PCP: Capital Allocation History & Introduction to Valuation Framework - Modern Day Value Investing Part 3

 Precision Castparts generated over $11bn of operating cash flow, and August 26, 2015 nearly the same amount of net income, over the last 13 years while achieving a 20% EPS CAGR and an average ROIC and ROE of 15% and 18% respectively. Not only is Precision Castparts highly acclaimed in its PRECISION CASTPARTS (PCP:NYSE) operational execution (increasing margins), but it’s also a leading example PRICE TARGET: NA of the power in able to re-invest capital in value creative opportunities CONSIDERATION: NA (profitable growth).

Market Information  Between FY 2013 and FY 2013, Precision Castparts consistently invested in M&A to drive growth while spending an enviably limited amount on Share Price $ $228.88 maintenance capex. However, at the end of FY 2013, PCP initiated its first 52 Week High $249.12 share repurchase in over a decade. Not only did PCP initiate a share 52 Week Low $186.17 3M Avg Vol. $mm $217.62 repurchase program, but the share repurchase became the largest use of capital through the announced acquisition by (BRK). Mkt Cap $bn $31.7 Firm Value $bn $36.0  Moreover, the share repurchases took place when PCP traded at a market estimated NTM PE range of 16.5x to 18.5x which is greater than the 10 year

historical PCP NTM PE multiple of 16.3x. Was PCP overpaying to acquire its Financials ($mm) 2013 2014 2015 shares or alternatively was PCP taking advantage of a lack of confidence by the market in PCP’s ability to generate net income. More recently, the PCP Revenue 8.378 9,533 10,005 management target EPS declined from a range of $15.50 to $16.50 per EBIT 2,190 2,659 2,604 share to $12.25 to $13.15 per share. % Margin 26.1% 27.9% 26.0% % Growth 20.6% 21.4% (2.1%) Net Income 1,458 1,777 1,530  In November 2012, before initiating a share repurchase program, PCP % Margin 12.2% 24.0% 10.2% announced one of its biggest M&A transactions acquiring Metals % Growth 19.1% 21.9% (13.9%) (TMET) for $16.50 per share all cash with a total transaction value of nearly EPS 9.94 12.12 10.66 % Growth 18.2% 22.0% (12.0%) $3bn. The transaction value represented over 13% of the PCP value. Morgan Div. Per Share 0.12 0.12 0.12 Stanley acted as the Financial Advisors to TMET and prepared a Fairness Opinion which was published in the transaction filings. Reviewing the Net Debt / (Cash) 3,527 3,210 4,112 fairness valuation performed by Morgan Stanley and applying such valuation Net Debt / EBITDA 1.5x 1.1x 1.4x to PCP today implies a PCP transaction value of $268 to $289 per share. ROE 16.1% 16.6% 13.9% ROIC 13.2% 12.3% 10.2%  Despite numerous signals highlighting the undervaluation of the Berkshire 5 Yr Avg ROIC 13.2% offer, the deterioration in the general markets while the PCP share price has remained stable through the turmoil could provide current PCP

investors the opportunity to re-invest capital at a higher rate of return.

Alternatively, investing in PCP today could provide a safe haven for the duration of the transaction. Soulor Research www.soulorresearch.com

Director of Research: Nicolas Carreras [email protected]

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 1

PCP Financial Considerations

Between Fiscal Year 2003 and 2015, PCP generated $11.7bn in operating cash flow (almost equivalent to the generated Net Income of $11.4bn).

PCP Historical Cash From Operations ($mm) - Sources of Cash - Lumpy but growing strong

2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

200

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 2

PCP allocated the capital across Capex (maintenance capital spend and growth capital spend), M&A (growth capital), Share Repurchases (return of capital to shareholders) and Dividends (return of capital to shareholders). Between the 2003 – 2013 timeframe and the 2014 – 2015 timeframe the PCP capital allocation framework changed dramatically as M&A went from 83% to 36% and Share Repurchases went from 1% to 46%. Capex allocation remained fairly similar at 15% and 18% respectively and the Dividend allocation remained at 1%.

