Has Warren Buffett’s ‘big’ mistake finally turned the corner?

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Warren Buffett has won a reprieve on a deal that the billionaire investor only four years ago described as a “big” mistake.

Berkshire Hathaway last month disclosed that it believed the value of Precision Castparts, the aerospace parts maker Buffett bought in 2016 for $37bn, had jumped by nearly $2bn from 2023 to roughly $34bn.

That brings Buffett, the so-called Sage of Omaha, closer to break-even on a deal that forced Berkshire to take a nearly $10bn writedown in 2021.

The Berkshire unit has bounced back recently as the aerospace industry has recovered from the 2020 pandemic, and as Boeing, a big client, has again revved up production after problems with two flagship jets.

Reflecting the reversal of fortunes, Berkshire’s auditor Deloitte & Touche cleared a critical audit matter related to Precision Castparts that had long hung over the sprawling conglomerate’s financial reports.

Critical audit matters, known as CAMs, are a warning sign that an auditor had to make a complex judgment over something that could be material to a business’ financial accounts. Deloitte flagged the issue of Precision Castparts’ valuation for five consecutive years, but Berkshire’s latest annual report, released last month, no longer included one.

In previous years, Deloitte had said the valuation required a “high degree of auditor judgment and an increased extent of effort” to check management’s assumptions and be sure that further writedowns were not necessary. A writedown would be needed if the estimated fair value of a business falls below the so-called carrying value, the historical takeover price Berkshire paid less writedowns and other reductions.

Berkshire disclosed in 2022 that it pegged the fair value of the business just 4 per cent above its carrying value.

But as the outlook for its customers has improved, management has upped its estimate, giving it more wiggle room. That figure jumped to “nearly 20 per cent” in 2024.

“The question for the auditor is always, how wrong can I be? I could be wrong by a lot more than when there was a narrower cushion, and it would not have a material effect on the financial statements,” an accounting firm partner familiar with CAMs said.

The CAMs were, in part, a reflection of the trouble Buffett has had with his high-profile 2016 takeover of Precision Castparts, which was hit hard by the pandemic as airlines paused aircraft deliveries to conserve cash.

Sales fell dramatically in 2020, dropping 29 per cent to $7.3bn, its lowest level since 2012. Profits declined by nearly two-thirds, prompting the $10bn writedown tied to the takeover.

“Precision Castparts is far from my first error of that sort. But it’s a big one,” Buffett said as Berkshire disclosed the writedown, conceding that he had “paid too much for the company”.

The difficulties at Precision Castparts were mirrored more broadly in the aerospace industry, which struggled as demand for new planes dissipated almost overnight. But even as that demand came roaring back as vaccines went into production and passengers returned to the skies, Precision faced other blows.

The unit suffered as one of its biggest customers — Boeing — struggled with production halts and delays of the 737 Max, and then with production stoppages over the 787 Dreamliner, due to quality issues with the jets.

Precision Castparts makes forgings and castings for jet engines, which became a supply chain bottleneck after it slashed its workforce.

Berkshire’s 2024 annual report showed revenues at Precision Castparts finally eclipsed a 2019 peak, rising 12 per cent last year to $10.4bn. Pre-tax profits also continued to rebound, up 24 per cent to roughly $1.9bn.

Buffett told the Financial Times he believed questions over CAMs and Precision Castparts were better addressed at the company’s annual meeting in May. “I hope the questions about Precision Castparts get asked at the annual meeting,” he said in response to the FT.

Precision Castparts remains one of the largest takeovers Buffett has struck, surpassed only by his takeover of the Burlington Northern Santa Fe railroad, according to data from LSEG.