Buffett/Berkshire - general news

[Spekulatius]

PCC is great example of suboptimal execution. I think in those cases , Abel can make a huge difference.

Berkshire paid a full price for PCC but tht want the biggest problem

1) They bought  a Cyclical high in the business (turbines)

2) Management that they put in place wasn’t good. The scams and Factory fires that @gfp reported are evidence of this. They failed to pivot the business to stronger market like aerospace components. its seems like Buffett lost interested this and the business remained undermanaged. 
I agree PCC should be worth a pretty penny now provided they can take advantage of the buoyant market and increase the earnings power.

[gfp]

One great thing about the PCC deal is that Berkshire actually succeeded in buying it.  Companies like that are very hard to buy for Berkshire because Berkshire doesn't like to pay up.  But you only have to buy a market leading business once and even if it was sub-optimal they will own it forever which is still better than never owning it at all.

 

And some of those disruptions at Boeing and then covid were probably hard to predict ahead of time but I'm sure someone will say they were totally aware of the Boeing culture and saw it coming a mile away...

 

Donegan still runs PCC and he was the architect of the whole merger driven roll up that created it.  Berkshire didn't install management, they left the supposed hot-shot in charge of his company.  Still seems like there is a lot of room for improvement but overall I'm happy Berkshire overpaid for it vs. never owning it at all.  That's my kind of fuck up!

[xboojum]

50 minutes ago, gfp said:

Donegan still runs PCC and he was the architect of the whole merger driven roll up that created it.  Berkshire didn't install management, they left the supposed hot-shot in charge of his company.  Still seems like there is a lot of room for improvement but overall I'm happy Berkshire overpaid for it vs. never owning it at all.  That's my kind of fuck up!

 

The bigger problem is that it seems to have left Buffett gunshy about larger acquisitions; I think PCC worked out poorly and maybe it's the case (I kind of think it is!) that needle-moving acquisitions are not unlikely to happen any more because large enough targets are going to attract people more willing to overpay than Berkshire, but the combination of the bad outcomes at PCC, Heinz, and Pilot plus climate- and Trump-related difficulties at Mid-American/BHE seem to have really pushed the company away from trying to land... not whales, but tuna... at all (with BHE GT&S being a welcome exception and OxyChem not really counting in my mind). Things may change somewhat with Abel at the helm!

[ValueMaven]

2 hours ago, gfp said:

I was doing some work on Precision Castparts after looking at the recent Doncasters IPO and the booming share price of PCC-peer Howmet.  It's interesting that Buffett overpaid for PCC in 2016, paying around 14x pretax earnings for earning power that just today is finally increasing past its peak.  They wrote down almost $10B of goodwill, got scammed on a German acquisition that was outright fraud, and had a recent major fire that destroyed an aircraft fastener plant.  For goodwill impairment tests, they value PCC at around $34 Billion currently - still below the $37 Billion Berkshire paid a decade ago.

 

But if you apply the valuations Howmet trades at in today's buoyant market for all things turbine-related and adjust for the acquisition-related D&A, an independent PCC that traded on the NYSE would trade around $115 Billion.  PCC inside Berkshire is essentially debt-free but I doubt a public PCC would find that to be the optimal structure.  PCC also basically stopped buying bolt-on companies after their German pipe fitting scam (they won $700m in arbitration after they discovered the sellers had committed outright fraud).  This year they bought a tiny company in the UK that does the wax patterns and ceramic core assemblies that are upstream to their castings but it was only 22m GBP in revenue / 6m GBP ebitda.  They did shell out $500m on that titanium melt facility in West Virginia in partnership with BHE Renewables, which created a 100% solar + battery microgrid for the project.

 

Anyway - it was just interesting to see that, much like the railroad, the public comps for PCC suggest it would not be available at the multiples Berkshire paid and since the $10 Billion impairment can never be "un-done" its another example of how even assets he "over-paid" for are meaningfully under-marked in book value vs. "fair value in today's environment."

 

Also - don't buy Doncasters stock!  Yikes that one is very richly valued and has an awful lot of stock coming out of lock-up at the end of September.  Howmet is also very fully valued but they seem very well run with margins above PCC.

 

I've always thought PCP had its issues - but yea, I agree ... it's worth a lot more then Berkshire paid for it.  Also dont forget the CEO Mark Donegan fits perfectly into the Berkshire culture.  I think he reports directly to Greg.  

[ValueMaven]

this is a really great point actually ... 

 

'One great thing about the PCC deal is that Berkshire actually succeeded in buying it.  Companies like that are very hard to buy for Berkshire because Berkshire doesn't like to pay up.'  

[Spekulatius]

Well the past is the past but from here going  forward, there is a whole lot more upside from PCC than downside. I do think they need to do some thing about management. I thought the left or were replaced afterthought purchase and I am surprised to hear that the same  folks are still in charge.

[John Hjorth]

1 hour ago, xboojum said:

The bigger problem is that it seems to have left Buffett gunshy about larger acquisitions; I think PCC worked out poorly and maybe it's the case (I kind of think it is!) that needle-moving acquisitions are not unlikely to happen any more because large enough targets are going to attract people more willing to overpay than Berkshire, but the combination of the bad outcomes at PCC, Heinz, and Pilot plus climate- and Trump-related difficulties at Mid-American/BHE seem to have really pushed the company away from trying to land... not whales, but tuna... at all (with BHE GT&S being a welcome exception and OxyChem not really counting in my mind). Things may change somewhat with Abel at the helm!

