From CNBC · Alex Crippen · · 3m
Buffett's worst deal just became one of his best
A $37 billion mistake Buffett publicly regretted is now worth an estimated $100 billion, thanks to AI's hunger for power.
In brief
A $37 billion mistake Buffett publicly regretted is now worth an estimated $100 billion, thanks to AI's hunger for power. A good business bought at a bad price can still win if you hold long enough for demand to catch up, but Berkshire gets no credit for wins it never talks about. Originally reported by CNBC.
The $11 billion admission
Six years ago Berkshire wrote down $11 billion on Precision Castparts, the metal components maker it bought for $37.2 billion in 2016. Buffett told shareholders flatly that he paid too much.
“too much”
A fine company, wrong price
Buffett never said the business was bad. He called it the best in its field and blamed himself for being too optimistic about how much profit it could throw off.
“simply too optimistic”
Covid laid it bare
Aerospace was Precision Castparts' biggest customer base, and the pandemic gutted it. The downturn exposed a miscalculation that might otherwise have stayed hidden for years.
“miscalculation ... laid bare”
He knew it was expensive
When the deal was announced in 2016, Buffett told CNBC on the record that the price was steep. He bought anyway.
“a very high multiple for us to pay”
Betting on the CEO
At the 2016 annual meeting Buffett said his confidence rested on Mark Donegan, the Precision Castparts chief. He still says the same thing today.
The wait is over
Buffett's timeline slipped by years, but the purchase now looks good. What changed was not the company, it was the world around it.
A shortage of the hard stuff
Reuters reports there is now a shortage of the complex parts Precision Castparts makes, the ones essential for engine turbine blades.
AI is the new customer
Those same components go into natural gas turbines, and gas turbines are what power artificial intelligence data centers. Demand arrived from a direction nobody priced in back in 2016.
A rival sells for $11.75 billion
GE Aerospace this week agreed to buy Consolidated Precision Products, one of the few real competitors in the business, for $11.75 billion.
26 times earnings
Barron's called the GE price pricey, at 26 times projected 2027 earnings before interest, taxes, depreciation and amortization. That number is the key to everything that follows.
Do the same math
Apply that same multiple to Precision Castparts and Barron's gets roughly $100 billion. Nearly three times what Berkshire paid a decade ago.
The estimate keeps climbing
Just last month Barron's pegged the unit at $60 billion to $75 billion and called it one of Berkshire's more valuable divisions. One rival deal reset the whole range.
Nobody is paying attention
Andrew Bary argues Berkshire's share price gets no credit for any of this, partly because Greg Abel, like Buffett, skips analyst calls and investor events.
“getting much credit”
Berkshire may have to talk
Bary's recommendation is blunt. Without Buffett as the draw, the company needs to start telling its own story to win a new generation of investors.
“Berkshire may have to start telling its story if it wants to attract a new generation of investors.”
The stock says something is off
Berkshire's B shares edged up almost 0.9% this week while the S&P 500 fell 0.8%. Even so, they trail the index by more than 10 percentage points this year.
“This year's trading action suggests that something may need to change.”
The lesson in the numbers
Buffett overpaid, said so in public, took the write-down, and held. Ten years later the asset is worth triple the price. Patience covered the error.
The big picture
A good business bought at a bad price can still win if you hold long enough for demand to catch up, but Berkshire gets no credit for wins it never talks about.
