Needham Funds’ commentary by John Barr on “Berkshire Hathaway’s acquisition of Precision Castparts.”
On January 29, 2016, Berkshire Hathaway, Inc. (BRK.A, BRK.B) closed its acquisition of Precision Castparts Corporation (PCP) for $235 per share in cash. It was a bittersweet event for the Needham Aggressive Growth Fund. Jim Kloppenburg, the founding Portfolio Manager of NEAGX, bought Precision Castparts for $10 per share in November 2002, resulting in a 13-year, 23-bagger and 27% return compounded annual growth rate1.
The investment was not without its difficult days, as the stock fell from a high of $154 in 2007 to a low of $47 in the depths of 2008. In the end, a sound business strategy and patient investing on behalf of the Fund produced quite a result. On behalf of all of us shareholders, a big THANK YOU to Jim.
Warren Buffett and Berkshire Hathaway look for companies that are simple to understand, have produced solid results over a number of years and have favorable long-term prospects. They look for committed management who reinvest the cash they generate at a high rate of return and produce a high return on equity. They view investments not as shares to be traded, but as partial ownership in great companies.
Precision Castparts - Creating Wealth for Long-Term Investors
Precision Castparts manufactures specialized parts for the aerospace industry. The company saw a fragmented aerospace supply base and the opportunity to bring scale to that market. It will continue to benefit from growing air travel throughout the world, particularly in emerging markets.
Mark Donegan became EVP of Precision Castparts in 1992 and CEO in 2002. In 2002, PCP had a market capitalization of about $1 billion; at its January 2016 acquisition, the company's market cap was $37 billion. EPS grew from a split-adjusted $0.40 per share in 2002 to $10.66 in the fiscal year ending March 2015. Return on equity for the last four years has averaged 14.7%. Precision Castparts had paid in capital of under $200 million, net of stock repurchases, and generated $11.7 billion in retained earnings.
Investment Inspiration - Berkshire Hathaway's Leadership
Berkshire Hathaway's acquisition of Precision Castparts led me to reread a number of books written about Warren Buffett and Berkshire's Vice Chairman, Charlie Munger. I recommend:
- Buffett, The Making of an American Capitalist by Roger Lowenstein
- The Warren Buffett Way, Investment Strategies of the World's Greatest Investor by Robert Hagstrom
- Tap Dancing to Work, Warren Buffett on Practically Everything, 1966-2013 by Carol J. Loomis
- Charlie Munger: The Complete Investor by Tren Griffin
This March 11, 2008 video of "A Conversation with Charlie Munger" at Caltech is quite informative. The Berkshire Hathaway annual reports are also great reads. On April 30, 2016, the Berkshire Hathaway annual meeting will be webcast to all for the first time ever.
Needham Aggressive Growth Fund - What We Learn from The Oracle of Omaha
Needham Aggressive Growth Fund's success with Precision Castparts can be summarized by a Charlie Munger quote from Janet Lowe's Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger:
"There are huge advantages for an individual to get into a position where you make a few great investments and just sit back and wait: you're paying less to brokers. You're listening to less nonsense. And if it works, the governmental tax system gives you an extra 1, 2 or 3 percentage points per annum compounded."
The beginning of 2016 has been very difficult for the markets. It's tempting to despair and wait for clearer times. In an August 6, 1979 essay for Forbes, Buffett wrote, "The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values."
We believe valuations are attractive in our small- and mid-cap, growth at a reasonable price universe; companies are on sale and it could be a great time to invest in domestic equities. We will miss Precision Castparts, but we believe we have a portfolio of companies with the potential to outperform in the future.