Buffett made a big splash into freight transportation with Berkshire Hathaway's (BRK.A) purchase of Burlington Railroad with his announcement in November 2009. Lately, Berkshire Hathaway has increased its mounting cash hoard due to lucrative contracts with Goldman Sachs (GS) and General Electric (GE) yielding 10% coupons, in addition to trimmed stakes in holdings including Home Depot (HD) and the banking and insurance portfolio.
Buffett now says he's on the hunt for the next elephant. Being skilled gunsmiths ourselves and always on the hunt for wide-moat, competitively advantaged firms, we offered to help Buffett. We'd be very surprised if one of the names below isn't Buffett's next big elephant.
Here's what we found:
FirstEnergy (FE): FirstEnergy is a conglomerate of 7 electric utility operating companies, which serves 4.5 million customers in Ohio, Pennsylvania, New Jersey and New York. As well, FirstEnergy owns a generating and marketing subsidiary, First Energy Solutions Corp and a regulated transmission utility. The company's power generation assets are 54% coal and 29% nuclear, and the remainder a combo of oil and natural gas and some hydro. We also believe this stock is a very safe idea for the ultimate retirement portfolio.
FirstEnergy (FE): FirstEnergy is a conglomerate of 7 electric utility operating companies, which serves 4.5 million customers in Ohio, Pennsylvania, New Jersey and New York. As well, FirstEnergy owns a generating and marketing subsidiary, First Energy Solutions Corp and a regulated transmission utility. The company's power generation assets are 54% coal and 29% nuclear, and the remainder a combo of oil and natural gas and some hydro. We also believe this stock is a very safe idea for the ultimate retirement portfolio.Fastenal (FAST) shares are up 41.8% over the last five years. On Friday, February 25, the company paid $0.50 per share in dividends. It typically pays dividends twice per year, and more recently, it also pays a special dividend. The company paid the most dividends per share in 2010 with $1.24. This was a yield of 2% in 2010. Shares trade at a P/E of 34.1, and FAST has a market cap of over $9 billion.
In 2010, company revenues were $2.26 billion with an EBT margin of 18.98% and ROIC of 21.46%. Looking at one competitor, over the last 12 months, WW Grainger (GWW) made $6.98 billion in revenues with an EBT margin of 11.55% and ROIC of 17.59%. However, Fastenal has no debt on its balance sheet, and WW Grainger has a D/E of 0.21.
Fastenal sells different types of industrial and construction supplies in the following product categories: threaded fasteners and miscellaneous supplies; tools; metal cutting tool blades and abrasives; fluid transfer components and accessories for hydraulic and pneumatic power; material handling; storage and packaging products; janitorial, chemical and paint products; electrical supplies; welding supplies; safety supplies; and metals, alloys and materials.
The company operates approximately 2,500 stores located primarily in North America with additional locations in Asia, Europe and Central America. The company operates 11 distribution centers in the United States - Minnesota, Indiana, Ohio, Pennsylvania, Texas, Georgia, Washington, California, Utah, North Carolina and Kansas, and three outside the United States - Ontario, Canada, Alberta, Canada, and Nuevo Leon, Mexico. (Read about more mid-cap bellwethers here.)
Fidelity National Financial (FNF): Fidelity National provides title and specialty title insurance, claims management and information services throughout the United States. It currently holds the largest market share in the title insurance market, at 38%. It currently yields 3.49%. Shares are worth $22 apiece using a discounted cash-flow analysis. Title insurance premium growth will likely remain strong due to bursts of refinancing and foreclosure sales. Margins will benefit from Fidelity’s further use of cost-cutting technology, and should remain around 9-10% as a result. For more details on FNF, see our full article here.
Cloud Peak Energy (CLD): Cloud Peak generated $1.37 billion in revenues in 2010, which was a decrease of 1.96%, after rising 12.78% in 2009. The EBT margins in 2010 and 2009 were 15.46% and 18.2%. The respective ROEs were 8.6% and 150.9%. The 30-day put/call ratio is 0.5. Share price is up 1.6% since December 17, 2010. Cloud Peak Energy is the third-largest U.S. coal producer and the only pure-play Powder River Basin coal company.
