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Flying high

10 August 2015 By Antony Currie

Warren Buffet’s latest mega-deal lacks precision. The Oracle of Omaha’s Berkshire Hathaway is paying $37 billion, including debt, for aircraft components maker Precision Castparts. The acquisition fits Buffett’s mold, but coincides with cyclical highs in plane orders, stock valuations and M&A.

Precision Castparts is a large, well-entrenched manufacturer in industries with a high barrier to entry. The company’s shares also have tumbled 40 percent from their peak in June last year. That smacks of just the sort of opportunity Buffett relishes. The premium also is modest, at 21 percent. When Berkshire bought Burlington Northern for $44 billion in 2010, it paid 31 percent more than the rail operator’s undisturbed share price.

While the falling price of oil has hurt Precision Castparts, the aircraft industry that accounts for most of its top line is being helped by optimal tailwinds. Commercial aircraft orders have increased by an average of 44 percent since 2010, according to SpeedNews. The nearly 4,000 placed last year are the most since the industry publication started tracking data in 2000.

It’s not obvious that kind of altitude can be sustained. Credit Suisse, for one, reckons that Precision Castparts would need “sustained M&A” to boost earnings. And only seven of the 18 analysts whose estimates Reuters publishes have the equivalent of a buy rating on the stock. That makes the deal the true mark of a contrarian, but against an incredibly uncommon showing of pessimism from Wall Street.

Berkshire, which just disclosed a big drop in second-quarter earnings from a year ago on Friday, is also paying almost 19 times expected earnings for its quarry. Even Buffett describes the valuation as “right there at the top.” Doing a deal in an environment where the S&P 500 Index fetches 19.4 times earnings, just off its 10-year peak, is a curious move for a value investor.

Finally, the M&A market is also on a tear. With some $2.8 trillion of deals already announced globally so far this year, a 38 percent increase from last year, 2015 could yet set a record. A long-term thinker like Buffett might be less worried about matters of timing, but it’s odd nonetheless.


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