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

Page 2 of 2

With Timet firmly in hand, most analysts agree that Precision Castparts Corp. (NYSE:PCP) will grow strongly over the next few years, averaging 14% increases in earnings annually. But while certainly a respectable pace of growth, I don’t think that’s strong enough to justify paying more than 24 times earnings for the stock.

Free cash flow at the firm — rarely anywhere near as good as the “GAAP” earnings it reports, today lags reported income by 20%. As a result, if you’re skeptical (like I am) of this stock’s 24.4 P/E ratio, you’re going to positively hate its price to free cash flow ratio of 31.5.

B/E Aerospace
I’m a bit more optimistic about Sterne’s other aerospace parts play of the day — but only a bit. Here, we’re looking at a stock that costs nearly 28 times earnings. On the other hand, with a 24% projected growth rate, that higher P/E ratio at least has more justification to it. Free cash flow at B/E Aerospace Inc (NASDAQ:BEAV), as at Precision Castparts Corp. (NYSE:PCP), is unimpressive — just $227 million over the past 12 months, versus reported net income of $255 million. As a result, the stock sells for almost precisely the same price to free cash flow ratio as we find at Precision Castparts Corp. (NYSE:PCP): 31.7.

The plus side here, of course, is the faster projected growth rate at B/E Aerospace Inc (NASDAQ:BEAV).

Sterne Agee sees “modest aftermarket growth coupled with integration gains tied to previous acquisitions” boosting the company’s results, and thinks B/E Aerospace Inc (NASDAQ:BEAV) is “well positioned to trade higher from current levels” — perhaps as high as $80.

Me, I disagree. I think a run to $80 is unlikely (or if likely, unjustified). But on the plus side, at least this stock isn’t quite as obviously overvalued as Sterne’s other pick.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Precision Castparts.

The article Thursday’s Top Upgrades (and Downgrades) originally appeared on Fool.com is written by Rich Smith.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Page 2 of 2