 

I'm confused. I've always thought Mr. Buffett always has been 'fishing', but - mind you -, I have always thought he was 'fishing elephants', not whales or tuna! [j/k]

[xboojum]

13 minutes ago, John Hjorth said:

 

I'm confused. I've always thought Mr. Buffett always has been 'fishing', but - mind you -, I have always thought he was 'fishing elephants', not whales or tuna! [j/k]

 

Haha -- not bagging elephants, but... lions, then!

[John Hjorth]

17 minutes ago, xboojum said:

Haha -- not bagging elephants, but... lions, then!

 

@xboojum,

 

 -Please also read here [H/T @scorpioncapital ] and onwards about float financing! 

 

 

Edited 2 hours ago by John Hjorth

[cubsfan]

4 hours ago, gfp said:

I was doing some work on Precision Castparts after looking at the recent Doncasters IPO and the booming share price of PCC-peer Howmet.  It's interesting that Buffett overpaid for PCC in 2016, paying around 14x pretax earnings for earning power that just today is finally increasing past its peak.  They wrote down almost $10B of goodwill, got scammed on a German acquisition that was outright fraud, and had a recent major fire that destroyed an aircraft fastener plant.  For goodwill impairment tests, they value PCC at around $34 Billion currently - still below the $37 Billion Berkshire paid a decade ago.

 

But if you apply the valuations Howmet trades at in today's buoyant market for all things turbine-related and adjust for the acquisition-related D&A, an independent PCC that traded on the NYSE would trade around $115 Billion.  PCC inside Berkshire is essentially debt-free but I doubt a public PCC would find that to be the optimal structure.  PCC also basically stopped buying bolt-on companies after their German pipe fitting scam (they won $700m in arbitration after they discovered the sellers had committed outright fraud).  This year they bought a tiny company in the UK that does the wax patterns and ceramic core assemblies that are upstream to their castings but it was only 22m GBP in revenue / 6m GBP ebitda.  They did shell out $500m on that titanium melt facility in West Virginia in partnership with BHE Renewables, which created a 100% solar + battery microgrid for the project.

 

Anyway - it was just interesting to see that, much like the railroad, the public comps for PCC suggest it would not be available at the multiples Berkshire paid and since the $10 Billion impairment can never be "un-done" its another example of how even assets he "over-paid" for are meaningfully under-marked in book value vs. "fair value in today's environment."

 

Also - don't buy Doncasters stock!  Yikes that one is very richly valued and has an awful lot of stock coming out of lock-up at the end of September.  Howmet is also very fully valued but they seem very well run with margins above PCC.

 

That's a great high level view of the PCC valuation, much appreciated as I can see the BNSF comparison.  I wondered about the impairment damage and some of the other missteps.

 

Thanks for all the detail.

[gfp]

As Buffett pointed out back in the day, PCC's purchase accounting adjustments were understating its owner earnings in the GAAP reports by almost $400m annually.  He called it "a gift to my successors" because the D&A of acquired intangibles would be mostly gone by the 19 year mark and PCC would magically appear more profitable inside Berkshire after that.

 

On the other side of the coin, he always calls out the annual capex at BNSF costing far more than the depreciation charge in our inflationary world.  Replacing tracks from 1980 or even 2010 costs a shit ton more today.  So at BNSF there is no "purchase accounting" bonus - if anything you need to add more to the depreciation charge to get owner earnings.  He took the cash out anyway, because he was able to increase leverage safely.

 

Pilot looked worse than it was and will work out fine but they sure learned a lesson and that lesson may pay for itself going forward.  Lots of stuff made Pilot look like it shit the bed right after they bought it but most of that was inventory being written up at acquisition, shutting down the energy trading division that made it look like revenues crater-ed, the push-down accounting that pissed off the Haslams in the first place, and of course the fact that Berkshire overpaid for the large 2nd tranche because Haslam gamed the 10x EBIT contract by juicing EBIT that year.

[DooDiligence]

6 hours ago, gfp said:

...if you apply the valuations Howmet trades at in today's buoyant market for all things turbine-related and adjust for the acquisition-related D&A, an independent PCC that traded on the NYSE would trade around $115 Billion.  PCC inside Berkshire is essentially debt-free but I doubt a public PCC would find that to be the optimal structure.  PCC also basically stopped buying bolt-on companies after their German pipe fitting scam (they won $700m in arbitration after they discovered the sellers had committed outright fraud).  This year they bought a tiny company in the UK that does the wax patterns and ceramic core assemblies that are upstream to their castings but it was only 22m GBP in revenue / 6m GBP ebitda.  They did shell out $500m on that titanium melt facility in West Virginia in partnership with BHE Renewables, which created a 100% solar + battery microgrid for the project.

 

Anyway - it was just interesting to see that, much like the railroad, the public comps for PCC suggest it would not be available at the multiples Berkshire paid and since the $10 Billion impairment can never be "un-done" its another example of how even assets he "over-paid" for are meaningfully under-marked in book value vs. "fair value in today's environment."

 

Nice! So PCC's an Easter egg? Probably a few more hidden away somewhere.