Precision Castparts
Company Overview
Precision Castparts Corp. (PCC) manufactures complex metal components for the aerospace, power generation, and industrial sectors — using casting, forging, and machining processes to produce parts that must meet extraordinarily precise specifications under extreme operating conditions. PCC's primary customers are Boeing, Airbus, GE Aviation, Pratt & Whitney, and Rolls-Royce. Berkshire acquired PCC in January 2016 for approximately $37 billion — Berkshire's largest acquisition and one of the largest industrial acquisitions in history.
Investment Story
2016: The $37 billion acquisition. Berkshire announced its acquisition of PCC in August 2015 at $235 per share, a 21% premium to the prior day's closing price. The total transaction value of approximately $37.2 billion surpassed even the BNSF acquisition as Berkshire's largest. Buffett described it simply: "PCC fits perfectly into the Berkshire model."
Mark Donegan's operating philosophy. PCC CEO Mark Donegan built the company around a simple premise: manufacturing excellence creates the most defensible competitive position in industrial markets. His 'continuous improvement' culture — intense focus on quality, reliability, cost reduction, and delivery performance — earned long-term relationships with aerospace original equipment manufacturers who cannot afford supply chain disruptions in their critical path components.
The aerospace duopoly context. Commercial aviation is effectively a duopoly: Boeing and Airbus. These two OEMs supply virtually all large commercial aircraft. Their suppliers — particularly those producing safety-critical structural components — are subject to extreme qualification requirements, making supplier switching essentially impossible once a relationship is established. PCC's position as a qualified supplier to both Boeing and Airbus on multiple aircraft programs creates near-permanent revenue streams tied to global aviation growth.
Post-acquisition challenges. The COVID-19 pandemic severely damaged commercial aviation in 2020, reducing new aircraft orders dramatically and causing Boeing and Airbus to cut production rates. PCC's revenues declined sharply, and Berkshire recognized that the acquisition had been made at or near peak aviation cycle economics. The long-term thesis remained intact but the near-term performance was significantly below acquisition projections.
Buffett's Own Words
Next year, I will be discussing the “Powerhouse Six.” The newcomer will be Precision Castparts Corp. (“PCC”), a business that we purchased a month ago for more than $32 billion of cash. PCC fits perfectly into the Berkshire model and will substantially increase our normalized per-share earning power. Under CEO Mark Donegan, PCC has become the world’s premier supplier of aerospace components (most of them destined to be original equipment, though spares are important to the company as well). Mark’s accomplishments r
Duracell and Precision Castparts (both bought in 2016) will for the first time contribute a full year’s earnings to this group. Additionally, Duracell incurred significant transitional costs in 2016 that will not recur. We have far too many companies in this group to comment on them individually. Moreover, their competitors – both current and potential – read this report. In a few of our businesses, we might be disadvantaged if outsiders knew our numbers. Therefore, in certain of our operations that are not of a si
Finally, Precision Castparts, a company built through acquisitions, bought Wilhelm Schulz GmbH, a German maker of corrosion resistant fittings, piping systems and components. Please allow me to skip a further explanation. I don’t understand manufacturing operations as well as I do the activities of real estate brokers, home builders or truck stops. Fortunately, I don’t need in this instance to bring knowledge to the table: Mark Donegan, CEO of Precision, is an extraordinary manufacturing executive, and any business
Clayton Homes, International Metalworking, Lubrizol, Marmon and Precision Castparts, had aggregate pre-tax income in 2018 of $6.4 billion, up from the $5.5 billion these companies earned in 2017. The next five, similarly ranked and listed (Forest River, Johns Manville, MiTek, Shaw and TTI) earned $2.4 billion pre-tax last year, up from $2.1 billion in 2017. The remaining non-insurance businesses that Berkshire owns – and there are many – had pre-tax income of $3.6 billion in 2018 vs. $3.3 billion in 2017. Insuranc
*Clayton Homes, International Metalworking, Lubrizol, Marmon and Precision Castparts, had aggregate earnings in 2019 of $4.8 billion, little changed from what these companies earned in 2018. The next five, similarly ranked and listed (Berkshire Hathaway Automotive, Johns Manville, NetJets, Shaw and TTI) earned $1.9 billion last year, up from the $1.7 billion earned by this tier in 2018. The remaining non-insurance businesses that Berkshire owns – and there are many – had aggregate earnings of $2.7 billion in 2019, *
Investment Lessons
Aerospace supply chain qualification creates durable pricing power. Being 'on program' as a qualified supplier to a Boeing or Airbus aircraft production run is an extremely durable competitive position: the aircraft will be in production for 20-30 years, the OEM cannot switch suppliers without extensive and expensive requalification, and safety regulations make any supply chain failure catastrophically costly. PCC's qualification on dozens of commercial, defense, and general aviation programs represents a form of long-term contractual moat.
Manufacturing excellence can create moats in capital-intensive industries. PCC proves that capital-intensive, technically demanding manufacturing businesses can generate exceptional long-term returns when quality standards are high enough to eliminate competition. The expertise required to produce aerospace castings and forgings to military-grade specifications — accumulated over decades — cannot be replicated by new entrants willing to invest capital. The moat is knowledge and relationship-based, embedded in processes rather than patents.
Cyclicality creates risk for peak-cycle acquisitions. The 2016 PCC acquisition was made during a period of high commercial aviation activity. The subsequent COVID demand destruction demonstrated that even structurally excellent businesses in cyclical industries can experience severe earnings declines that make any single-point acquisition price appear aggressive in hindsight. Valuing cyclical businesses requires estimating mid-cycle earning power, not peak-cycle earnings — a discipline the PCC acquisition may not have fully applied.