B/E Aerospace Inc (BEAV), Precision Castparts Corp. (PCP): Thursday’s Top Upgrades (and Downgrades)

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This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines feature a pair of hikes to price target at aerospace parts suppliers B/E Aerospace Inc (NASDAQ:BEAV) and Precision Castparts Corp. (NYSE:PCP). But the news isn’t all good, so before we address those two, let’s start with why one analyst thinks…

B/E Aerospace Inc (NASDAQ:BEAV)

Cliffs could dive
In direct contradiction to the bullish note struck by analysts at BB&T Capital earlier this week (where analysts upgraded Cliffs Natural Resources Inc (NYSE:CLF) stock on news of its CEO’s departure) a different banker announced this morning that it’s not nearly so hot on the company’s chances. Disagreeing with BB&T’s analysis (but agreeing with my own), analysts at CIBC cut their rating on Cliffs Natural Resources Inc (NYSE:CLF) from sector perform to underperform.

Why might this be the right all, and BB&T’s endorsement of the stock the right one?

For the same reasons I outlined earlier in the week: Cliffs Natural Resources Inc (NYSE:CLF) is not a profitable company. It might turn profitable next year (or it might not). But even if it does, the 4% consensus earnings growth projections of the analysts simply aren’t strong enough to support the 10 times forward earnings valuation the share now carry. Not with Cliffs Natural Resources Inc (NYSE:CLF) burning through cash at the rate of $500 million a year. Not while it’s laden with $3.4 billion in net debt.

Based on these facts, CIBC is right to turn to be pessimistic.

Now for the good news
Turning now from iron to aluminum, titanium and carbon composites…  in contrast to CIBC’s bearish note on Cliffs Natural Resources Inc (NYSE:CLF), one analyst is taking a decidedly bullish note on the aerospace sector, and on the companies that supply parts to it in particular. In a note released to investors this morning, investment banker Sterne Agee argued that “pure-play aerospace companies should continue to benefit from production rate increases” in the current quarter.

Reviewing seven companies operating in the sector, Sterne highlighted five that it likes — and two that it likes a lot. Those two, from which the analyst says it expects to see “the most upside to our estimates,” are metal aircraft components manufacturer Precision Castparts Corp. (NYSE:PCP), and aircraft interiors specialist B/E Aerospace Inc (NASDAQ:BEAV). For each of these firms, Sterne sees “still plenty of runway left in cycle.” Let’s take them one at a time.

Precision Castparts
Sterne notes that Precision Castparts Corp. (NYSE:PCP) now has “a full quarter” revenues from its Timet acquisition now under its belt, and on its books. “Momentum is just commencing on the $30-$40 million of synergies expected over the next 12+ months,” says the analyst, as this has Sterne predicting the shares will hit $281 within 12 months.

Is such an 18.5% profit on the stock likely? I don’t think so, and I’ll tell you why.

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