Warren Buffett Makes $37.0 Billion On Aerospace and Titanium

Warren Buffett Expects Aerospace SectorIn August, noted investor Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) bought Precision Castparts Corp. (NYSE:PCP) at a price of $235.00 per share, amounting to nearly $32.5 billion in cash. The details of the transaction are less important than what the billionaire from Omaha’s logic was behind the acquisition. By his own admission, he bought it at a high price—especially considering PCP’s 52-week low was $186.00 a share.

Buffett is clearly bullish on aerospace; and Precision Castparts is a world leader in the manufacturing of highly complex titanium alloys and other metal parts for that sector. Titanium casting is not for everyone. There are but a handful of specialists worldwide; PCP just happens to be the most important one. The company admits that the highly-specialized nature of its products and production processes have acted as a barrier to potential competitors. Not surprisingly, PCP ranks first or second in each of its markets and any would-be challenger would have to face massive investments just to catch up—let alone compete.

With little competition, PCP is less bound by price concerns than similar part suppliers. Moreover, the critical nature of the components, most of which are used in aircraft engines and gas turbines for power generation plants, means that its customers are unlikely to encourage cutting corners to save costs or to find bargain basement price alternatives. Growing energy demands and new regulations demanding lower carbon dioxide emissions will see a gradual switch from coal to gas, requiring turbines.

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But it is the prospect of long-term growth in the aerospace sector that attracted Buffett to PCP, which sells to Boeing, Airbus, or Lockheed Martin.

Boeing and Airbus each have growing backlogs of thousands of airplanes. Whether or not people like it, the Iran nuclear deal means that that country’s airlines will finally be allowed to upgrade their equipment. Iran alone expects its airlines to buy 1,000 new airliners over the next decade. Before the Revolution of 1979, Boeing and Iran Air were close partners. After last August’s deal. Mohammad Khodakarami, the head of Iran’s Civil Aviation Organization said Iran would begin renewing its fleet at the rate of 80-90 planes, valued at some $10.0 billion per year.

As much as Buffett, one of the wisest financiers in history, has bet on long-term growth in commercial aerospace by choosing to make his biggest single investment in PCP, he has also made a bet on titanium. Indeed, Buffett, not one to gamble, is not the first to have expressed confidence in airplanes the materials needed to make them.

In March of this year, Alcoa Inc., the world’s largest aluminum company, whose performance serves as one of the gauges of global economic appetite, bought RTI International Metals, Inc. (NYSE:RTI), one of the world’s main titanium producers outside of Russia for $1.5 billion.

Alcoa, like Buffett, has also bet on the aerospace industry, expecting seven percent annual growth over the next five years. Just weeks before buying RTI (which generates some 80% of its revenues from aerospace), Alcoa acquired other titanium makers such as Tital, a German producer of titanium components for engines and aircraft fuselages, and Firth Rixson, one of the world’s main manufacturers of jet engine components.

To get a sense of titanium for the aerospace industry, note that a Boeing 777 airliner contains some 130,000 pounds of this metal, while an Airbus 380—the world’s largest airliner—has as much as 200,000 pounds distributed among all structures and components from landing gear to engine fan blades. The Lockheed SR-71 “Blackbird,” the world’s fastest jet aircraft, was one of the first to use titanium widely.

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