Uses of Cash from 2003 - 2013 - M&A is biggest use of capital

Capex M&A Dividend Share repurchase 1.3% 0.8% Share Repurchase Dividend

14.9% Capex

83.0% M&A

Uses of Cash from 2014 - 2015 - Share repurchase is biggest use of capital

Capex M&A Dividend Share repurchase

17.6% Capex 45.6% Share Repurchase

36.0% M&A

0.8% Dividend

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 3

The Capex allocation over the last 13 years highlights the limited maintenance capex requirements of PCP which ranged from 2.0% to 4.5% of sales.

Capex ($mm) - Very steady Capex as % of sales between 2.0% and 4.5% and a small portion of uses

500 Capex % of sales 5.0%

450 4.5%

400 4.0%

350 3.5%

300 3.0%

250 2.5%

200 2.0%

150 1.5%

100 1.0%

50 0.5%

0 0.0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

17.6%

PCP increased the nominal dividend per share consistently, however, as a % of Net Income (the payout ratio) dividends actually declined from 5% of Net Income to 1% of Net Income.

Dividends ($mm) - Although PCP constantly increased its dividend but the total dividend is insignificant and the payout ratio constantly declined

20 Dividend % of sales 6.0%

18 5.0% 16

14 4.0% 12

10 3.0%

8 2.0% 6

4 1.0% 2

0 0.0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

17.6%

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 4

Starting at the end of FY 2013, but ramping up in 2014 PCP shifted its capital allocation to share repurchases. The chart below indicates the amount spent on share repurchases relative to the PCP next twelve months (NTM) PE multiple between 2006 and Q1 2016. The average PCP NTM PE multiple between January 2006 and June 2015 was 16.3x. PCP acquire a majority of its shares in FY 2014 and 2015 while PCP NTM PE multiples were between 18.5x and 16.5x.

Share Repurchase ($mm) - A vast majority of share repurchases executed between 18.5x and 16.5x NTM PE

1,800 Share repurchase Hist. Fwd PE Multiple 20.0x

1,600 18.0x 1,400 10 year average Hist Fwd NTM PE Multiple of 16.3x

1,200 16.0x

1,000 14.0x 800

600 12.0x

400 10.0x 200

0 8.0x 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q116

17.6%

Did management purposefully choose to pay a higher PE to repurchase shares than the average PE and destroy value? Or alternatively, did management believe that the NTM Earnings (the denominator) was too low and that it was actually buying back shares at a lower PE? In other words, while near term EPS Guidance fell from $15.50 - $16.50 to $12.25 - $13.15 and the share price reacted accordingly, did the PCP board continue to believe in the higher earnings range?

The below chart highlights the Berkshire Headline Offer PE multiple of 18.5x at the current EPS guidance which is at a slight premium to the average NTM PCP PE but only in-line with the multiple that PCP was willing to repurchase its own shares.

However, assuming the original EPS guidance, the BRK Offer PE multiple is 14.7x which is significantly below the PCP average as well as the S&P 500 last 10 year NTM PE average of 15.1x.

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 5

At first glance the BRK Offer Multiple appears to be 18.5x but could it actually be 14.7x?

1,800 Share repurchase Hist. Fwd PE Multiple 20.0x Berkshire Offer Headline PE multiple of 18.5x based on most recent 2016 EPS Guidance 1,600 18.0x 1,400 10 year average Hist Fwd NTM PE Multiple of 16.3x

1,200 16.0x Berkshire Offer based on original 2016 EPS Guidance Implied NTM PE of 14.7x 1,000 14.0x 800

600 12.0x

400 10.0x 200

0 8.0x 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q116

17.6% Throughout the timeframe, PCP has generated strong Returns on Equity and Invested Capital. Between 2005 and 2008 the returns consistently increased but subsequently declined. The average ROE and ROIC remain an envious 18% and 15% respectively. How many investment managers have generated an 18% annualized return over the last 11 years.

PCP Generates Steady and High Returns on Equity and Invested Capital

30% ROE ROIC

25%

20%

15%

10%

5%

0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

One possible reason for the decline in the returns over the last 2 years is the timing factor related to obtaining the full earnings of the $3bn Titanium Metals (TMET) acquisition in November 2012. At the transaction time, TMET represented over 13% of the value of PCP and PCP was TMET’s largest customer (15% of sales).

