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After Big Aviation Bet, Buffett Is Cautious on Next Acquisition

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Feb. 25 2019, Updated 11:05 a.m. ET

Aviation bet

In his 2018 annual letter, Berkshire Hathaway (BRK-B) chairman Warren Buffett said that he and vice-chair Charlie Munger “hope for an elephant-sized acquisition.” However, Buffett admitted that acquisitions aren’t cheap. He lamented that the company might have to deploy its cash into publicly-traded companies (SPY).

Buffett’s love for large companies that Berkshire Hathaway can fully own isn’t new. Previously, Buffett was looking at such acquisitions and even brought Precision Castparts in 2015.

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Precision Castparts

Berkshire Hathaway already had a minority stake in Precision Castparts before the acquisition. Precision Castparts makes industrial products for sectors including aerospace and oil and gas. The deal was seen as a proxy exposure to the aerospace sector (GE) (BA). Berkshire Hathaway acquired Precision Castparts at a trailing 12-month EV-to-EBITDA multiple of 13x. Buffett didn’t mince any words and called the deal “expensive.” Speaking to CNBC, he said, “This a very high multiple for us to pay.”

Space saw turbulent times

The aerospace component space saw a re-rating after 2015. While investors can’t really predict how Precision Castparts might have played out as a separately listed entity over the last three years, Berkshire Hathaway should have been able to acquire the company at a much lower price after 2015. The acquisition was almost at the peak valuation for companies in the aerospace component space (ARNC).

In the fourth quarter, Berkshire Hathaway sold some shares of Southwest Airlines (LUV), United Continental (UAL), and Charter Communications (CHTR).

Next, we’ll discuss what Buffett had to say about doomsayers.

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