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

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With my second graph I bring in monthly closing stock prices (the black line) and a calculation of the historical normal P/E ratio (the dark blue line).  It’s interesting to note that since 2003 Precision Castparts’ stock price has been awarded a normal P/E ratio of 18.2, which is the multiple of the dark blue line across the entire graph.

What I found interesting is that coming off of excessive valuation in 2013, Precision Castparts’ stock price fell precipitously throughout all of 2014 and prior to Warren’s purchase throughout 2015.  At the beginning of 2015 the stock price went right on through the historical normal P/E ratio of 18, and just prior to being purchased by Warren Buffett was trading at a theoretical fair value blended P/E ratio of 15.4.

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However, what I found most interesting is that the price that Warren Buffett is paying brings the stock price into alignment with its historical normal P/E ratio.  Personally, I do consider that a moderately steep price to pay.  On the other hand, perhaps it’s not too high considering he’s buying the entire company.

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When I examined the associated performance report with the above graph, it provided additional perspective on why Warren Buffett might have been interested.  This high-quality aerospace and defense company has dramatically outperformed the average company as measured by the S&P 500 since 2003.  However, Warren Buffett’s purchase did provide a nice boost to the historical returns of long-term shareholders.

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At its closing price on August 7, 2010 Precision Castparts was trading at a blended fair value P/E ratio of 15.4.  Once again, this is below the historical normal P/E ratio of 20.3 since fiscal year 2011. 

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Consequently, an argument could be made that Warren Buffett is paying a slight discount to the company’s historical normal P/E ratio over the past 5 or 6 years.  I’m not suggesting that he’s buying the company cheap, I’m simply pointing out that relative to historical norms, it doesn’t appear that he is overpaying either.

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Disclosure: No position at the time of writing.

Disclaimer: The opinions in this document are for ...

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