General Electric's pricey purchase of Consolidated Precision Products for $11.75 billion from two private-equity firms highlights the value in Berkshire Hathaway's Precision Castparts unit.
Both companies are suppliers to the aircraft industry, providing complex castings and other parts. GE is one of the top makers of aircraft engines in the world.
Based on the valuation of Consolidated Precision Castparts of 26 times projected 2027 earnings before interest, taxes, depreciation and amortization (Ebitda), the Berkshire unit could be worth close to $100 billion, more than an estimate of $60 billion to $75 billion that Barron's made in an August article. A multiple of 26 times Ebitda probably is consistent with a price/earnings multiple of close to 40.
Berkshire isn't getting much credit for the rising value of Precision Castparts. Berkshire's class A and B shares are up less than 1% this year, way behind the 13% total return of the S&P 500 and lagging many companies in industries in which Berkshire operates such as Union Pacific. Berkshire's Class A stock finished Monday at $757,791, down 0.2% on the session and the B stock is at $505.83, little changed.
The stock-price action this year frustrates some Berkshire holders who argue the shares should be trading higher based on fundamentals-gains in its equity portfolio and solid earnings.
At an admittedly lofty valuation of $100 billion, PCC would account for almost 10% of Berkshire's $1.1 trillion market value, and the PCC situation also highlights the growing value of Berkshire's industrial businesses that include Marmon (manufacturing), Lubrizol (chemicals) and IMC (industrial tools) that are benefiting from strength in the industrial economy. Precision Castparts is about six times the size of Consolidated Precision based on revenues with the Berkshire unit on pace to generate $12 billion in sales this year based on its first-half results disclosed in the Berkshire second-quarter 10-Q.
The two companies, along with the public Howmet and U. K-based Doncasters, are market leaders in the hot area of engineered castings and subassemblies used in the aircraft industry, according to a note Monday from Jefferies analyst Sheila Kahyaoglu. Howmet trades for nearly 50 times projected 2026 earnings. They command some of the highest valuations in the industrial sector.
Precision Castparts also makes airfoil castings for the natural gas turbine market, another fast-growing area due to turbine demand from utilities and data centers.
Barron's estimates that Precision Castparts could generate $3.3 billion of pretax income in 2026 based on its first-half profit gain of 34% and perhaps $3.8 billion of profits in 2027. Its Ebitda (which adds back depreciation expense) in 2027 could top $4 billion.
PCC has gone from being albatross for Berkshire to one of its best businesses. Berkshire paid about $37 billion for the formerly public company in 2016 and took a roughly $10 billion write-down on it in 2020 when the aircraft industry cratered during Covid with then-CEO Warren Buffett admitting at that time that Berkshire "paid too much for the company." Things have changed dramatically since then with growth in the aerospace industry-both commercial and defense. One potential negative: Customers like SpaceX are exploring in-house manufacturing of key components.
Berkshire doesn't report PCC's earnings regularly. The last time Barron's found an annual earnings disclosure was in 2023.
CEO Greg Abel, who succeeded Warren Buffett at year-end, doesn't help Berkshire's case by refusing to do quarterly conference calls or investor events that would highlight the company's key divisions-the BNSF railroad, Berkshire Hathaway Energy (a big utility), property and casualty insurance, and retail and industrial-for an investor community eager to better understand the complex company. Investors might want to know Abel's view on PCC's outlook, margins and competitive position versus other companies in the field.
Abel explained his approach of limited communications in his initial shareholder letter in February, writing that quarterly earnings calls and commentary are inconsistent with his focus on the "long-term horizon." He communicates directly with Berkshire holders in his letter and the annual meeting in May.
Abel did appear on CNBC last week for a 20-minute interview that touched on various topics, including Berkshire's $45 billion of investments in five Japanese holding companies and the company's approach to providing power to data centers. But there was no notable news in the interview. It also doesn't help Berkshire's case with the investment community that it last disclosed PCC's annual earnings in 2023, forcing investors to go through a series of subsequent annuals to estimate its current profits. Berkshire does the same thing-infrequent profit disclosure-with many of its smaller units. Berkshire could provide that earnings data quarterly. It wouldn't hurt the competitive position of those businesses.
Many long-term Berkshire holders like the way the company operates, saying it attracts the right kind of informed investors willing to do the work to understand the company using such public disclosures as 10-Qs and 10-Ks. They say Berkshire stock will ultimately trade at an appropriate price, citing value investor and Buffett mentor Ben Graham's view that the market eventually is a "weighing machine."
Buffett has long argued that managements spend way too much time courting investors that could be better spent focusing on operations.
These investors also argue that Berkshire's laggard status in the stock market is a boon to investors since it allows the company to buy back stock more cheaply and create long-term value for holders. Berkshire bought a total of about $8 billion of stock in the second quarter and during July-one of its more active periods of repurchases since 2020.
The stock now trades reasonably at about 1.4 times book value-near the lower end of its range in recent years.
Without Warren Buffett at the helm, Berkshire may have to start telling its story if it wants to attract a new generation of investors. This year's trading action suggests that something may need to change.
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