After a disappointing quarter, below analysts' estimates, Berkshire Hathaway (BRK.B) has reached into its wallet to buy Precision Castparts (PCP). The largest investment ever for Warren Buffett's holding company. The operation has garnered the favor of Morningstar analysts, but not that of the market. The stock, in fact, remains stable at around $143 (price relating to class B) and continues to be traded at a discount to the fair value of $168.
ACQUISITION OF VALUE
“Precision Castparts meets many of Buffett's requirements for an acquisition: it is large enough to weigh on the group's accounts, it has high profit margins, it is lightly leveraged, it has good management, it has a simple business model and most importantly, it's reasonably priced,” says Morningstar equity analyst Greggory Warren.
“Berkshire will pay the acquiree's shareholders a premium of approximately 25% over Friday's closing price, but in return will secure a healthy, high cash-generating business that finished the year (at the end of March) with a turnover of approximately 10 billion dollars”.
Precision Castparts is one of the few manufacturers in the world of components used in the manufacture of aircraft engines and this guarantees it an advantage over its competitors. The management has managed in the last fifteen years to significantly improve operational efficiency, increasing the Ebit margin from 12% to 28% and generating cash flows that have been used to consolidate the market position through new acquisitions.
Analysts evaluate the operation positively not only for the value of the company, but also for the benefits it will have on the Berkshire portfolio and for the ways in which it was finalised. The acquisition of Precision Casparts increases the weight of the industrial sector within the basket of assets held by the holding company and will help cushion the negative effect of the imminent rise in interest rates on the financial statements of the group's insurance companies. Furthermore, the decision to resort to credit for approximately 10 billion is reasonable, considering the still very low level of the cost of money.
DISAPPOINTING QUARTERLY
If traders didn't cheer over Buffett's latest buy, they also didn't tear their hair out over Berkshire's disappointing second-quarter data. Although the numbers reported were lower than analysts' expectations, they did not produce any significant changes to the share price, which closed the eighth year last Friday without significant changes.
In the three months from April to June, the company's revenue grew by just 3% compared to the same period last year, while the progress in the first half was about two percentage points lower than estimated by analysts for the end of the year (equal to 5%).
Furthermore, the more than proportional increase in costs compared to revenues translated in the second quarter into a 10% drop in operating profit and a 37% contraction in net income (compared to the same period of 2014).
“Our forecasts for the next five years, which indicate average revenue and earnings growth of approximately 6%, take into account the positive impact of new acquisitions by the group,” adds Warren.
“At the end of the second quarter, on-balance sheet cash totaled more than $66 billion and, given the cash outlay to finance the Precision Castparts transaction and which company management typically holds on hand, no more than $20 billion to meeting possible requests from insurance companies, we expect the group's shopping to continue also in the second half of the year”.
Attachments: Source: www.morningstar.it
