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Why Precision Castparts Is A 'Perfect Fit' For Berkshire Hathaway

Why Precision Castparts Is A 'Perfect Fit' For Berkshire Hathaway

Shares of Precision Castparts Corp. (NYSE: PCP) were trading higher by nearly 20 percent mid-Monday after Warren Buffett's Berkshire Hathaway Inc. (NYSE: BKR-A) (NYSE: BRK-B) confirmed it will acquire the company in a deal valued at more than $30 billion and $235 per share.

Here's a summary of how Wall Street's top analysts reacted.

Sterne Agee CRT: ‘Perfect Fit' For Berkshire

Peter Arment of Sterne Agee CRT commented in a note that he thought for a long time that Precision Castparts is a "great strategic fit" for Berkshire's portfolio as it's in a growth industry, controls significant market share, is protected from a higher barrier to entry, and is an overall very profitable company with industry leading (and sustainable) margins.

Arment also noted that Precision Castparts is vertically integrated for both nickel and titanium, which ensures a long-term competitive position in securing contracts with engine and airframe manufacturers.

Stifel: Classic Buffett Acquisition

Stephen Levenson of Stifel, meanwhile, commented in a note that the acquisition is consistent with Buffett's "formula" of acquiring "a market leader at a time when it is somewhat out of favor, but operates in a market where there is significant underlying strength."

Levenson did note that the acquisition price tag is below the stock's 52-week high and 29 percent below its all-time high seen in 2014. As such, some investors may find the deal disappointing -- it remains subject to shareholder approval in the first quarter of calendar 2016.

Levenson suggested that Precision Castparts was considering a sale of itself given its exposure to the oil and gas market, which has been "weak" and offers limited organic growth and margins. In addition, there is uncertainty in the aerospace sector where supply chain and customer roles are changing.

Levenson also pointed out Precision Castparts was faced with a lack of meaningful acquisition targets of its own at a compelling price that would be accretive to earnings.

On the other hand, Levenson argued that Buffett found the company's strong free cash flow generation, superior operating margin, and "excellent forward visibility" as attractive enough to acquire the company outright from its already existing 3 percent stake.

JPMorgan: Implications Of The Deal

Seth Seifman of JPMorgan commented in a note that Berkshire's "hands-off" approach to its acquisition companies will likely imply there will be no major changes to Precision Castparts management team and business conducts.

Seifman continued that it is possible Berkshire's acquisition is based on a "unique thesis" about aerospace, though this seems "unlikely." In fact, the company's "weak" organic growth over the past few years makes it a "poor vehicle" for aero exposure.

In the near term, Seifman sees the deal as a "modest positive" for aerospace stocks and a "vote of confidence" for aircraft demand. In addition, the deal could lead investors to evaluate other M&A scenarios.

Latest Ratings for PCP

Jan 2016DowngradesBuySell
Oct 2015MaintainsHold
Oct 2015DowngradesOutperformMarket Perform

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