PCP - Precision Castparts Corp.

[KCLarkin]

Rolls also asked for a 15% price cut from all suppliers, according to GW.

[rishig]

Can some people who are long in PCP comment about this article about GE Aviation's vertical integration? How much competitive edge will PCP lose once GE has completely integrated their 3D manufacturing process? http://www.gwinvestors.com/wp-content/uploads/2015/07/Rolls-Royce-Mind-the-Gap.pdf

 

The 2012 acquisition of Morris Technologies added key 3D printing technology to GE Aviation’s list

of capabilities. The company spent a couple of years testing out components manufactured

through the additive layer process, particularly ones that were complex and sole-sourced from a

single supplier. Suddenly highly complex, sophisticated components were able to be developed

and manufactured by GE Aviation without significant investments. The company then used this

added capability to have pricing discussions with some of its part suppliers. A couple years later,

GE would add mass additive manufacturing to its components factory in Alabama. This has

achieved two crucially important things for GE.

First, it has allowed the company to replicate components that previously required heavilyspecialized

fabrication technology. We’ve spoken with a retired jet engineer who worked on

multiple major joint-ventured engines in the past, and prior to his retirement in 2008, the fabrication

companies Precision Castparts (PCP) and Alcoa’s (AA) Howmet were the only companies capable

of competitively fabricating many crucial components of a jet engine. In fact, in the 1970s, Pratt &

Whitney invested heavily in an automated casting facility that was able to produce a turbine blade

from a single crystal alloy. After all the development had been completed, it turned out that PCP

was able to fabricate the blades at a much more competitive cost than Pratt could, so the

company transferred the technology and PCP ended up becoming the fabricator despite Pratt’s

best efforts. Additive manufacturing has greatly reduced the competitive edge these fabrication

firms once had.

 

Quoted from page 8.

 

Forgot to attached the url. opps. it's is now attached

 

The company that GE acquired, Morris Technologies, is at the forefront of additive manufacturing. CEO of Morris Technologies explaining additive manufacturing here: https://www.youtube.com/watch?v=4C5tLi4o4GY. For more background on additive manufacturing, here is a Google talk by Cornell researcher Hod Lipson:

 

My understanding is that additive manufacturing is great for rapid prototyping but does not scale well when you have a well defined process and want to scale up. If you have an electrical engineering background, this is similar to using FPGAs for rapid prototyping but then moving over to ASIC once you want to produce a large volume.

 

From Q3 2014 conference call:

 

Ronald J. Epstein - BofA Merrill Lynch, Research Division

.. There's been a lot of discussion lately, and I don't know if it's hype or whatever, about additive manufacturing and 3D printing and potentially what impact that could have on aerospace. Just curious, I mean, what opportunities does that present, if any, for Precision Cast? And I mean, and if you're already playing in it in terms of the powders that you guys do, if you can just give us more color there?

 

Mark Donegan - Chairman and Chief Executive Officer

Yes, Ron. I mean, obviously, there is quite a bit of hype or buzz. I mean, if I look at additive manufacturing, it is a process that we've been using for years. When I ran Structures back in '90, we actually started the additive manufacturing process. And we used it for really, before that, we used that to make a tool. And if you get into large structurals, a tool can be in the millions of dollars. And then we would run a part and we would try it and we'd redesign it, and the end customers would go -- and it would be a reiterative process that it wouldn't be uncommon for us to do 10 trials and rework the tool 5 times. We started using it, and we still use it very aggressively today to make multiple parts, 6, 7 parts that we can provide different shapes, configurations to our customers without the investment of tooling. Now there is a very high cost to that model, so it's very good for speed, very good for running. But when you start getting a defined process, the tooling starts to become the way to go, and we get out of the additive manufacturing as quickly as possible. If you take that down the stream kind of to where it is right now and you apply it against our particular components, we do use it in some cases to make cores. We do use it sometimes to make a shell, again to try it out. As soon as we can get away, it becomes cost prohibitive on a high-volume basis in today's world. You start looking at the cost of the material, the power to run the machines, the time it takes. The more complex the part is, the longer the time takes because you're going to build it up in small segments. So if I look at, does it have a place? Absolutely. For us, it's been more in the R&D in giving speed, cutting down the cycle times of tool development. But it becomes very costly as an ongoing bank of machines doing a single piece at a time. And we look at this model all the time. We're metals people. We know the cost of making a particular material input. You start off with a huge increase in just the cost of material to begin with. And then from there, you go through a very costly process to make a part. So if I look at for us, on our components -- and there's a lot of components in an engine that we don't make. But if you look at our components through right now, what's going to fly through 2025, all of our value and share in everything is growing [ph] in those programs. So I'd say through that time frame, again, our technology stays well intact. 

