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This is what a Berkshire Hathaway target looks like

By August 10, 2015No Comments

This weekend Bloomberg reported that Berkshire Hathaway is in the final stages of a deal to acquire Precision Castparts Corporation. This transaction provides us with a front row seat into what Berkshire Hathaway is looking for in acquisition candidates. Shares of Precision Castparts closed at $193.88 on Friday which equates to an enterprise value of $31.8 billion. The company’s latest fiscal year ended on March 29, 2015 and their latest quarterly filing was for the period ended June 28, 2015.

Below is a list of ratios and metrics from Precistion Cartparts that stand out. All of these ratios and metrics were computed with the Ratio Analysis model using data from TagniFi Fundamentals. A shareable copy of the model with data from Precision Castparts is available for free download.

Precision Castparts Ratio Analysis

Profitability Ratios

Precision Castparts is impressively profitable with an EBITDA margin of 29.3% and a net profit margin of 15.3% in fiscal 2015. Furthermore, the company’s profitability has been very consistent over the last 5 years. These levels of profitability serve as evidence of Mr. Buffett’s preference for companies with defensible moats.

Growth Rates

Revenue growth slowed in fiscal 2015 to 5.0% and began to decline in the first quarter of fiscal 2016 (-4.3%). Growth in profits has declined more dramatically with EBITDA down 13.7% in Q1-2016 and net income down 17.4% for the same period. Management has indicated that these declines are primarily related to the slowdown in spending from oil and gas customers. Mr. Buffett must view these as temporary hiccups that are creating a sale at Mr. Market’s shop.

Management Effectiveness Ratios

Return on equity has averaged an impressive 15.5% over the last 5 years while the average return on invested capital has  average 12.1%. These will provide attractive returns for Berkshire’s future excess cash.

Efficiency and Liquidity Ratios

The company appears to be operating very consistently from an efficiency and liquidity perspective. This predictability should be a good fit with Berkshire Hathaway.

Valuation Ratios

At 11.4x trailing twelve EBITDA the company is trading below it’s 5-year average of 12.5x EBITDA. Shares are currently trading at 19.5x trailing twelve net income. Neither measure is indicative of a fire sale, especially considering that these ratios do not include any acquisition premium, but this quote seems appropriate:

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett