It’s not so much that billionaire Warren Buffett has a fear of flying as an antipathy for airlines, and just about anything having to do with them, investment-wise.
After all, this market guru in 2007 famously called the airlines industry “a bottomless pit” and lamented buying U.S. Air preferred stock nearly two decades before. “Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down,” Buffett wrote in a letter to investors.
Ouch. Now that’s a grounded flight.
So how improbable, incredible and just plain astounding is it that the Oracle of Omaha made his biggest deal ever Monday — $37.2 billion — to buy an airline-related company? More than that, this company is as unsexy as they come: Precision Castparts Corp. (ticker: PCP) is a Portland, Oregon, outfit that makes machined airframe components for aerospace applications and aircraft engines. Yawn. And it’s been in the dumps for the year, off 20 percent before Monday.
Yet when Buffett climbs into the cockpit, things take off. He plunked down $235 per share in cash — cold, hard cash, folks — marking a 21 percent premium over PCP’s Friday closing price of $193.88. By the end of the day Monday, PCP shares had soared 19 percent, meaning that the stock has recovered virtually all its losses for 2015.
Buffett, who has an unparalleled knack for scooping up bargains before they bloom into valuables, may indeed be fueling Precision’s single-day rally. But is it also possible that he’s had an aerobatic change of heart from his previous airline stock hatred?
Observers on the ground remain unconvinced.
“Buffett’s investment in Precision Castparts is specific to the company,” says David Kass, clinical associate professor of finance at the University of Maryland’s Robert H. Smith School of Business. He also runs a blog dedicated to Berkshire Hathaway (BRK-A, BRK-B) and the Oracle himself.
“In fact, at recent Berkshire annual meetings, he has expressed his skepticism about investing in airlines,” Kass says. “Berkshire does not own any airline stocks in its equity portfolio.”
The word “skepticism” may indicate some softening in Buffett’s stance, given the latest airline stock stats. Southwest Airlines (LUV) is already up about 32 percent from a year ago, and coming off record profits in the second quarter. Even stodgy legacy carriers are gaining altitude. United Continental Holdings (UAL) has risen 33 percent from a year ago, trading at about $57.
“Warren Buffett doesn’t invest in industries with dim prospects, and his acquisition of Precision Castparts is another sign that smart investors believe the airline industry has remade itself,” says Mark Yusko, founder and CEO of Morgan Creek Capital Management in Chapel Hill, North Carolina.
But don’t expect the positive returns to pry investment dollars from the billionaire’s pocket.
“This doesn’t seem like a change in Warren Buffett’s philosophy,” says Seth Kaplan, managing partner of Airline Weekly, an industry newsletter based in Fort Lauderdale, Florida. “In the past we’ve always said, ‘Everyone makes money in the airline industry except the airlines.’ Historically, smart suppliers have always been able to profit even when their customers, the airlines, were struggling.”
Not that Berkshire is struggling. Kass notes that in the wake of this acquisition, “everyday investors can benefit by investing in Berkshire Hathaway class B stock at its current price of about $142 per share.” But prepare for a prolonged flight: “Buffett has a very long time horizon,” he says.
One Buffett-ism particularly strikes Michael Schwerdtfeger, managing director at Chapman Associates Middle Market Mergers & Acquisitions in Long Beach, California.
“The ultimate takeaway from Buffett’s purchase is summarized by his comment on it: ‘We’re going to be in this business for 100 years, so it doesn’t really make any difference what oil and gas does in the next year,'” Schwerdtfeger says
Buffett also takes an inside-out view of the sector that doesn’t address how to invest in airlines, but rather how the airlines themselves will invest. Aging fleets need repair and replacement; that will emerge as a priority for carriers eager to devote more resources to those priorities in the digital age.
Iran Air ranks as one of the many. Its motto is “Our mission is your safety,” but a creaky fleet arguably works against that. Its Boeing 747SP dates to about 1977 and as of July, its aircraft average 23 years of age. That’s almost twice the international average, according to the Iranian-American news site Payvand.com. Yet the potential lifting of the U.S. economic embargo in the wake of Tehran scrapping its nuclear program could create billions of dollars in business for aircraft and parts manufacturers — especially Boeing Co. (BA), experts note.
And that’s where the once-obscure Precision comes in.
“Precision is poised to continue to be a critical supplier to Boeing, Airbus and engine makers,” Schwerdtfeger says. “Hot companies come and go, but people will continue to need airplanes and fuel until ‘Star Trek’-quality transporters come into fashion.”
And if Precision hits the stratosphere, you might as well borrow from Captain Kirk: “Beam me up, Mr. Buffett.”
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Precision Castparts Is Warren Buffett’s Biggest Bet originally appeared on usnews.com
