Was Warren Buffett A True Value Investor When He Bought Precision Castparts?

Introduction

When I first got interested in investing in common stocks some 50 years ago, I thought it would be wise to research and then study the investing behaviors and philosophies of the recognized investor greats.  My efforts first led me to Ben Graham, and from there to many other famous value investors such as Philip Fisher, Walter Schloss, William J.  Ruane, Irving Kahn, Peter Lynch, and of course the venerable and perhaps most famous of all, Warren Buffett.

Although each of these investing greats had their own unique style and approach, they were all investors that focused on value.  Consequently, I patterned my own investment philosophies and beliefs on sound valuation.  Admittedly, assessing sound valuation is not a perfect science.  However, there are certain fundamental principles that do apply and have passed the test of time.  One of those principles is to be only willing to invest when fundamentals, primarily earnings, can be purchased at a price that makes economic sense.

Does Warren’s Purchase of Precision Castparts Make Economic Sense?

Yesterday, Seeking Alpha reported on Warren Buffett’s purchase of Precision Castparts Corp (PCP) under the following headline: “Buffett pays high price for Precision Castparts.”

There were several links in the report, but this one suggested that Warren was paying a P/E ratio of 18×1 year’s forward earnings:

“It's the biggest deal of Warren Buffett's career: BRK is paying $235/share for PCP, a 21.2% premium over Friday's closing price and 18x projected profit over a 12-month period.”

Since I’ve been a long-term follower of Warren Buffett, I thought it would be interesting to evaluate Warren’s purchase through the lens of the F.A.S.T. Graphs™ fundamentals analyzer software tool.  My first graph produces a look at the company’s earnings and dividends only (yes, PCP does pay a miniscule dividend).  What we discover is a reasonably consistent record of operating earnings growth averaging 15.6% since 2003.  Although there is minor cyclicality along the way, Precision Castparts has been a very profitable enterprise.  Note that although earnings fell in 2009, the company remained highly profitable even during the Great Recession.

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Disclosure: No position at the time of writing.

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