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 6

PCP Acquisition of Titanium Metals in 2012

The PCP acquisition of TMET provides a framework for M&A transaction analysis in the sector. Investors can review the transaction documentation including the Fairness Opinion provided by Morgan Stanley to TMET stating the transaction was at a fair value.

Link to SEC TMET Acquisition 14D9 Document:

http://www.sec.gov/Archives/edgar/data/1011657/000119312512476541/d440886dsc14d9.htm

A fairness opinion in an M&A transaction is a written opinion from a professional advisor (such as and almost always an Investment Bank) to the selling companies Board of Directors highlighting that the offer price is fair. A fairness opinion oftentimes includes several valuation methodologies including but not limited to:

‘1) Historical % Transaction Premium Paid (% premium to pre-announced target share price)

‘2) Current Peer Comparable Trading Multiples

‘3) Historical Peer Comparable Trading Multiples

‘4) Historical Peer Comparable Transaction Multiples

‘5) Discounted Cash Flow Valuation Analysis

‘6) Leveraged Buyout Analysis

The Morgan Stanley valuation analysis is provided below to provide a framework for how the PCP Board of Directors potentially thought about the BRK offer when it chose to unanimously approve the transaction.

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 7

Historical Transaction Premium

"Morgan Stanley also reviewed the premiums paid in all acquisitions of worldwide public targets with a value of $1bn or more between 1/1/90 and 9/30/12 over the unaffected stock price, defined as the stock price four weeks prior to the earliest of the deal announcement, announcement of a competing bid, or market rumors. Based on its professional judgement and taking into consideration, among other things, the observed percentage premiums paid in such transactions, Morgan Stanley applied a premium to the current market price per share of Commong Stock ranging from 30% to 40% and derived a reference range of implied equity value per share of the Common Stock of $14.75 to $16.00. Morgan Stanley noted that the $16.50 per share offer price represented a 44.2% premium to the Common Stock's closing price on 11/8/12."

TMET Historkcal Transaction Premium 30% to 40% --> Applied to PCP Trans. Prem. TMET Share Price Information Price / Disc

Price November 8, 2012 11.44 44.2% Transaction Price 16.50 12 Months Pre November 8, 2012 Min 10.42 58.3% Average 13.42 22.9% Max 16.53 (0.2%)

Morgan Stanley Transaction Premium Analysis Historical Transaction Premium 30.0% 40.0% Implied TMET Value 14.75 16.00

Trans. Prem. TMET Imp PCP Implications for PCP Price / Disc Prem Fair Price

Price August 7, 2015 193.88 21.2% 44.2% 279.63 Transaction Price 235.00 12 Months Pre August 7, 2015 Min 186.17 26.2% 58.3% 294.80 Average 216.80 8.4% 22.9% 266.52 Max 245.54 (4.3%) (0.2%) 245.09

Unaffected Price 193.88 193.88 Premium 30.0% 40.0% PCP M&A Val 252.04 271.43

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 8

Applying a 30% to 40% premium to the PCP unaffected stock price of $193.88 implies a fair PCP Transaction value of $252.04 to $271.43 per share. The Berkshire offer of $235 per share represents a 7% to 14% discount to the fair transaction value. PCP offered a 44.2% premium to the TMET unaffected stock price which would imply a PCP transaction share price of $279.63. The Berkshire offer of $235 per share represents a 16% discount to the fair transaction value.

In addition, a review of several of the prior Berkshire acquisitions including Wrigley, BSNF, and highlights Berkshire paid transaction premiums from 20% to 31% which would imply a transaction price for PCP of $232.66 to $253.98. The average transaction premium paid by Berkshire is 26.8% which would represent a PCP price of $245.74.

