Precision Castparts reported record sales of $2.36 billion in the second quarter of fiscal 2014, a 23% increase including 6% organic. The surprise, once again, was the 170-basis-point increase in operating margins to 27.5%, as the company has quickly brought Titanium Metals’ midteens operating margins closer to Precision’s mid-20s levels, leaving no doubt regarding the execution ability. Solid commercial aerospace build rates, strong spares, the shipment of oil and gas drilling pipes, and acquisitions helped Precision deliver earnings per share of $2.90, up 28% from the prior year.

The company’s three segments are mainly driven by aerospace, industrial gas turbines, and oil and gas pipe business. Demand remains steady and visibility is high as production rate increases in aerospace are well supported by immense aircraft backlogs at OEMs. Still, Precision is exposed to business jets that showed some weakness in the quarter.

New power plant builds have been weak, but the firm has been able to offset this by providing spares. Precision has established a fiscal 2016 EPS target of $15.50-$16.50, compared with the $9.72 delivered in fiscal 2013, and excludes future acquisitions.

CEO Mark Donegan believes ample acquisition opportunity remains in the near term. While the company has debt of $3.6 billion, we believe it could pay it off rather quickly with more than $2 billion in cash from operations and low capital expenditure requirements.