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With its $4.3 billion profit booked for the latest quarter, Berkshire Hathaway (BRK.A) now has about $40 billion in cash. [If you don't have $172,000 to throw at a single share of stock, try a Baby Berkshire (BRK.B).]

That's too much, according to legendary chairman Warren Buffett.

The problem is, it's really too much to invest in current holdings. Berkshire Hathaway already has huge stakes in such companies as Coca-Cola (KO) and IBM (IBM). Given the weakness in those two names, buying more makes little sense.

In the last decade, moreover, Berkshire Hathaway has taken to buying whole companies. The investment criteria is pretty simple:

  • Decent growth.
  • An opportunity for market consolidation.
  • No high techies.
  • American.
  • Sound management.
  • Focus on services.

Given these criteria, I did a quick search of companies that might take $15 billion or more of that cash pile off Berkshire Hathaway's hands, leaving ample room for additional investment. I focused on areas where the company has a presence, thus knowledge, but doesn't have a dominating position.

The current ledger of subsidiaries is heavy on insurers, surprisingly heavy on retail, with some representation in food and medical. But the word that jumps out is service - Buffett likes companies that provide vital services, and branded food may be as much of a service business as any other.

Before beginning, let's think about what $15 billion represents. It's more than the value of Myanmar (Burma). It's beyond the category of "mid-cap." You're definitely in the "large cap" category here.

So here is my list:

AutoZone (AZO) - With a $14.85 billion market cap, this company is in the sweet spot. The stock is up 14% over the last year, the market cap is just 1.5 times sales. Operating cash flow last year was nearly $1.5 billion. Profit and operating margins are steady, with net income more than 10% of total revenue.

Cardinal Health (CAH) - Cardinal provides services across the health care sector. Its recent acquisition of Assuramed Holdings improves its market position. Cardinal's present market cap of $20.5 billion makes it something of a stretch - it would wipe out half of Berkshire Hathaway's cash position at a stroke - but there is no reason to call it unaffordable.

Campbell Soup (CPB) - I read reports indicating Buffett was looking at Campbell's before buying Heinz. With a present market cap of $13.3 billion, this branded food company is at the right price, and could be integrated with Heinz to dramatically improve cost-efficiency.

Charter Communications (CHTR) - Charter is presently thinking of trying to buy much-larger Time Warner Cable (TWX), and this deal would shortstop it. The market cap is still under $14 billion, the company does have operating margins, and it could be profitably flipped to an outfit like Liberty Global (LBTYA) or back to Time Warner itself. In a consolidating industry, a piece like this can easily be flipped for a portion of a better piece.

CIGNA (CI) - Berkshire Hathaway already has a host of insurance units, but none are yet in the health area. With the Affordable Care Act now on the way to being implemented, but with maximum political push back, health insurers start looking like bargains. As with Cardinal CIGNA would be a stretch, at $21.7 billion in market cap. But it is still affordable.

Coca-Cola Enterprises (CCE) - This may be the biggest no-brainer on the list. CCE owns many of Coca-Cola's bottling operations, and Buffett is a big fan of Coke. But CCE has never proven to be quite as profitable as its larger sibling. The present market cap of $10.85 billion makes this one a snip. It would probably take some negotiation, directly with Coca-Cola's board, to pull this off. But it's a deal that makes sense.

Con-Agra (CAG) - Again, a food company like Heinz. A market cap of $13.42 billion. A host of brand names to build, and a nice private label business as well. It is something of a turnaround candidate, with falling sales and margins over the last few years. But that is what makes this a bargain. If Berkshire Hathaway can be convinced of management, or bring in new management, it's a deal that can be done.

Hormel Foods (HRL) - Similar to Con-Agra. The present market cap is $11.44 billion. The best known brand is Spam. There are opportunities, however, to combine brands with Heinz, especially with that company now being run by the former head of Burger-King. Buffett also might be persuaded to move following the Chinese takeover of Smithfield Foods. Emotion and patriotism are both in his heart, and in some buys - witness the newspapers he's bought.

Hillshire Brands (HSH) - Again, a meat company. Could easily be combined with Hormel, if he has a preference for one or the others' management team. The present market cap is under $4 billion. This company used to be called Sara-Lee, and has been shedding small units. Better management could reverse that.

Kohl's (KSS) - Berkshire Hathaway likes good managements, and Kohl's has one. The market cap remains under $13 billion, and you're talking about an outfit that has $19 billion in sales, and usually generates $1.5 billion in operating cash flow in an average year. That could improve if Berkshire Hathaway could add some of its jewelry assets to the retail mix.

Tiffany (TIF) - Berkshire Hathaway could use this brand to consolidate industry control with its other jewelry chains. The company's market cap is just $10.1 billion, it's consistently profitable, and for a retailer shows minimal debt, less than 25% of assets.

There are, of course, other ways to play. Which would you choose?

Source: Who Might Berkshire Hathaway Buy Next?