Recent Transaction Premiums Paid by Berkshire

Date Target % Premium

Apr-08 Wrigley 28.0% Nov-09 BNSF 31.0% Mar-11 Lubrizol 28.0% Feb-13 HJ Heinz 20.0%

Average Berkshire Transactin Premium Paid 26.8%

Unaffected PCP Price 193.88 193.88 193.88 Berkshire Average transaction premium % 20.0% 26.8% 31.0% Implied Premium $ 38.78 51.86 60.10 Implied PCP Transaction Value 232.66 245.74 253.98 BRK Offer Premium / (Discount) 1.0% (4.4%) (7.5%)

Wall Street Price Targets

In the Fairness Opinion Morgan Stanley provided to TMET, Morgan Stanley highlighted the standalone (pre transaction announcement) price targets of 3 Wall Street Brokers: (1) $13.00; (2) $17.00; and (3) $20.00. The average price target was $16.67. Morgan Stanley thereafter applied a 9.5% discount rate (based on professional judgement and cost of capital analysis) to imply a 1 year discounted price target value of: (1) $11.87; (2) $15.53; and (3) $18.26. The average discounted back price target was $15.22. The transaction price of $16.50 represented an 8.4% premium to the discounted back average price targets. However, Morgan Stanley did not apply a transaction premium to the standalone fair value. Had Morgan Stanley applied a transaction premium to the standalone fair value targets discounted back one year the transaction price of $16.50 per share would have represented a discount of 17% to 23%.

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 9

Before the rumors of the transaction started, 7 Wall Street Brokers had Price Targets for PCP ranging from $213 to $244 with an average of $224.

Morgan Stanley Fairness Opinion Review of TMET Public Market Target Prices Target Price Discount Prior to Offer Rate End Yr Broker 1 13.00 9.5% 11.87 Broker 2 17.00 9.5% 15.53 Broker 3 20.00 9.5% 18.26 Average 16.67 15.22

PCP Offer 16.50 16.50 Offer Premium / (Discount) (1.0%) 8.4% PCP Public Market Target Prices and Morgan Stanley Discount Methodology Target Price Estimated Transaction Value MS TMET Prior to Offer Low High Discount Rate End Yr Broker 1 215.00 9.5% 196.35 Broker 2 221.00 9.5% 201.83 Broker 3 218.00 9.5% 199.09 Broker 4 230.00 242.00 252.00 9.5% 210.05 Broker 5 244.00 9.5% 222.83 Broker 6 225.00 9.5% 205.48 Broker 7 213.00 250.00 9.5% 194.52 Average 223.71 246.00 252.00 204.31 Berkshire Offer 235.00 235.00 235.00 235.00 Offer Premium / (Discount) 5.0% (4.5%) (6.7%) 15.0%

Morgan Stanley Historical Transaction Premium 40.0% Public Market Standalone Fair Value of PCP (Discounted back 1 year to today) 204.31 Implied Takeover value 286.03

The Morgan Stanley methodology would yield a standalone PCP value of $204.31 implying a BRK offer premium of 15%. Applying a 40% transaction premium to the standalone fair value would yield a takeover fair value of $286.03.

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 10

Peer Comparable Trading Multiples

Morgan Stanley identified several comparable peers to TMET including Precision Castparts, Allegheny Technologies, Carpenter Technologies, Toho Titanium and RTI International Metals (Please note Alcoa announced the acquisition of RTI in early 2015 – A Barclays Fairness Opinion is publicly filed). Morgan Stanley notes it attached limited relevance to Toho as it is distinct from TMET. Morgan Stanley’s analysis yielded a fair value range of $9.50 to $16.50. The analysis does not include a transaction premium. Based on the analysis, Morgan Stanley stated the standalone fair value of TMET was $9.50 to $16.50.

Peer Trading Multiples Range Low Mean Median High

2012E Enterprise Value / EBITDA 7.7x 9.6x 9.0x 12.4x 2013E Enterprise Value / EBITDA 5.9x 8.5x 7.3x 13.6x 2012E P/E 15.3x 20.8x 18.0x 32.2x 2013E P/E 12.6x 15.3x 14.3x 20.0x

Morgan Stanley Applied 2013E EV/EBITDA 6.5x 8.0x Implied Fair Value Per Share of TMET Street Case 11.00 13.75 Management Case A 9.50 11.75 Management Case B 11.50 14.00 Management Case C 13.25 16.50

Morgan Stanley "Stated" Fair Value of $9.50 to $16.50 Analysis Fair Value of $12.80 to $28.84

However, Morgan Stanley did not indicate why it used 6.5x and 8.0x EBITDA multiples when the average was 8.5x and the High was 13.6x. The table below indicates the TMET value based on the average and high EBITDA multiples.

