Over the weekend news broke that Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) nears a deal for Precision Castparts (PCP, Financial). Berkshire will take over Precision Castparts at the valuation of more than $30 billion. This puts PCP at around $220 a share. Interestingly, this is about where GuruFocus DCF calculator puts the fair value of PCP shares.
This link is the GuruFocus DCF Calculator on PCP: http://www.gurufocus.com/dcf/PCP.
We can see that GuruFocus DCF Calculator gives PCP a fair value of $249.46 per share. At 138.9 million shares outstanding, the total value of the Precision Castparts is $34.6 billion. This is very close to where the price tag is for the takeover.
This is a validation of GuruFocus DCF Calculator, we believe. We are very proud of that.
GuruFocus DCF Calculator has been discussed in great detail here. In summary:
- Instead of using Cash Flow per share, we use earnings per share (without non-recurring-items).
- The default value for growth is the growth rate of earnings per share over the past 10 years. If the growth is higher than 20%, we use 20%.
- The terminal growth rate is 4%.
- Both the numbers of the years in the growth stage and terminal stage are 10 years.
- The discount rate is 12%.
In the case of PCP, the earnings per share is $10.27, the growth rate is 17.6%. With the fair value of $249.46 a share, the margin of safety at the current price is 22%.
DCF Calculator has its limitations, but it works well with the companies that rank high in GuruFocus Business Predictability Ranking. PCP has a Business Predictability Rank of four-star, a perfect fit for DCF model. We are very glad that Warren Buffett (Trades, Portfolio) agrees with the results of our DCF Calculator.
In addition, Precision Castparts was also a recommendation in GuruFocus'Â Buffett-Munger Newsletter March 2015. Since we recommended the stock, it has declined more than 10%. This is a good thing for Mr. Buffett.
GuruFocus DCF Calculator is just one of the very powerful tools that we developed for our subscribers. If you are not a Premium Member, we invite you for a 7-day Free Trial.
