Buffett Buys Precision Castparts

The big news is that Warren Buffett is buying Precision Castparts (PCP) for $37.2 billion. This is his biggest deal ever.

Berkshire Hathaway, his $354 billion industrial empire, said on Monday that it would buy Precision Castparts for $32 billion. The move will help move Mr. Buffett’s company — which includes earlier acquisitions ranging from the Burlington Northern Santa Fe railroad to Fruit of the Loom underwear — further into the industrial sector. Including debt, the transaction is worth $37.2 billion.

Not only is the acquisition Mr. Buffett’s most ambitious — just weeks from his 85th birthday, but it is also a standout in what has been a banner year for mergers, with more than $2.7 trillion in deals already announced.

Deal watchers and fans of Berkshire Hathaway have long expected the conglomerate to strike huge deals with regularity. The company generates an enormous amount of cash from its various operations, sitting on nearly $67 billion as of June 30.

And Mr. Buffett has long spoken about his “elephant gun,” the huge pile of cash that Berkshire Hathaway has reserved for big deals, and his itchy trigger finger.

Berkshire is paying $235 per share for Precision Castparts. That’s a 21% premium. PCP’s fiscal year ends in March. Wall Street expects earnings of $13.94 for the calendar year of 2016. That means Buffett is paying 16.86 times next year’s earnings for PCP. That seems like a good price but not a screaming bargain.

What’s interesting is that Buffett is buying this stock after it’s had several great years. Since 1978, PCP is up over 158,000% to the S&P 500’s 2,100%.

From December 31, 1999 to December 31, 2013, PCP gained 4,003%. The S&P 500, in contrast, gained 25.8%. PCP has lagged the market since then, but Buffett clearly doesn’t have a problem with buying a stock that’s run up so much.

Posted by on August 10th, 2015 at 2:39 pm


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