Management Case Management Case A B C A B C

2013E EBITDA 268 319 370 268 319 370 Multiple - Mean / High 8.5x 8.5x 8.5x 13.6x 13.6x 13.6x Implied Firm Value 2,278 2,712 3,145 3,645 4,338 5,032 Less: Net Debt (38) (16) 17 (38) (16) 17 Implied Equity Value 2,240 2,696 3,162 3,607 4,322 5,049 Implied Value per Share 12.80 15.40 18.06 20.60 24.69 28.84

The analysis highlights the subjectivity involved in such analysis.

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 11

Given what appears to be a significant amount of subjectivity which remains unexplained, we undertook a separate peer comparable analysis for PCP. The peer group includes: Triumph Group; Allegheny Technologies, Alcoa, Rolls Royce, Airbus, Boeing and Transdigm.

The first part of the analysis reviews the 10 year historical forward Next Twelve Months EBITDA multiples of the peer group.

Historical Forward NTM EBITDA Multiples - Over 10 years, PCP trades on average at a 36% premium to peers

14 PCP ATI Total Peers

13

12

11

10

9

8

7

6

5

4 8/31/05 8/31/06 8/31/07 8/29/08 8/31/09 8/31/10 8/31/11 8/31/12 8/30/13 8/29/14

PCP ATI Peers

Minimum 4.3x 4.7x 4.4x Average 9.9x 7.1x 7.4x Max 13.3x 9.6x 10.2x

Pre-Offer 9.8x 6.1x 8.6x The PCP NTM EBITDA multiple was on average 44% and 36% higher than Allegheny and the peer group respectively. In addition, the premium appears to have been very consistent over time. We applied a selected range of EBITDA multiples to the low and the high public market NTM EBITDA estimates to obtain a standalone fair value of $236 to $268 in the table below.

PCP Valuation based on historical and current NTM EBITDA Multiples - $236 to $268

EBITDA Multiple 9.8x 11.0x 12.0x 13.3x 9.8x 11.0x 12.0x 13.3x NTM EBITDA (Low/High) 3,085 3,085 3,085 3,085 3,448 3,448 3,448 3,448 Imlpied Share Price 186.63 214.07 236.30 264.46 212.17 242.84 267.69 299.16

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 12

We run a similar analysis on NTM PE multiples.

Historical Forward NTM PE Multiples - Over 10 years, PCP trades on average at a 5% and 9% premium to Peers and the S&P 500 respectively

30.0x PCP ATI Total Peers SPX

25.0x

20.0x

15.0x

10.0x

5.0x 8/1/05 8/1/06 8/1/07 8/1/08 8/1/09 8/1/10 8/1/11 8/1/12 8/1/13 8/1/14

PCP ATI Peers SPX

Minimum 7.1x 4.9x 8.0x 11.5x Average 16.3x 16.6x 15.5x 15.1x Max 22.1x 30.1x 21.0x 17.6x

Pre-Offer 14.7x nm 15.7x 16.9x

The PCP NTM PE multiple was on average 5% and 9% higher than the peer group and the S&P 500 respectively. We applied a selected range of PE multiples to the current 2016FY EPS guidance and the original 2016FY EPS guidance to obtain a standalone fair value of $270 to $290 in the table below. Management originally guided for an EPS range of $15.50 to $16.50 which has subsequently declined to $12.25 to $13.15. We believe that while the market has discounted the value of PCP to the lower earnings, the PCP board of directors continued to repurchase shares in PCP because they believe the real EPS power of PCP is between $15.50 and $16.50 (please see the discussion above regarding the BRK PE Offer multiple at either 18.5x or 14.7x).

