|
Jelly Roll Capital Equity Research |
|
Market Analysis, Education, and Wall Street-Quality Stock Reports |
|
Sizing Up Buffett and Berkshire’s Hit List |
|
Warren Buffett revealed at the annual Berkshire Hathaway (BRK-A, BRK-B) shareholder meeting that he was interested in making a “huge” acquisition in the range of $5 billion to $20 billion or so to put some of his excess capital to work. What kind of companies could fit the bill? We will be screening for companies in that price range ($5 to $25 billion) that generate solid returns on assets and equity (greater than 10% ROA and 15% ROE), and are also trading no more than 20% above their 52-week lows to keep the typical contrarian value flavor in tact. Seventeen stocks meet all those criteria, and they are - from smallest to largest: 1. Lexmark (LXK) Of those, only six - Lexmark, Varian, Cintas, Quest, Intuit, and Rockwell - are trading for less than 25x Enterprise Value/Free Cash Flow. Brown Forman, Hershey, Staples, and Kellogg all miss that cut by a small amount. Of the first group, I think the nature of Varian and Quest’s businesses exclude them from consideration, with a similar result for Intuit. Although Lexmark isn’t an extraordinarily complex business, I doubt Buffett would buy that one either. Rockwell doesn’t appear to be a bad company from a quick financial overview, but I think the much more realistic possibility here is Cintas. Cintas has 18% insider ownership, and the founding family still operates it - traits Buffett has been drawn to in the past. As for the “best of the rest” - the strong brand name recognition among companies like Hershey, Kellogg, Starbucks, and Staples could certainly provide a draw even if the companies don’t appear exceptionally cheap. The trust structure in place at both Hershey and Kellogg are wildcards, but perhaps Buffett has the goodwill and touch to pull off a deal with one of those companies should he so desire. The role Howard Schultz has to play at Starbucks would, in my opinion, be more of an impediment to a deal than a benefit; couple that with my belief that the miserly Buffett would probably fail to see the unique value in a $5 cup of coffee effectively erases any remaining potential of a deal there. While I am loathe to pretend I understand where and how Buffett is allocating capital, it is an interesting pastime and can be profitable if one is correct - as I learned with Posco (PKX), the Korean steelmaker. If I had to place my money on one company here under the idea of a Berkshire acquisition, it would likely be in Cintas (CTAS). I think some of the other companies - particularly Lexmark (LXK) - look more attractive on a valuation basis, but from a holistic standpoint of owner involvement, simple but profitable business models, and industry leading position, Cintas looks to be the winner. Note to Mr. Buffett: should you happen to see this before any final decisions are made about future CIO candidates, I am available to entertain offers. |