Of late, the world's most successful investor, Warren Buffett, has made no secret of the fact that Berkshire (BRK.B) is looking to make a large acquisition. In a recent piece, I suggested that Waste Management (WM) might be a good fit for Berkshire. Similarly, I believe The Clorox Company (CLX) would also be a good fit for Berkshire.
Buffett Buys What He Knows
One trademark of Warren Buffett's investing style is that he only buys businesses that are simple and that he truly understands. In terms of private companies, Berkshire's holdings are focused in a few areas: insurance, retail operations, railroads, construction, and chemicals. Some notable companies owned by Berkshire include GEICO, General Re, Dairy Queen, See's Candies, Acme Brick, and Benjamin Moore. Berkshire's two most recent massive acquisitions were railroad operator Burlington Northern Santa Fe and specialty chemical producer Lubrizol. CLX meets this criteria as the company that is simple to understand. CLX, a consumer products company, creates and sells products that make everyday life better.
Brands and Moats
Buffett often says that he likes to buy high quality brands and companies with wide competitive moats. Evidence of what Buffett likes to buy can be seen by looking at his five largest stock holdings: Coca Cola (KO), Wells Fargo (WFC), IBM (IBM), American Express (AXP), and Procter & Gamble (PG). All of these companies have something in common: they have highly visible, trusted, and valuable brands. Likewise, CLX is a company with many strong brands, most notably Clorox bleach. However, Clorox is not the only strong brand in CLX's portfolio. Other highly respected brands include 409, Glad, Burt's Bees, Brita, and many others. The reputation of these brands has been built over many years and has created something of a moat for CLX.
Price & Valuation
Currently, CLX trades at 18 times trailing earnings and 16 times forward earnings. Based on these numbers, it is difficult to argue that CLX is "cheap", but Buffett does not necessarily seek out "cheap" investments. Buffett has famously said:
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
In terms of the value of the deal, currently CLX's equity value is $9.66 billion and the company has debt of $3 billion. So, given a reasonable premium, the total cost of the deal for Berkshire would be likely be about $15 billion. Buffett has said that he is looking for a deal between $20 billion & $30 billion so CLX is a bit on the small size. That being said, Buffet could buy another company in addition to CLX if he wants to spend more of Berkshire's cash.
Carl C. Icahn
In 2011, noted investor Carl C. Icahn pushed for a sale and actually made his own bid for the company. For Icahn, his crusade to get CLX sold to another company failed, coming to an end in late 2011. It must be noted, though, that the CLX board did not seem terribly interested in selling the company to anyone, especially Icahn. However, perhaps management would be more open to a buyer like Berkshire as Buffett would likely allow the company to continue running much like it is today with the same leaders.
Given its simple and easy to understand business, competitive advantage, market leading position, and price, CLX is a good fit for Berkshire and a possible target for Buffett. However, my speculation that CLX could be takeover target for Berkshire is not the only reason to consider the stock. The company's solid growth prospects in addition to stealth dividend history make this stock worth owning for any long-term investor, not just Buffett.