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 13

PCP Valuation based on Current 2016E Guidance - $216 to $290

PE Multiple 14.7x 16.3x 17.6x 22.1x 14.7x 16.3x 17.6x 22.1x 2016E Guidance 12.25 12.25 12.25 12.25 13.15 13.15 13.15 13.15 Imlpied Share Price 180.57 199.70 216.07 270.42 193.84 214.37 231.94 290.29

PCP Valuation based on Original 2016E Guidance - $270 to $290

PE Multiple 14.7x 16.3x 17.6x 22.1x 14.7x 16.3x 17.6x 22.1x Original 2016E Guidance 15.50 15.50 15.50 15.50 16.50 16.50 16.50 16.50 Imlpied Share Price 228.48 252.68 273.39 342.17 243.22 268.98 291.03 364.24

Peer Comparable Transaction Multiples

Morgan Stanley included an analysis of historical peer transaction comparables in the fairness opinion to the TMET Board of Directors. Morgan Stanley included 15 transactions over the past 8 years with a range of LTM EBITDA multiples of 8.2x to 14.4x.

Morgan Stanley assumed a fair range of multiples from 10.0x to 12.5x which implied a fair value of $11.75 to $14.75 (compared to the $16.50 offer price from PCP).

We include the Morgan Stanley selected transaction details below:

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 14

Comparable Transaction Multiples - Morgan Stanley Fairness Analysis for TMET (sale to PCP) Date Target Acquiror Trans Val ($mm) LTM EBITDA Mult

7/17/12 Aerospace Ops of Heroux Precision Castparts 295 13.0x 3/8/12 RathGibson Precision Castparts NA 9/22/11 Sumitomo Metals Nippon Steel 22,474 10.3x 9/12/11 Cons. Precision Castpart Warburg Pincus 600 10.5x 7/18/11 Primus International Precision Castparts 900 11.4x 6/20/11 Latrobe Specialty metals Carpenter Technology 558 9.6x 1/31/11 Transdigm Aero. Fast. Alcoa 240 14.5x 11/17/10 Ladish Co Allegheny Technologies 778 12.2x 8/26/09 Carlton Forge Works Precision Castparts 850 NM 11/11/07 Firth Rixson Oak Hill Partners 1,975 NM 4/26/07 Boehler - Uddeholm Voestalpine AG 5,955 8.6x 2/23/07 FasteTech Doncasters Group 492 8.2x 1/8/07 Cherry Aerospace Precision Castparts 300 NM 12/14/05 Doncasters Group Dubai Int'l Corp 700 9.2x 8/26/05 Specialty Metals Corp Precision Castparts 540 14.4x Total Average 11.1x Total Median 10.5x PCP Average Acquisition Multiple 12.9x * Source: SEC Filed 14D with the management plans ** We estimate the PCP acquisition of Primus was at 15.0x EBITDA and not 11.4x

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 15

Thereafter, we review the PCP transaction (not included in the Morgan Stanley Fairness Opinion):

Titanium Metals Case Study - LTM EBITDA Transaction multiple 13.4x

Unaffected Stock Price 11.44

Offer Price 16.50 % Premium 44.2% Mkt Cap 2,889 Plus: Net Debt (1) Firm Value 2,887

Cons. Base Up Cons. Base Up

LTM EBITDA & Multiple 216 216 216 13.4x 13.4x 13.4x NTM EBITDA & Multiple 268 319 370 10.8x 9.1x 7.8x

LTM Net Income & Mult. 104 104 104 27.8x 27.8x 27.8x NTM Net Income & Mult. 133 168 203 21.7x 17.2x 14.2x * Source: SEC Filed 14D with the management plans

Applying the TMET transaction multiples (13.4x LTM EBITDA and 27.8x LTM PE) to PCP, we obtain a fair value range of $240 to $358 with an average and median value of $302.21 and $304.74.

TMET Transaction Multiples Applied to PCP today

EBITDA Multiple Value

PCP LTM EBITDA (Q1 16) 2,813 13.4x 240.51 PCP LTM EBITDA (Q3 15) 3,143 13.4x 272.30

PCP LTM EPS (Q1 16) 12.14 27.8x 337.18 PCP LTM EPS (Q3 15) 12.92 27.8x 358.84

Average Transaction Value per share 302.21 Median Transaction Value per share 304.74

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 16

Finally, subsequent to the PCP acquisition of TMET, several other transactions have taken place in the sector some of which include PCP and others such as Alcoa’s acquisitions of Firth Rixson which are very similar to BRK’s offer for PCP. The transaction multiples of recent transactions have increased with an average LTM EBITDA multiple of 14.3x which would imply a fair transaction value range for PCP to $259 to $293.

