No. of Recommendations: 8
https://archive.ph/C7EjcValue of PCP gets written up by $2B to $34B (versus $37B purchase) and critical audit matter (CAM) note removed by Berkshire auditor Deloitte.
PCP revenues exceeded 2019 peak revenues. Boeing and Airbus deliveries are humming along and hopefully rising in the 2026-2028 timeframe.
Pre-tax profits rose 24% to $1.9B in 2024.
Over the long haul, very glad that Warren pulled the trigger on PCP.
No. of Recommendations: 7
Over the long haul, very glad that Warren pulled the trigger on PCP.
Maybe over the long haul, it will turn out okay. But it seems like an awful lot of slack you are giving WB on what was not a great acquisition. That was an expensive, high multiple acquisition that left many of us scratching our heads. A lot of people gave BRKB wide berth when it happened because of the history and credibility WB had. But it seemed like a mistake unless WB figured out something that no one else had. And because it was him, a lot of people assumed he did. Until they wrote down the business and essentially admitted it was a mistake to buy the business at the time, at the value they ascribed.
Glad its working out now, after many years, but I can't say I was glad he pulled the trigger on it.
No. of Recommendations: 18
I invested in Precision Castparts in Dec. 2014, about nine months before Buffett announced he was acquiring the company for $235 per share in cash or about the same price I had paid. In hindsight, I was lucky to have had the position taken away from me at a relatively breakeven result. I have watched with interest PCP's struggles since the acquisition and was somewhat stunned by the large $10 billion impairment charge Berkshire had to take as Covid wreaked havoc in the aerospace market. I have been glad to see the PCP business finally improving in the latest Berkshire reports and decided to go back and take a peek at my original notes on why I purchased PCP over a decade ago:
Precision Castparts is a worldwide, diversified manufacturer of complex metal components and products. It serves the aerospace, power and general industrial markets. The company is a market leader in manufacturing large, complex structural investment castings, airfoil castings, forged components, aerostructures and highly engineered, critical fasteners for aerospace applications.
MARKET LEADER
Precision Castparts has been headquartered in Portland, Oregon, for more than 60 years. The business has grown from a small manufacturer of investment castings for a wide variety of applications to a global market leader producing investment castings, forgings and fasteners for aerospace, power and general industrial markets.
In fiscal 2014, aerospace markets accounted for 68% of sales, power markets represented 18% of sales and general industrial and other markets accounted for 14% of sales. On a business segment basis as of 9-30-14, forged products accounted for 43% of sales, airframe products represented 32% of sales and investment cast products accounted for 25% of sales.
Because of the complexity of the manufacturing process and the application of proprietary technologies, Precision Castparts is one of the few manufacturers that can consistently produce large, complex structural investment castings in quantities sufficient to meet customers’ quality and delivery requirements. This has enabled the firm to become the preferred and leading supplier of structural and airfoil casting for jetcraft and industrial gas turbine engines and to expand into the structural airframe and armament markets.
Precision Castparts has been supplying castings for jet engines to GE, Pratt & Whitney and Rolls-Royce for several decades. Boeing and Airbus are also important customers. Many new generation engines, which are expected to be built through the next decade and beyond, make significantly greater use of Precision Castpart’s products than did previous engine designs. Approximately 30% of the company’s sales of airfoil castings used in aircraft turbine engines are replacement parts.
STRONG CASH FLOWS
Precision Castparts generates strong cash flows with free cash flow having soared fivefold from less than $300 million a decade ago to more than $1.5 billion today. With a minimal dividend, the company’s primary use of the growing cash flows has been for acquisitions. With a focus on aerospace and power markets, acquisition candidates are selected which complement the company’s core capabilities. Management has been disciplined in their value-creating acquisition strategy with acquisitions immediately accretive to earnings. Management continues to focus on strategic acquisitions and expects to deploy $4-$6 billion to merger and acquisition activity between now and 2017.
In addition, with a solid balance sheet, PCP recently expanded its share buyback program by $1 billion, reflecting management’s confidence for future strong growth in cash flows.
DOUBLE-DIGIT GROWTH
Over the past five years, Precision Castparts has generated double-digit growth with sales and net income compounding at 15.3% and 17.5% annual rates. Through the first half of fiscal 2015, double-digit growth continued as net income rose 13% to $952 million with EPS up 14% to $6.56, demonstrating solid leverage of the company’s strong market share position in its primary end markets.
Going forward, end markets remain strong, especially as aging aircraft is replaced in developed markets while solid demand continues for new commercial jets in emerging markets. This supports management’s outlook for continued double-digit EPS growth and strong cash generation in fiscal 2016 and beyond as the company expands content and leverages aerospace production rates while maintaining a relentless cost focus as it gains market share through vertical integration.
