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Guardian Fund Thesis On Precision Castparts Corp. (PCP)

Guardian Fund Thesis On Precision Castparts Corp. (PCP) by Stock Pucker

Precision Castparts is the largest investment of our fund. We believe that the true value of the company is far in excess of the USD 235 per share offer by Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B). In our view:

  1. An independent Precision Castparts is worth at least USD 40 billion.
  2. Berkshire Hathaway is not paying an appropriate premium.
  3. Accepting the USD 235 per share offer is not in line with the fiduciary duty of the Board of Directors.
  4. We will vote against the proposed sale.

We believe that the Precision Castparts Board of Directors is leaving significant value on the table.

We expect earnings of USD 2 billion

First, Mr. Buffett is telling the media that the multiple is high. This might be true based on 2015 earnings but it is incorrect when using future expected earnings and free cash flow. Current earnings are temporarily under pressure due to lower volumes in energy markets. Precision Castparts ’s aerospace business is much less cyclical than widely believed and the ramp-up of several programs such as the The Boeing Company (NYSE:BA) 737 MAX, A320neo and the H-class turbines is likely to significantly increase earnings per share in the next few years even when energy markets remain weak. Mr. Donegan confirmed this in several recent earnings calls. We believe that free cash flow will grow to USD 2 billion annually.

Multiple of at least 20 times

Second, Precision Castparts deserves a high multiple because it has a tremendously strong market position, which is clearly visible by the continuously high return on equity. It is the low-cost and often sole-source provider of mission critical components in a secular growth market, a leader in metallurgical technology, owner of intellectual property and strategic assets such as TIMET and has a strong balance sheet. Especially in these times of low interest...