Berkshire Hathaway Inc. (NYSE:BRK.A)’s Warren Buffett paid 22x 5 year average EPS for Precision Cast Parts (NYSE:PCP). For many years I regarded 20x as the FMV of grade A #1 companies, a figure I recently increased to 22x to reflect current market realities.
The Oracle is a patient man and has been known to hold large cash balances for years while waiting for the right opportunity. But now he maintains that he will reload his elephant gun over the coming year and then bag another. It really seems as if all that cash was burning a hole in his pocket.
I’ve been operating under a “something’s got to give” line of thinking. But Buffett’s move seems to reflect an opinion that rates will be lower for longer and major corrections may not occur as frequently as they have in the past. Otherwise he could have sat it out another year or two and got a better price for something of comparable quality.
The belief system necessary to support the idea that better prices won’t be available in the short to mid term includes some improbable outcomes:
- China’s command economy can avoid a debt-induced crash indefinitely
- A diminishing pie in oil dependent economies will lead to the elimination of sectarian and ethnic hatred and violence, and peace will prevail in the Middle East.
- Big Banks will no longer game and destabilize the financial system
- Fraud, abuse and manipulation have been permanently removed from all world financial markets
- The EU will achieve a sustained economic recovery by the application of crushing austerity.
- Demographic trends world-wide will revert to growth in the working age population
- And so on and so forth
I don’t get it.
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