Key Transaction after the TMET Fairness

Date Target Acquiror Trans Val ($mm) LTM EBITDA Mult Jun-13 Permaswage Precision Castparts 600 13.3x Mar-14 Aerospace Dynamics Precision Castparts 625 16.5x Jun-14 Firth Rixson Alcoa 2,900 14.3x Mar-15 RTI Alcoa 1,500 13.1x Average 14.3x Note: Implied PCP Transaction Value 259.41 293.41

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 17

Valuation Summary:

The table below highlights the PCP standalone and takeover valuations calculated in the analysis above.

Applying the TMET Fairness Opinion to PCP (TMET is one of the largest M&A transactions completed by PCP)

Standalone Val Trans. Value Low High Low High

Historical Transaction Premium Analysis from Morgan Stanley in TMET Fairness Opinion 252 271

Public Market Standalone Price Targets 213 244

Morgan Stanley TMET Discounted Value Methodology of Public Market Price Targets 204 214

Morgan Stanley Transaction Premium Range Applied to Discounted Value of Public Market Price Targets 278 286

Berkshire Hathaway Historical Transactions Premiums Paid 233 254

PCP Historical Forward EBITDA Multiple Standalone Fair Value Range 236 268

PCP Historical Forward PE Multiple Standalone Fair Value Range 232 273

Morgan Stanley TMET EBITDA Transaction Multiple Applied to PCP LTM EBITDA 241

Morgan Stanley TMET EBITDA Transaction Multiple Applied to PCP LTM EBITDA as of Q3 2015 272

TMET PE Transaction Multiple Applied to PCP LTM EPS 337

TMET PE Transaction Multiple Applied to PCP LTM EPS as of Q3 2015 359

Average Value 221 250 268 289 Median Value 222 256 252 272 PCP Share Repurchase Price Range Over Last 9 Quarters 195 257 *** Is It A Coincidence That PCP Repurchased Shares At Or Below The Above Calculated Standalone Fair Value? *** Or Did PCP Board of Directors Also Calculate the Standalone Fair Value of PCP between $221 and $250 and purchase 10% of share capital for average price of $221 Bershire Hathaway Offer 235 235 235 235 Berkshire Offer Premium / (Discount) to Average PCP Value 6.1% (5.9%) (12.3%) (18.5%)

Morgan Stanley also performed a Discounted Cash Flow Analysis and LBO analysis on 3 separate management plans. We did not perform a DCF or LBO analysis on the current PCP operations.

The total analysis yields a standalone fair value of $221 to $250 per share. The cumulative average PCP share repurchase price over the last 9 quarters was $221 per share (please see the first note published on seekingalpha and included in the appendix below). In addition, the maximum PCP paid over a quarter of repurchases was $257.14 which is near the high Median value of $256.

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 18

The PCP transaction value analysis yields a fair value of $268 to $289, however the Median range of values is slightly lower at $252 to $272 per share.

The Berkshire offer at $235 per share represents an approximate 6% premium and a 6% discount to the standalone fair value range.

The Berkshire offer represents a 12% and 19% discount to the transaction fair value range.

Since the transaction was announced, nearly 65mm PCP shares (50% of outstanding share capital) have traded hands.

Conclusion:

The valuation analysis highlights a standalone PCP fair value range of $221 to $250 which coincidentally or not is exactly in line with the PCP share repurchase prices paid over the last 9 quarters. The average price paid by PCP over the last 9 quarters for nearly $2.5bn worth of stock was $221 per share.

The Morgan Stanley in the TMET Fairness Opinion states the transaction premium for transactions such as BRK’s acquisition of PCP is between 30% and 40% which applied to the $221 per share would yield a fair transaction price of $287 to $309, a significant premium to the current $235 per share offer. The total transaction analysis yields a fair transaction price range of $268 to $289.

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 19

Appendix: Could It Makes Sense To Accept An Undervalued Takeover Offer?

All of our analysis so far (Modern Day Value Investing Parts 1, 2 and 3) highlight the undervaluation of the Berkshire offer. However, in certain instances, it may make sense to sell or tender shares in an undervalued offer when the net of tax and brokerage fees spread to an index or a better investment opportunity increases dramatically.