In reviewing the above notes, the growth did not materialize as expected due to a variety of challenges. However, last year, PCC once again reported double-digit growth. From Berkshire's annual report:
PCC’s revenues were $10.4 billion in 2024, an increase of 12.0% compared to 2023. The revenue increase was primarily
attributable to higher demand for aerospace products, and to a lesser degree, power generation products. Long-term industry
forecasts continue to show growth and considerable demand for air travel and aerospace products. PCC’s pre-tax earnings
increased 24.4% in 2024 compared to 2023, primarily attributable to sales increases and improved manufacturing and operating
efficiencies. Continued growth in revenues and earnings will be predicated on PCC’s ability to successfully increase production
levels to match the expected growth in aerospace products, as well as from improvements in industry supply chains and labor
relations, which have been constraining commercial aircraft production at original equipment manufacturers.
No. of Recommendations: 1
That was very interesting and helpful information on this large Berkshire acquisition. I no nothing about the company. I imagine Mr Buffett liked the return on capital and profit margins when he purchased the company. He probably had factored in fluctuations in demand from customers as they waxed and waned. He probably liked the company’s chances of maintaining or growing its share of the market. He could not have foreseen a global pandemic than no doubt resulted in an unprecedented collapse in orders and then was followed by a bounce back a couple of years later. I’d love to know what after tax multiple he paid. The net profit margins and the return in capital numbers. If anyone knows?
No. of Recommendations: 7
Unfortunately PCP took another significant hit in February with a major fire at a key manufacturing plant. Supply outages could impact the entire airline manufacturers industry because of the very limited number of suppliers for the kind of parts PCP makes.
https://www.reuters.com/business/aerospace-defense...Apologies if this has been reported to the board before.
I thought PCP was a good acquisition at the time. A super Iscar if you will - a highly specialized supplier of key parts based on proprietary technology with limited competition, and thus pricing power. Iluvbabyb covered this well. I can't blame Buffett for the airline industry being hugely impacted by the Covid pandemic.
But I guess anything closely tied to the airline industry is risky - particularly over short periods.
Remember BRK could well have gone belly-up on the OXY financing if the Covid vaccines followed by the Ukraine invasion hadn't restored oil demand. OXY could have easily gone bankrupt with its high debt load.
No. of Recommendations: 5
The business has grown from a small manufacturer of investment castings for a wide variety of applications to a global market leader producing investment castings, forgings and fastenersFor those of us who have no idea what an "investment casting" is:
"
Investment casting is an industrial process based on lost-wax casting, one of the oldest known metal-forming techniques"and
"
Investment casting is so named because the process invests (surrounds) the pattern with refractory material to make a mould, and a molten substance is cast into the mold. Materials that can be cast include stainless steel alloys, brass, aluminium, carbon steel and glass. The cavity inside the refractory mould is a slightly oversized but otherwise exact duplicate of the desired part. Due to the hardness of refractory materials used, investment casting can produce products with exceptional surface qualities, which can reduce the need for secondary machine processes."https://en.wikipedia.org/wiki/Investment_casting-- sutton
another 15 min Google search reduced by Wikipedia to a few seconds
trying not to remember that this research in my school days would have taken a trip to the library, a search though several drawers of a very large wooden card catalog, locating and pulling multiple volumes off of the shelf, going to those books' indexes and finally locating the 10-30 year old answer on page 847 of the third volume I pulled. Maybe an hour, plus commute time.
No. of Recommendations: 7
Thank you so much.
Captain Obvious comments from me here -
That is the kind of return on equity I would have expected. That along with a net margin of 17%, certainly indicates the type of jewel that would have attracted Mr Buffett for a buy and keep for ever wholly owned subsidiary.
16 times earnings is a little higher than he might have paid in the past but it looks to me like it will work out well in the long term. It’s hard to find big acquisitions. Plenty of errors of omission over the years waiting for perfection. This was not one of those errors. Rather it looks like it was a solid allocation. Good to see it performing well of late. Who cares about the previous accounting write down: assuming it was largely pandemic related and not company specific relative to competitors. I’m sure the company is focused on delighting customers and widening its moat and is thriving inside Berkshire.
No. of Recommendations: 3
Just seeing the FT article on PCP published today. Extract below. Interestingly FT is implying they spoke to Buffett. Doubt that. But probably spoke to someone at HQ. He is ready for a question on PCP it seems at the AGM.
“Buffett told the Financial Times he believed questions over CAMs and Precision Castparts were better addressed at the company’s annual meeting in May. “I hope the questions about Precision Castparts get asked at the annual meeting,” he said in response to the FT.
Precision Castparts remains one of the largest takeovers Buffett has struck, surpassed only by his takeover of the Burlington Northern Santa Fe railroad, according to data from LSEG.”
