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Summary

  • I will be using a multi-step process to search for a small list of companies that might be the next large acquisition target of Berkshire Hathaway.
  • I focus on companies that have similar characteristics to the top holdings of the Berkshire Hathaway portfolio.
  • My final list of 6 stocks includes one stock that Berkshire Hathaway already has a stake it.

In this article, I will be looking for the next big acquisition target for Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B). The reason why I am looking for targets is because a Reuters article in March, where Warren Buffett said: "he remains on the prowl for more big acquisitions, which he calls "elephants." I will be using a multi-step process to find potential targets that I think Berkshire Hathaway could buy, based on the common characteristics of the Top 5 holdings of the Portfolio of Berkshire Hathaway, which account for 67.74% of the total portfolio.

Step #1: Common Characteristics

For this step, I looked at each of the five stocks that make up the top five holdings of Berkshire Hathaway's portfolio, and those five are listed in the table below. [Portfolio Date from WhaleWisdom.com] I looked at the five companies below to find characteristics that I could enter into the Zacks.com stock screener to get my initial starting list of potential acquisition targets. Below the table is a bullet list of my criteria I entered in the stock screener. After entering the criteria below, I found that 84 companies met all the criteria and those companies would be the start of my search.

% of Portfolio

(NYSE:WFC)

WELLS FARGO & CO

21.79%

(NYSE:KO)

COCA-COLA CO

14.62%

(NYSE:IBM)

INTERNATIONAL BUSINESS MACHINES

12.90%

(NYSE:AXP)

AMERICAN EXPRESS CO

12.44%

(NYSE:WMT)

WAL-MART

4.19%

Screener Criteria

  • Market Cap: >20000 [$20 billion]
  • Exchange: Not Equal to OTC
  • PE [F1] -Forward PE: <25
  • Dividend Yield: >.50
  • 5-year historical dividend growth: >5
  • Long-Term EPS Growth Estimate: >5
  • PEG Ratio: <3
  • ROE: >10
  • Price/Cash Flow: <20
  • Price/Book: <15
  • Price/Sales: <4
  • Beta: <1.5

Step #2: Eliminations

Elimination #1: Market Cap

The first eliminations I made from my last were companies with a market cap of over $40 billion because at that amount Berkshire Hathaway would be using a large portion of their available cash for the acquisition so I cut my list to only those companies with a market cap between $20-40 billion. After this cut, I had 32 companies remaining, which are listed in the table below.

ACE LIMITED

(NYSE:ACE)

MACYS INC

(NYSE:M)

AETNA INC-NEW

(NYSE:AET)

MAGNA INTL CL A

(NYSE:MGA)

AIR PRODS & CHE

(NYSE:APD)

MARSH & MCLENNAN

(NYSE:MMC)

ALLSTATE CORP

(NYSE:ALL)

NORFOLK SOUTHRN

(NYSE:NSC)

AON PLC

(NYSE:AON)

NORTHROP GRUMMN

(NYSE:NOC)

BAXTER INTL

(NYSE:BAX)

PRAXAIR INC

(NYSE:PX)

BECTON DICKINSO

(NYSE:BDX)

RAYTHEON CO

(NYSE:RTN)

BROADCOM CORP-A

(NASDAQ:BRCM)

STRYKER CORP

(NYSE:SYK)

CARDINAL HEALTH

(NYSE:CAH)

TARGET CORP

(NYSE:TGT)

CSX CORP

(NYSE:CSX)

TELUS CORP

(NYSE:TU)

DEERE & CO

(NYSE:DE)

TIME WARNER CAB

(NYSE:TWC)

DISCOVER FIN SV

(NYSE:DFS)

TJX COS INC NEW

(NYSE:TJX)

GENL MILLS

(NYSE:GIS)

TRAVELERS COS

(NYSE:TRV)

ILL TOOL WORKS

(NYSE:ITW)

V F CORP

(NYSE:VFC)

KELLOGG CO

(NYSE:K)

VIACOM INC-B

(NASDAQ:VIAB)

KROGER CO

(NYSE:KR)

WASTE MGMT-NEW

(NYSE:WM)

Elimination #2: Railroads

Out of the 32 companies there were two rail companies included, CSX Corp and Norfolk Southern, therefore, I excluded them from consideration because Berkshire Hathaway already owns BNSF Rails.

Elimination #3: Insurance & Financials

Because Berkshire Hathaway owns GEICO insurance, and has a large position in American Express, I decided to exclude all insurance and financial companies from my list of 32, and those companies are listed in the table below.

AON PLC

AON

DISCOVER FINANCIAL

DFS

TRAVELERS COS

TRV

MARSH &MCLENNAN

MMC

ALLSTATE CORP

ALL

ACE LIMITED

ACE

Elimination #4: Discount Retailers

I chose to eliminate discount retailers from my list of 32 because Berkshire Hathaway has a large position in Wal-Mart, therefore it would not make sense for Berkshire to buy other competing discount retailers. There were two discount retailers included in the list that I eliminated, and they were Target, and TJX Companies.

Elimination #5: Non- US Companies

In the Reuters article I referenced above, Warren Buffett was quoted saying, "Though we invest abroad as well, the mother lode of opportunity resides in America." Therefore, I excluded any companies that were headquartered outside the United States. There were two companies with headquarters outside the United States and they were Telus, and Magna International.

