Buffett's Bet: Aerospace and Energy

08/25/2015 7:01 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Warren Buffett has done it again, announcing plans to buy an aerospace and energy firm for $37 billion, notes Ian Wyatt, editor of Million Dollar Portfolio.

Buffett's Berkshire Hathaway (BRK-B) will buy Precision Castparts (PCP), a huge company with $10 billion of annual sales, $1.5 billion of net income, and 30,000 employees.

The aerospace business—which makes fasteners and turbine blades for airplanes—has been thriving, as airlines upgrade to more fuel-efficient airplanes.

Meanwhile, the energy business has been under pressure, due to the sharp drop in crude oil prices. In turn, investors had been selling off Precision shares. Prior to Buffett's bid, the shares had fallen 30%.

Once completed, this acquisition will mark the largest ever by Berkshire Hathaway. Berkshire plans to finance the deal with $23 billion of cash and $10 billion in debt.

Existing Berkshire shareholders will not experience any dilution as a result of the transaction.

After the acquisition, Berkshire will be out of the market for big acquisitions for at least one year. The company will have $43.5 billion of cash reserves after making the acquisition, providing a healthy amount of financial liquidity.

Year-to-date, Berkshire Hathaway shares have lagged the market, in part due to a $16 billion profit windfall from its investment in H.J. Heinz.

I remain bullish on Berkshire Hathaway and this acquisition. The stock continues to be one of the top blue chip investments that you can own today.

Year-to-date, Berkshire Hathaway shares have lagged the market. Meanwhile, the shares are attractively priced and offer meaningful upside from the current level price of $143.

Berkshire Hathaway is a buy at these levels. I expect shares could rise 15% or more in the next year.

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