[physdude]

Berkshire might be looking to buy PCP - http://www.wsj.com/articles/berkshire-hathaway-nears-deal-to-buy-precision-castparts-1439050499 .

 

I have been looking at PCP closely and was leaning on buying it but it looks like the price will get away from me on this news. I am happy as a Berkshire holder though as I think it is a good firm for Berkshire to acquire.

[vinod1]

Please no. I would like to own this for the long term.

 

Vinod

[karthikpm]

Please no. I would like to own this for the long term.

 

Vinod

 

Agree, I just initiated a position a month ago!

[bigbluffzinc]

I'm with you guys, (initiated about a month ago as well) no chance he gets this for 30B though right?  WSJ suggested that but that seems absurdly low...

[rb]

I am in the middle of buying it. I love buffet but this is pretty frustrating. He can be such a blocker sometimes.

[VersaillesinNY]

If BRK is really buying PCP; I would like to see at least a sweet 30% premium ($ 250-275 per share) along with a combination of cash and BRK stock, similar to the Burlington acquisition.

As a fairly new and lucky PCP shareholder (30 days), I would be sad to see the company going private. However, BRK would be a good home for PCP and its team.

 

[krazeenyc]

If BRK is really buying PCP; I would like to see at least a sweet 30% premium ($ 250-275 per share) along with a combination of cash and BRK stock, similar to the Burlington acquisition.

As a fairly new and lucky PCP shareholder (30 days), I would be sad to see the company going private. However, BRK would be a good home for PCP and its team.

 

$235 per share.

 

[Shane]

I doubt Buffet would announce a deal without being all but certain it will go through, which I find frustrating as this is too cheap for the company.  I'd imagine Donegan would want to be under the BRK fold which would give him more resources and freedom to run the company as he sees fit... I wonder if that played a part in his negotiation on the price.

[Picasso]

“I’ve admired PCC’s operation for a long time. For good reasons, it is the supplier of choice for the world’s aerospace industry, one of the largest sources of American exports. Berkshire’s Board of Directors is proud that PCC will be joining Berkshire,” said Warren E. Buffett, Berkshire Hathaway chairman and chief executive officer.

 

And then on CNBC:

 

Buffett said the deal started with his portfolio manager Todd Combs, who manages $9 billion. "Three or so years ago, he added Precision to his portfolio. I had never really heard of the company before that."

 

Oh Warren....

[jay21]

“I’ve admired PCC’s operation for a long time. For good reasons, it is the supplier of choice for the world’s aerospace industry, one of the largest sources of American exports. Berkshire’s Board of Directors is proud that PCC will be joining Berkshire,” said Warren E. Buffett, Berkshire Hathaway chairman and chief executive officer.

 

And then on CNBC:

 

Buffett said the deal started with his portfolio manager Todd Combs, who manages $9 billion. "Three or so years ago, he added Precision to his portfolio. I had never really heard of the company before that."

 

Oh Warren....

 

3 years isn't a long time?

[Picasso]

I guess you can call a long time what you want.  Three years isn't a long time in my books.  That's barely the plural form of years.

[rb]

I doubt Buffet would announce a deal without being all but certain it will go through, which I find frustrating as this is too cheap for the company.  I'd imagine Donegan would want to be under the BRK fold which would give him more resources and freedom to run the company as he sees fit... I wonder if that played a part in his negotiation on the price.

 

I think it was a majour part of Donegan's decision to sell. There's no other reason to sell at 235. It was higher than that just at the beginning of the year.

[AccentricInv]

Anyone know the ownership concentration of this?  Any chance it gets blocked by shareholders (the price offered seems too low and all cash too...)?

 

Seems like great minds think a like. I also bought this only a few weeks ago and was in the middle of building my position. Buffett's great and all, but as the previous poster said, what a c**k block.

[rishig]

Anyone know the ownership concentration of this?  Any chance it gets blocked by shareholders (the price offered seems too low and all cash too...)?

 

Seems like great minds think a like. I also bought this only a few weeks ago and was in the middle of building my position. Buffett's great and all, but as the previous poster said, what a c**k block.