Elimination #6: Already being acquired

For this elimination, I excluded Time Warner Cable because it is already in the process of being acquired by Comcast (NASDAQ:CMCSA).

List after Eliminations

After the above eliminations I made, my list is down to a manageable 19 companies, which are listed in the table below.

AETNA INC-NEW

AET

AIR PRODS & CHE

APD

BAXTER INTL

BAX

BECTON DICKINSO

BDX

BROADCOM CORP-A

BRCM

CARDINAL HEALTH

CAH

DEERE & CO

DE

GENL MILLS

GIS

ILL TOOL WORKS

ITW

KELLOGG CO

K

KROGER CO

KR

MACYS INC

M

NORTHROP GRUMMN

NOC

PRAXAIR INC

PX

RAYTHEON CO

RTN

STRYKER CORP

SYK

V F CORP

VFC

VIACOM INC-B

VIAB

WASTE MGMT-NEW

WM

Step # 3: MOAT Screen

For the 19 stocks above, I will be running each stock through a MOAT screen I created using the Zacks.com stock screener to compare each to other companies in their respective industries and see if they have the best MOAT score. I used four factors to determine my moat score, the first three I will use the stock screener for, and the fourth I will be using a employee recommendation score from Glassdoor.com.

  • ROE [To measure management efficiency]
  • Profitability
  • Intangibles [patents, trademarks, copyrights, business methodologies]
  • Employee Recommendations

MOAT Screen Criteria

For each of the above 19 stocks I looked at the industry each companies was in, and used that as the industry entry for the criteria below. I will show my process using the first stock on my list, which is Aetna. I will rank each company 1 to x many companies in the industry for each of the moat criteria, which are shown below.

Basic Criteria

Exchange: Not Equal OTC

Market Cap: >5000 [$5 billion]

Industry: Med-HMO

MOAT Screen Criteria

ROE: >.01

Net Margin: >.01

Intangibles: >.01

Results

The second table below shows the score for each stock in each category and the stock that has the lowest score is the one that I consider to have the best moat in the industry, and if that company matches the company from my list of 19 stocks above, that company will make my final list. I calculated the moat score by adding the ranking for each stock in the four categories I screened for. In the case of AET, it was not determined to have the best moat score so it was eliminated from being added to my final list. I repeated this process for each of the other stocks on my list of 19, and the stocks that had the best moat score are listed below in the semi-final list section.

Rank

ROE

Rank

Intangibles

1

UNH

17.27

1

UNH

35448

2

AET

16.75

2

WLP

25358.2

3

HUM

13.48

3

AET

12321.6

4

WLP

9.6

4

HUM

3733

Rank

Net Margin

Rank

Employee Rec.

1

UNH

0.05

1

AET

61%

2

AET

0.04

2

HUM

59%

2

WLP

0.04

3

WLP

58%

3

HUM

0.03

4

UNH

46%

ROE

Net Margin

Intangibles

Employee Rec.

Moat Score

UNH

1

1

1

4

7

AET

2

2

3

1

8

HUM

3

3

4

2

12

WLP

4

2

2

3

11

Semi-Final List

Out of the 19 companies above, only eight had the highest moat score for their respective industries, and they are in the table below.

BDX

BECTON DICKINSO

BRCM

BROADCOM CORP-A

DE

DEERE & CO

ITW

ILL TOOL WORKS

M

MACYS INC

RTN

RAYTHEON CO

VFC

V F CORP

VIAB

VIACOM INC-B

Step #4: Book Value Growth

It is widely known that Warren Buffett uses book value growth as a measure of performance; therefore, I will also use it for my final step. I looked at the book value growth for each of the companies above using data from Morningstar, the data is in the table below. After this, my final list is down to the six companies that have had positive book value growth over the last ten years. [VIAB only had 3 years of History]

BV growth

BRCM

4.77

5.99

7.64

7.51

7.38

7.85

10.82

11.97

13.78

14.41

13.07%

RTN

11.87

12.76

13.78

17.65

19.12

20.39

21.66

22.34

32.11

35.34

12.89%

VFC

5.66

6.31

7.3

8.16

8.08

8.65

8.9

10.23

11.63

13.8

10.41%

BDX

12.12

13.14

15.68

17.92

20.26

21.69

23.65

22.48

21

26

8.85%

DE

12.88

14.2

16.2

16.13

15.3

11.39

14.9

16.75

17.64

27.46

8.78%

ITW

12.9

13.45

15.91

17.19

14.99

17.58

18.83

20.71

23.21

22.55

6.40%

M

18.22

24.83

23.33

22.88

11.05

11.06

13.06

14.32

15.31

16.96

-0.79%

VIAB

15.48

14.69

11.56

-13.58%

Final List

BDX

BECTON DICKINSO

BRCM

BROADCOM CORP-A

DE

DEERE & CO

ITW

ILL TOOL WORKS

RTN

RAYTHEON CO

VFC

V F CORP

Closing Thoughts

In closing, I believe that based on my process, the next large acquisition Berkshire Hathaway, will end up being a company that is on my final list. I understand it is likely that some of these companies Berkshire Hathaway would likely not acquire, however I believe that Berkshire could take a stake in these companies as they have already done in Deere. As far as which of the companies do I think have the highest likelihood of actually being acquired by Berkshire Hathaway, I would have to say my top three choices are: Deere, Illinois Tool Works, and Becton Dickinson.

Disclaimer

Source: Potential Acquisition Targets For Berkshire Hathaway