The Implications Of Buffett's PCP Buyout

As the dust settles on Warren Buffett’s largest purchase ever, Wall Street analysts are now free to piece together the market implications of the move. Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A)(NYSE: BRK-B) announced this week that is it buying aerospace supplier Precision Castparts Corp. PCP for a staggering $32.3 billion.

Benzinga had the chance to talk to IBISWorld aerospace analyst Maksim Soshkin about the opportunity Buffett sees in Precision Castparts and what the deal means for the aerospace and oil & gas industries.

Value Play

Buffett has long been known as a patient value investor, and Soshkin sees plenty of long-term growth exposure for Precision. “The company is an essential supplier to aircraft manufacturers and we expect the Global Commercial Aircraft Manufacturing industry to grow at more than twice the rate of the global economy,” he told Benzinga.

Related Link: Warren Buffett Reveals How Precision Castparts Acquisition Unfolded

Soshkin explained that the company’s product diversification also insulates it from the level of company-specific risk associated with other names within the aerospace industry.

“Buffett has bought a company that is not exciting, but plays a fundamental role in a sector that will grow due to its reliance on long-term global trends such as the continued development of emerging markets,” he added.

M&A Trend

According to Soshkin, the Berkshire deal is representative of the recent trend toward consolidation within the aerospace industry. “I think that just as we have seen the Precision Castparts and Sikorsky-Lockheed deal, one of the biggest trends in the Aerospace Sector will be M&A.”

Implications For Oil & Gas?

While about 70 percent of Precision Castpart’s business is related to the aerospace industry, the company also has exposure to the battered oil & gas industry. Soshkin believes that the timing of the deal was carefully chosen. “I do think that, in part, Buffett used Precision Castparts’ exposure to a weakened oil & gas market and its subsequent decline in value to go long on the aerospace sector at a discount.”

Although Soshkin is not completely convinced that oil has found a bottom just yet, the timing of the deal could be an indication that Buffett sees little remaining downside risk associated with Precision’s exposure to the oil & gas market.