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.
