Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) announced on Monday it will acquire Precision Castparts (PCP, Financial) for $235 per share in what will be its biggest deal to date, valued at about $37.2 billion.
Precision Castparts is an industry leader in manufacturing complex metal components and serves the aerospace, power, and general industrial markets. The deal must be approved by a majority of Precision Castparts’ shareholders, and Berkshire expects closing to happen during the first quarter of 2016.
Buffett spoke with CNBC’s Squawk Box on Monday and said this will not only be the largest, but also one of the most expensive purchases he’s made. The company currently trades at a P/E of 18.3, and GuruFocus’ DCF calculator estimates just a 7% margin of safety. Buffett drew a comparison to his purchase of Burlington Northern in 2009 when P/E was high because earnings were at a trough. Similarly, Precision Castparts’ earnings have declined recently due to the current oil and gas environment.
It’s not difficult to find evidence for Precision Castparts’ high quality business and why Berkshire is comfortable to pay the price. The annual revenue growth rate over the past 10 years was 10.1%, while EBITDA grew by 16.2%. In addition, Precision Castparts’ CEO Mark Donegan has overseen at least 30 acquisitions since 2002, all while maintaining operating margins that have not gone below 20% since 2008. The company’s strong management and consistent operating history fall in line with Buffett’s investing strategy.
“All (Donegan) wants to do is run Precision; he doesn’t want to run Berkshire, and that’s true of most of our managers,” Buffett told CNBC. “They love what they’re doing, that’s the beauty of it.”
Buffett credited Berkshire investment manager Todd Combs for the deal. Combs, who manages about $9 billion for Berkshire and is frequently mentioned as a successor to lead the firm, added Precision to his portfolio three years ago, introducing Buffett to the company. But it wasn’t until five weeks ago that Buffett considered an acquisition, when he dropped in on a meeting between Combs and Donegan.
Precision Castparts is a favorite among the gurus, as 21 other managers currently hold positions. After Buffett, who already holds a 3% stake in the company, investment firm Ruane Cunniff (Trades, Portfolio) holds the next largest stake at 2.55%.
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