During the TMET transaction process, the S&P 500 fell 1.2%. A TMET Shareholder who acquired TMET shares for $13.40 on September 20, 2012 (also equal to the 12 month VWAP) who fell in the 25% Capital Gains Tax bracket would have earned 17.2% on the transaction and adding back the S&P decline would have outperformed the S&P by 18.4%. By immediately re-investing the net of tax proceeds into the S&P, the total return to date would be 57.6%.

An investor who acquired PCP on July 30, 2015 for $195.88 per share would obtain a 12.6% return net of Capital Gains Taxes in the 25% tax bracket compared to the S&P performance of (8.0%) for a net spread of 20.6%. The ability to re-invest the capital into the S&P today or an investment opportunity which yields a better return than the S&P could drive investor outperformance in the future.

There may also be significant investors buying into PCP today in order to prevent a loss of capital from general declines in the S&P.

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 20

Appendix – PCP Historical Share Repurchases

After 10 years without any share repurchases, PCP announced a significant share repurchase program in January 2013 (Q4 13) leading to a fundamental shift in capital allocation away from M&A and organic growth which drove over 15% EPS CAGR for over a decade. PCP acquired over 10% of the share capital in the last 9 quarters with an average price of $221.28. The BRK offer represents a 6% premium to the total blended share repurchase price.

Acquisition Price represents only a 6% premium to a Board highlighted UNDERVALUED Price

Precision Castparts (PCP) - Reecnt Share Repurchase History

Jun 13 Sept 13 Dec 13 Mar 14 Jun 14 Sept 14 Dec 14 Mar 15 Jun 15 (Year End March 31) Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Cumul.

Share Price During Period Low 180 211 227 243 238 226 215 186 200 Average 202 225 251 259 256 243 231 212 210 High 227 254 272 275 275 261 245 242 222

Number of shares repurchased (mm) 0.800 1.000 0.035 0.764 0.637 2.260 0.836 3.486 1.292 11.110 Total spend on share repurchase ($mm) 156 221 9 194 159 524 194 730 271 2,458 Price per share on repurchase 195.00 221.00 257.14 254.53 249.24 231.90 232.07 209.35 210.01 221.28 Premium / (Discount) of BRK Offer 20.5% 6.3% (8.6%) (7.7%) (5.7%) 1.3% 1.3% 12.3% 11.9% 6.2%

Cumulative shares purchased 1 1.800 1.835 2.599 3.236 5.496 6.331 9.812 11.104 Cumulative spend on repurchase 156 377 385 580 739 1,263 1,457 2,186 2,457 Implied cumulative price per share of repurchase 195.00 209.44 209.81 223.21 228.33 229.82 230.12 222.79 221.27 Premium / (Discount) of BRK Offer 12.2% 12.0% 5.3% 2.9% 2.3% 2.1% 5.5% 6.2%

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 21

Source Documentation: All Publicly Available Online

1) PCP Website 2) PCP SEC Filings 3) Triumph Group Website 4) Triumph Group Filings 5) BRK SEC Filings 6) Titanium Metals SEC Filings 7) Alcoa filings for RTI acquisition 8) SEC Filings for various investment funds (13F filings) 9) General Internet

Disclosures and Notices

Soulor Research research and reports express our opinions, which we have based upon generally available information, field research, inferences and deductions through our due diligence and analytical process. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer. However, such information is presented “as is,” without warranty of any kind, whether express or implied. Soulor Research makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. Further, any report on this site contains a very large measure of analysis and opinion. All expressions of opinion are subject to change without notice, and Soulor Research does not undertake to update or supplement any reports or any of the information, analysis and opinion contained in them.

Investing is a risky activity and can lead to substantial losses. This research report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors

This research report is not an offer to sell or a solicitation of an offer to buy any security. Soulor Research is not registered as an investment advisor in any jurisdiction.

You agree that the information in this research is copyrighted, and you therefore agree not to distribute this information (whether the downloaded file, copies / images / reproductions, or the link to these files) in any manner.

PRECISION CASTPARTS (PCP:NYSE) MODERN DAY VALUE INVESTING PART 3 22