Warren Buffett’s Berkshire Hathaway wrote its biggest check – a whopping $37B including debt – in history last week with a deal to acquire industrial parts maker Precision Castparts. This deal is another step in what looks, to me, like a deliberate strategy to remake Berkshire into a more industrially focused business as opposed to its current form known for its massive insurance operations and equally massive stock portfolio.
Few people may have heard about Precision Castparts until news of the deal broke, but its products touch the lives of millions of people around the world on a daily basis. Need to catch a flight to New York? The aircraft that you’re flying in is more than likely fitted with parts from Precision Castparts. Pumping gas into your SUV? It’s very likely Precision Castparts was involved in getting the gasoline into your tank.
While the 20% premium Buffett is paying may seem expensive to some – Precision’s shares were actually down about 17% over the past twelve months – he is the ultimate BUY and HOLD investor. As such, a few hundred million here or there doesn’t matter for someone who said his favorite holding period was “forever” especially if he has confidence in the business he is buying.
Buffett definitely did his homework on this one. Precision has a wide moat – one cannot set up a shop supplying aircraft components overnight and customers are not likely to switch suppliers frequently – excellent brand recognition, strong management, good financials (rising sales, strong margins, good cash generation).
There’s also the rosy long term outlook mainly due to America’s rebirth as an energy powerhouse, rebounding North American travel numbers, and newly minted travelers from China and other emerging economies requiring more and newer aircraft. Not enough for you? It looks like he’s already hard at work on another huge play according to this.
Only time will tell if the Precision bet turns out to be a winner. However, if the Burlington Northern Santa Fe railroad acquisition was any indicator, the odds are stacked in his favor.