estimated $50 billion of his stimulus package into “Repowering America” — building new power plants and making existing ones more efficient… and this company is primed to scoop up the majority of the new business. Because it’s a leader in efficient, next-generation power plant technology. From natural gas turbines to tubing for deep-sea oil platforms as well as parts for coal and nuclear power plant parts and even state-of-the-art pollution controls….

“High-tech Trend No. 3 — The Infrastructure Boom: This manufacturer supplies more than 5,000 customers with a diversified number of high-performance metal alloys. Including complex systems and parts for utilities and smart grids. Plus, this company also forges industrial tools that are lighter, stronger, and more reliable than those of the competition.”

So who is it? The first guess for many folks is probably something gigantic like GE … but here’s the last bit of our clues:

“How can one company profit from all these sectors? Is it some sort of conglomerate?

“Quite the contrary, it’s a relatively small company. And that’s why it’s been flying under the radar of Wall Street for so long. But industry insiders know it well.

“And make no mistake, when it comes to the mission-critical technology we’ve just discussed, switching suppliers is costly… and also very risky.

“It’s why you won’t see this company losing business to China. There’s simply no room for gambling on complex, critical components like the landing gears of a jet… engine parts for Navy warships… and metal alloys that can stand up to 2,400F of heat…

“As a result, this company has clawed its way into thousands of companies’ supply chains — practically guaranteeing itself continued business for life!”

So who is it? Well, there’s one solid guess that I get from those clues, but after looking at the pictures given in the ad (they show the “clean facility” of this company next to a smoggy factory photo from China), I can confirm it for sure: This has to be …

Precision Castparts (PCP)

This is a company that has been an investor favorite for a few years, and it has primarily been known — by investors, anyway, as a supplier of precision cast metal parts (so the name makes sense, right) for Boeing and other aerospace companies. They had a huge run for several years, hitting a high of about $150 a share right around the time the market peaked in late 2007/early 2008, and Louis Navellier, everyone’s favorite momentum growth guy, could hardly shut up about PCP. Then, of course, when the economy tanked everyone realized that it was a little silly to overpay so dramatically for a manufacturing company, high-tech or no, if their earnings were going to take a cyclical hit, so the shares collapsed and lost about 2/3 of their value in 2008. They’ve been on a jittery recovery this year, getting up to about $75-80, where the shares now trade.

And PCP looks like it’s certainly now at a much more reasonable valuation than it was in the go-go growth days, whether or not you think it’s going to again become a market darling — and it’s far from a hidden stock, it is in the Fortune 500 and it has more than a dozen Wall Street analysts following the shares. Those analysts think, on average, that PCP will earn roughly $7.50 both this year and next, which means we’re looking at a PE ratio of almost exactly 10.

Precision Castparts does pay a teensy weensy dividend (far less than 1%, and they haven’t shown any particular interest in raising it), it carries no real debt and, though revenues and earnings have slumped a bit over the past year, it remains quite profitable, with profit margins of about 15%.

I don’t have any argument with the choice of PCP — it’s a great company with what looks to me like a pretty defensible market niche, though I’m far from being an expert on high-tech manufacturing, and I have no idea whether stimulus spending will trickle down to them or not (it seems like at least some of it would have to, but I don’t know the math). This is a lot like a conglomerate, however, it’s certainly not a tiny company — they have offices and manufacturing facilities around the globe, under the names of the dozens of small casting, manufacturing, and fastener companies they’ve rolled up over the years.

And I have no idea what the August 8, 2009 date might mean — I assume it was just invented on the premise that the big push has been to have federal stimulus dollars showing some employment gains and economic impact by early August, and I’m sure we’ll all be hearing a lot more about the stimulus for the rest of the Summer, but I don’t really know.

Oh, and the bit about the picture from the ad? I won’t copy it here, but they showed a photo of PCP’s clean facility under blue skies, next to a photo of a Chinese factory. Precision Castparts is headquartered in Portland Oregon, which is both a very green city and a center of intellectual capital and technology, so that makes sense — but the photo was of their headquarters building in an office park, which is perhaps not a fair comparison to a smokestack facility in China.

So what do you think? Will Precision Castparts keep America competitive with a hammerlock on key high tech manufacturing technologies? Or will it, at least, be a profitable investment? Share your thoughts with a comment below.

And if you’ve subscribed to the Motley Fool’s Stock Advisor, click here to review it and let us know what you thought (or, of course, you can also click here to see the reviews from other Gumshoe readers).


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5 Comments on "“America’s Hidden Resource: Poised to hand you generous profits”"

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Bruce
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July 20, 2009 2:26 pm

PCP is not only a casting company, which has bought up some of its competitors, but it is a forging company — because they bought up what used to be Wyman-Gordon. I’m surprised the Justice Department let ’em make these purchases, what with monopoly-like control of the first manufacturing phase of the parts needed to make jet engines. I owned PCP, sold in time to make a nice profit, and I’m watching it now. Given the agony being experienced in the airline industry, and with the airplane builders, I’ll stay on the sidelines for a while.

Dusty
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Dusty
July 20, 2009 5:52 pm

I agree wholeheartedly with Buuce. PCP is the supplier not only of parts for new engines but of replacement parts when the engines need overhaul. My money will wait for the bottom of the Markets when the share price is at a PE of 5 or less, however, and when (almost) new airplanes are no longer being parked/mothballed in the Arizona desert.

Borat
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Borat
September 7, 2009 3:25 am
If casting is high tech, then the US is in trouble. Technologies like electrochemical machining (a form of “sculpting” using electron charges) is already in the hands of Japan, India, South Korea and China. ECM, as it’s usually referred to, is just one of the inexpensive high-precision casting methods that are fairly well-known right now (although ECM isn’t strictly a casting method but it produces the same type of products that conventional casting does). This is the one US technical capability that can’t be outsourced elsewhere? Ha. The one constant truth with technology is that anyone out there can always… Read more »
tomt
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tomt
April 22, 2010 7:41 pm
Main street wishes this economy will recover, and typically ignores conflicting fundamentals which is human nature. Little do they realize what their complacency and wishful thinking is enabling. Payback time will surely come sooner than we expect. Does 2 1/2 years of supporting banks and their currupt practices and ignoring the rest of us give you a clue? I expect we will see ALL RED portfolio screens in the near future, similar to 2008. If that's the case then PCP will repeat to the downside once again along with everything else. It sounds like a good stock for the short… Read more »
Daddio
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Daddio
April 24, 2012 9:56 am

Very interesting to see the results in the rear view mirror. For all the heck TMF catches, this is one they appear to have gotten right. They are up over double:
http://finviz.com/quote.ashx?t=PCP&ty=c&ta=0&p=m

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