Warren Buffett has expressed an aversion to airlines as
investments, but his potential deal for Precision Castparts Corp.
would amount to a bet that the carriers' business will remain
strong enough to sustain a boom in aerospace manufacturing.
An acquisition of Precision Castparts, which has a market value
of about $27 billion, would be the aerospace sector's biggest ever
takeover, as well as potentially the largest for Mr. Buffett's
Berkshire Hathaway Inc. It would come as airlines' seemingly
insatiable appetite for new fuel-efficient jets in the past several
years has left Airbus Group SE and Boeing Co. with combined orders
on the books for over 10,000 jets.
Portland, Ore.-based Precision Castparts has been one of the
largest beneficiaries of that demand. The company derived about 70%
of its $10 billion of revenue in its last fiscal year from the
aerospace business, supplying Boeing and Airbus as well as engine
makers General Electric Co. and Rolls-Royce PLC with specialist
metal parts and spares, such as titanium ailerons for wings and the
blades in jet turbines.
However, Precision Castparts has suffered from exposure to the
energy and power-generation markets, which account for about a
quarter of sales. The outlook for a recovery in that sector has
been repeatedly pushed back as oil prices swooned. Bristow Group
Inc., a big helicopter operator for energy companies and a
bellwether of future activity, last week said it didn't expect a
recovery in the industry until late 2017.
Meanwhile, Boeing, Airbus and other plane makers have pushed
suppliers to cut costs and invest in more production capacity,
putting pressure on profit margins. One analyst said Precision
Castparts appears to lack the pricing power that Mr. Buffett has
often sought in deal targets.
And some investors also have been anxious that the aerospace
boom could come to a stuttering halt if economic growth slows and
unleashes a wave of cancellations of jetliner orders. A recent lull
in sales of spares to airlines in particular has also spooked
investors.
"This has prompted concern that the sector is not the 'safe
haven' within the challenged industrials sector that many investors
had been hoping for," said RBC analyst Rob Stallard in a recent
note to clients.
Precision Castparts' revenue grew just 5% in its last fiscal
year, from 14% the year before. Net profit fell 14% to $1.5
billion, its first drop in five years. The company's stock is down
about 20% this year, and off 29% from its all-time high in
mid-2014, a slump that may have provided an opportunity for Mr.
Buffett to pounce.
Berkshire already is one of Precision Castparts' largest
shareholders, with a 3% stake as of March 30. A deal to buy the
rest would add to the billionaire investor's limited exposure to
aviation. Mr. Buffett has long disparaged owning airline stocks,
and he got burned buying convertible preferred stock in USAir Group
Inc. in 1989, eventually needing to write down the $358 million
investment. Berkshire does own private-jet operator NetJets Inc.,
although that has been a headache for Mr. Buffett of late.
Founded in 1953, Precision Castparts employs about 30,000. It is
headed by Mark Donegan, just the third chairman and chief executive
in the company's history, who took the helm in 2002 and who has
engineered a series of acquisitions. He has spent around $9 billion
on deals in the past several years to boost the share of aircraft
and engine parts and structures that Precision Castparts supplies.
The company has said it may spend an additional $5 billion on deals
over the next few years.
Those deals are part of a broader wave of consolidation in
aerospace amid the pressure to trim costs. Alcoa Inc. last month
closed a $1.5 billion deal to acquire RTI International Metals
Inc., a big supplier of titanium to the aerospace industry. In
April, Transdigm Group Inc. paid $336 million for Pexco Aerospace,
a big maker of plastic parts for the industry.
Amid complaints from some analysts and investors that Precision
Castparts has been sometimes opaque, Mr. Donegan recently has
started providing financial guidance. Last month it said the
outlook for profit margins is improving despite the prolonged
downturn in the energy sector. That helped give the stock a bounce,
even though the company reported quarterly profits that fell short
of expectations and cut its full-year guidance.
Write to Doug Cameron at doug.cameron@wsj.com
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