10 'Elephants' Buffett May Seek to Buy

Includes: A, BRK.A, CB, CL, CMI, GR, HON, ITW, STJ, WBA, WHR
by: Joe Kunkle

In Berkshire Hathaway's (NYSE:BRK.A) most recent annual letter, famed investor Warren Buffett noted that the "elephant gun has been reloaded, and my trigger finger is itchty" in regards to the Company's 3 year high of $38.2B cash on hand.

It is no secret that Buffett prefers to acquire companies with easy to understand business models, consistent operating cash flow and profitability, low amounts of debt, above average operating margins, and a relative value within its industry.

I screened for companies meeting this criteria, and certain other effciency ratios, and also the comments suggest the acquisition is likely to be above $10B, and these were the names that I considered as the most likely targets for Buffett:

Colgate (NYSE:CL): Colgate has a market cap of $38.27B, and a buyout would likely require at least a 15% premium, putting a likely deal around $45B, at the upper end of a potential deal. Although not all that attractive on valuation at 14.1X earnings, 2.46X sales and 25X cash flow, Colgate has a well recognized brand, a simple business model, high margins, and stable cash flow. Colgate does have a high amount of debt on the balance sheet, which could deter Buffett here.

Whirlpool (NYSE:WHR): Whirlpool is trading with a market cap of just $6.16B, and recognized as the leading home appliance Company in the World. Shares are a great value at 8.3X earnings, 0.34X sales and 18.9X cash flow. The margins are fairly low in this business, but the ROE of 15.7% is attractive. Although Buffett may not do his own cooking and cleaning, I am sure he is familiar with the industry, and it is tough to ignore the value here for a Company that will be around forever.

Honeywell (NYSE:HON): This one may be a bit of a stretch with a market cap of $44.3B already, but Honeywell is a leading supplier to the Aerospace industry which Buffett already is familiar with, and also has other business segments that could be spun-off in the future. Shares trade 12.9X next year's earnings, 1.33X sales and 17X cash flow, also a high ROE of 20.7%.

Agilent Technologies (NYSE:A): Agilent has a market cap of $16.3B and shares trade 15.6X earnings, 2.83X sales and 24.16X cash flow, also a high ROE of 26.95% and strong margins. Agilent is also providing strong growth with consistently strong earnings. This one may not fit the familiarity test, but is still a fairly simple business.

Walgreen (WAG): Buffett is a simple thinker and can obviously see that prescription drugs will continue to grow with the population and aging of Americans. Walgreen is a retailer with plenty of room left for expansion, and with a $39B market cap, trades just 14X earnings, 0.57X sales and 17.8X cash flow with a ROE of 15.06%.

Goodrich (NYSE:GR): Goodrich is a $10.8B Company, and also a supplier to the Aerospace industry, the smaller option to Honeywell. Goodrich trades 13.8X earnings, 1.55X sales and 3.2X book with a ROE of 18.14%. The Aerospace industry is hot and new plane orders continue to come in strong, likely to continue from demand overseas, and Goodrich is well positioned as a beneficiary.

Illinois Tool Works (NYSE:ITW): The $27B industrial Company with businesses including metal and plastic components, packaging, food equipment, polymers & fluids, and more has its hands in a lot of rudimentary business lines. Shares are also a value at 12.5X earnings, 1.7X sales, 2.9X book and with a ROE of 16.8%, also limited debt. It is a Company with plenty of value to unlock and would make a great acquisition for Buffett to provide better leadership.

St Jude Medical (NYSE:STJ): The $16.08B maker of medical devices may be a bit out of Buffett's comfort zone, but the Company is a leader in its industry and a value at 13.5X earnings, 3.7X book and 16.6X cash flow with a ROE of 23.58%. It falls under the simplistic approach that people are getting older, hearts are getting weaker, and St Jude fills a need for life saving devices.

Chubb Corp (NYSE:CB): Buffett is a major fan of the insurance industry with Geico being one of his greatest acquisitions ever. Chubb is a $17.55B property and casualty insurer that trades 10.3X earnings, 1.14X book and 9.6X cash flow with a ROE of 13.95%. Insurance is always going to be a necessity and prices will continue to steadily climb, a business that will provide consistent earnings in up and down times.

Cummins (NYSE:CMI): The $20.28B maker of truck engines offers a compelling value at 11.75X earnings, 1.53X sales and a ROE of 24.64%, also without much debt and plenty of cash. Buffett understands that things need to be shipped from here to there, and that was the basis behind his Burlington Northern acquisition, so adding a maker of engines to his portfolio would make some sense.

Those are the 10 names I feel are the most logical buys for Warren Buffett, but in all honesty it could be any of 100 companies. Regardless, each of the names above is a strong value and can be seen as great long term holdings for a portfolio, adding on pullbacks.

A few other names that fit my screen were Northrop Grumman Corp. (NYSE:NOC), General Dynamics Corp. (NYSE:GD), Danaher Corp. (NYSE:DHR), Becton Dickinson & Co. (NYSE:BDX), Covidien Ltd (COV), Dover Corp. (NYSE:DOV), Mattel Inc. (NASDAQ:MAT), and Parker-Hannifin Corp. (NYSE:PH).

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in STJ, ITW, GR over the next 72 hours.