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Warren Buffett

Buffett Heads Back to Manufacturing with $35 Billion in Deals

April 27, 2016
In February, Buffett told shareholders to expect profit in the manufacturing, service and retailing segment to “grow substantially in 2016 as Duracell and Precision Castparts enter the fold.”

When Warren Buffett took control of Berkshire Hathaway Inc. in the mid-1960s, it was a struggling textile manufacturer. After trying for years to revive its fortunes, he shuttered the mills and turned his focus to other industries.

Today, Berkshire is one of the most-valuable companies in the world because of those efforts. It has interests in insurance, utilities, transportation, retail and -- increasingly -- manufacturing.

The billionaire has been beefing up the segment of his business that makes everything from T-shirts to bricks. In January, he completed a $32.7 billion takeover of Precision Castparts Corp., a supplier to the aerospace and energy industries. And a month later he closed on the acquisition of battery maker Duracell for more than $2 billion.

The deals are part of a broader evolution at Berkshire, which will be on full display as shareholders gather this weekend for the company’s annual meeting in Omaha, Neb. In his earlier years running the company, Buffett focused on investing in stocks by using funds held at insurance units. More recently, he’s sought to diversify by buying whole businesses, several of which will showcase their wares in an exposition hall adjacent to the meeting.

Buffett's 'Short List’

While the latest acquisitions were for manufacturers, that may have been driven by circumstance rather than a “grand strategy,” said David Rolfe, chief investment officer at Wedgewood Partners Inc., which manages $8.5 billion including Berkshire shares. The deal for Duracell was part of a tax-saving stock swap with Procter & Gamble Co. And the Precision Castparts takeover got done after shares of the manufacturer slumped amid lower demand from customers in the oil-and-gas industry.

“He’s got his short list in his head of stuff that he’d like to own and that would move the needle,” Rolfe said of Buffett. “If it’s another one in the manufacturing industry, so be it.”

The new businesses will probably be a major driver of earnings at Berkshire this year. In February, Buffett told shareholders to expect profit in the manufacturing, service and retailing segment to “grow substantially in 2016 as Duracell and Precision Castparts enter the fold.”

Analysts at UBS Group AG estimate that the aerospace supplier alone will contribute $2.59 billion in pretax profit this year. In 2015, Berkshire’s manufacturing businesses -- which also include a chemical company, a toolmaker and Fruit of the Loom -- produced $4.89 billion in earnings before tax. Duracell’s contribution to the group could be as much as $350 million annually after tax, according to Jim Shanahan, an analyst at Edward Jones.

‘Stronger Multiple’

Both purchases will probably benefit investors, he said. A month before the Precision Castparts deal was completed, Buffett’s company had more than $70 billion in cash that was earning almost nothing. Adding manufacturers means Berkshire will be getting a greater portion of profit from a sector that investors value highly, Shanahan said.

“As they diversify away from insurance and they add more manufacturing, on balance, the earnings warrant a stronger multiple,” he said. “It’s favorable for valuation.”

Berkshire had climbed 11% this year through Tuesday, beating the 2.3% rise in the Standard & Poor’s 500 Index. The company isn’t expected to report its full results for the first quarter until May 6, though Buffett may provide a snapshot of earnings at the annual meeting.

There are other differences between the manufacturing operations Berkshire owns now and Buffett’s early chapters with the company.

The billionaire knew the textile business was declining when he started buying the stock in 1962. In contrast, many of Berkshire’s manufacturers now are in growing industries and often make acquisitions to expand into new areas.

Lubrizol, a chemical company that Buffett bought in 2011, has been a regular buyer of businesses. Precision Castparts will also probably keep expanding through acquisitions, Buffett has said. And the company is poised to benefit if increasing demand for travel boosts aircraft production.

Buffett understood that the textile industry had “all kinds of problems” and “made every effort to turn around a business that was going downhill,” said Bill Smead, who oversees about $2.4 billion including Berkshire shares at Smead Capital Management. “That’s not the kind of businesses that he’s getting involved in now.”

By Noah Buhayar

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Licensed content from Bloomberg, copyright 2016.

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