Berkshire Hathaway is buying Precision Castparts (PCP)!
That is kind of encouraging as it's a big ($37.2Bn) bet on manufacturing but PCP manufactures aerospace parts and that is one of our only working sectors and PCP, as you can see from this chart, is 70% aerospace. BUT $32Bn is only a 20% premium to Friday's close with the stock at $193.88 so we're looking at about $233 if this deal goes through as advertised. You will hear some irresponsible journalists (let's fact it, most of them) calling this a $37Bn deal because they are adding in the assumption of debt but they don't subtract the assumption of assets and profits so this is an idiotic way to look at a merger deal aimed only at creating more excitement than there actually should be and to fool you into thinking things are better than they actually are.
Warren Buffett is no fool with his money and has owned a bit of PCP for many years and is taking advantage of the recent weakness in the sector to buy the whole company for far less than last year's highs at $275.
PCP made $1.77Bn last year and $1.5Bn this year (they year ends in Q1) and is on track to do about the same ($1.5Bn) this year so $32Bn is a p/e of 21.3. This does NOT give other investors the green light to bid other companies up to p/es of 33 or 103 – but they will because investors are idiots, so today will not be a day we chase any stocks.
We can, however, chase PCP with an arbitrage play, but we won't know which until we see the market open and get an idea of the prices. We will feature the trade idea live, over at Seeking Alpha's Premium Research Section, where our 5% Monthly Portfolio has just been launched.
The real story is that Berkshire managed to find a bargain needle in this market haystack and, since there aren't many other good deals these days – they figured they may as well buy the whole company and make it part of Berkshire Hathaway (BRK-A), which is a $350Bn company with an overall p/e of 17.41. So adding PCP at 21.3 will bring the overall p/e of BRK-A up to 17.76 over the short-term but Berkshire also owns plenty of industrial companies that can help PCP expand their sales including 2.5% of General Electric (GE), 5% of Deer (DE), 2.5% of General Motors (GM), all of NetJets (private)…