 

I don't think the deal will get blocked. BRK is definitely not stealing the company and management has incentive to let the deal go through. Here are the largest owners of PCP:

 

Capital Research Global Investors 12.53

T. Rowe Price Associates, Inc.        7.79

Vanguard Group, Inc.                    5.61

State Street Corp                          4.08

Berkshire Hathaway Inc                3.03

Janus Capital Management LLC      3.03

BlackRock Fund Advisors                2.85

Ruane, Cunniff & Goldfarb Inc        2.55

Walter Scott & Partners Limited      2.49

Soroban Capital Partners LP            1.78

Northern Trust Investments, N.A.    1.65

Waddell & Reed Investment Management Co 1.57

Harris Associates L.P.                      1.43

MFS Investment Management K.K.  1.40

Columbia Mangmt Investment Advisers, LLC 1.39

Capital World Investors                  0.98

SQ Advisors, LLC                            0.98

State Street Global Advisors (Aus) Ltd 0.94

Davis Selected Advisers LP              0.83

 

 

[rb]

With those concentrations from large shareholders a bid could be blocked, but a lot of those funds are Buffett friendly, so I don't think they're gonna try anything. Despite as you said he's stealing the company. Today he says he's paying a large multiple and 3 years from now we'll read a nice story in the annual report detailing how it was such a bargain.

[Green King]

Supposedly from the ft

Buffett is financing 1/3 of it from debt. I am just surprised how low of a interest rate Berkshire is paying for debt.

 

http://www.businesswire.com/news/home/20150306005762/en/Fitch-Rates-Berkshire-Hathaway-Inc.s-Euro-Denominated-Senior#.Vcj0F3GqpHw

[rb]

If BRK is an A+ then what would be AA? God?

[ZenaidaMacroura]

If BRK is an A+ then what would be AA? God?

I wonder if the domicile of CBI prevents Berkshire action.  It almost seems like Buffett takes a few years to get comfortable etc

[VersaillesinNY]

Why sell a fantastic business for a small premium paid all in cash? I’d rather keep a great moat for the long run. I would prefer to endure a few years of pain while the company repurchases shares, conducts acquisitions and grows the business.

 

I don’t understand why PCP’s board of directors is rushing to sell the company. Are the economics of the business that negative in the short term?

 

In my humble opinion, BRK shareholders are getting a better deal than the PCP ones.

 

[rb]

In my humble opinion, BRK shareholders are getting a better deal than the PCP ones.

That's my only comfort. That I also have a large BRK position.

[Liberty]

Why sell a fantastic business for a small premium paid all in cash? I’d rather keep a great moat for the long run. I would prefer to endure a few years of pain while the company repurchases shares, conducts acquisitions and grows the business.

 

I don’t understand why PCP’s board of directors is rushing to sell the company. Are the economics of the business that negative in the short term?

 

In my humble opinion, BRK shareholders are getting a better deal than the PCP ones.

 

Could this be a case of agent-principal misalignment?

 

Unless management knows something we don't about future prospects and this is actually a good price..

 

Could it be that being comfortably inside the Berkshire fold is worth a lot to management (a kind of psychic benefit -- less stress, not more public company hassle, access to more low-cost capital, halo effect from Buffett, etc), but all these benefits aren't actually available to common shareholders. So management is getting part of its premium in case, and part of its premium in new working conditions, while shareholders only have access to the cash portion.

 

Just a theory..

[rb]

Why sell a fantastic business for a small premium paid all in cash? I’d rather keep a great moat for the long run. I would prefer to endure a few years of pain while the company repurchases shares, conducts acquisitions and grows the business.

 

I don’t understand why PCP’s board of directors is rushing to sell the company. Are the economics of the business that negative in the short term?

 

In my humble opinion, BRK shareholders are getting a better deal than the PCP ones.

 

Could this be a case of agent-principal misalignment?

 

Unless management knows something we don't about future prospects and this is actually a good price..

 

Could it be that being comfortably inside the Berkshire fold is worth a lot to management (a kind of psychic benefit -- less stress, not more public company hassle, access to more low-cost capital, halo effect from Buffett, etc), but all these benefits aren't actually available to common shareholders. So management is getting part of its premium in case, and part of its premium in new working conditions, while shareholders only have access to the cash portion.

 

Just a theory..

I think it's definitely principal agent misalignment. If they face short term struggles that management would be aware but not the street why didn't they shop the company around when the stock was at 270 and everybody loved them?

[vinod1]

Donegan seems to be someone who just likes the business. He enjoys running the company and does not seem to be all that interested in making money. He does not bother to even write a shareholder letter, hardly any investor presentations, etc. So working under Buffett umbrella would be perfect for him.

 

This has become my 3rd largest holding over the last few weeks and having spent quite some time on this, I am very disappointed that I cannot benefit much over the long term.

 

Vinod