Exelon (EXC): Exelon is a utility holding company that provides electricity to 1.6 million customers in southeastern Pennsylvania and 3.8 million customers in Illinois. As well, it provides natural gas retail sales to half a million customers in Pennsylvania. With the largest nuclear fleet of any U.S. utility, Exelon’s 11 nuclear plants in the Midwest and Mid-Atlantic generate 17% of U.S. nuclear power and constitute 80% of Exelon’s generation output. Currently, Exelon trades at $41.04 and yields 5.12%. On a discounted cash flow basis, we believe shares are worth upwards of $70 apiece. Our full long thesis on EXC can be read here. We also think Exelon is a dividend king for 2011.
Actuant (ATU): is a global manufacturer of a broad range of industrial products and systems with operations in more than 30 countries. In FY 2010, ending on August 31, the Company made net sales of $1.16 billion with a 10% increase in profits. B
Return on equity is 3.3% at the end of Q1 2011, or the three months ending November 30, 2010. It was 3.23% at the end of FY 2010, and 1.99% at the end of FY 2009.
Forest Labs (FRX): made $4.33 billion in revenues through December 2010, which is up 4.1% from the same period in 2009. The EBT margin is 23.44%. The current ratio is 5.29. With an EPS of $2.53, the P/E is 12.8. The company expects that EPS for FY 2011 will be in the range of $4.20 to $4.30. EPS was $2.25 for FY 2010. Also, the put/call ratio is 0.3.
The company is an international pharmaceutical manufacturer and marketer. It has a well-established central nervous system and cardiovascular franchises and innovations in anti-infective medicine. Shares are up 3% since January 18, when earnings were released. Its market cap is $9.2 billion.
Gilead Sciences (GILD): made $7.94 billion in net sales and $2.9 billion in profits in 2010. These are respective increases of 13.3% and 10%. In 2009, the same figures were 31.4% and 31.06%, respectively. EPS was at $3.31, which implies a P/E of 11.7. The 30 day put/call ratio is 0.7.
On February 22, the company announced that it would acquire Calistoga Pharmaceuticals for $375 million. Calistoga has a portfolio of proprietary compounds that selectively target isoforms of phosphoinositide-3 kinase (PI3K). This pathway has demonstrated to be a central signaling pathway for cellular proliferation, survival and trafficking. Calistoga’s lead product candidate is CAL-101, which is a first-in-class specific inhibitor of the PI3K delta isoform. PI3K delta is preferentially expressed in leukocytes involved in a variety of inflammatory and autoimmune diseases and hematological cancers. CAL-101 is in Phase II studies as a single agent in patients with refractory indolent non-Hodgkin's lymphoma (iNHL), and in combination with rituximab in treatment-naïve elderly patients with chronic lymphocytic leukemia (CLL). Also, Calistoga’s product development pipeline includes other selective PI3K inhibitors that are in preclinical development, and may have application in both oncology and inflammatory diseases.
Year-to-date, GILD is up 7.5%. Its market cap is $31 billion.
Colgate-Palmolive (CL): As we wrote here, this company has returned 36.03% on invested capital in 2010. The figure in 2009 was 39.32%. The company made $15.56 billion in revenues in 2010, which was an increase of 1.55%, after a flat 2009. Profits also came in at $2.2 billion, which was a decrease of 3.84% in 2010, after rising by 17.06% in 2009. The respective EBT margins were 22.04% and 23.08%. EPS was at $4.31, implying a P/E of 17.9.
Reflecting the company’s positive outlook, the Board of Directors increased the ongoing quarterly common stock cash dividend by 9%. The increase will be effective as of Q2 2011. The new rate of $0.58 per share is up from $0.53. The second quarter dividend is to be paid on May 16, 2011 to shareholders of record as of April 26, 2011. On an annual basis, the new dividend rate is $2.27 vs. $2.03 per share previously. The current yield is 3%. The company has paid uninterrupted dividends on its common stock since 1895.
However, share price is down 3.1% since the FY 2010 earnings release on January 27. Its current ratio is 1.0, and its debt to equity ratio is 1.05.
Kimberly-Clark (KMB): The company sports an ROE of 31.1% in 2010. In 2009, its ROE was 97.74%. The household products industry average ROE is 25.67%. ROA for KMB in 2010 is 9.27%. The PEG ratio for KMB is 1.6 while the industry average is 1.84. Comparatively, the P/Es for KMB and CL are 14.6 and 18.2 for the trailing 12 months. For the household products industry, the average P/E is 16.1.
EPS fell by 1.5% for KMB in 2010, but increased for CL by 17.1% in the first 9 months of 2010. In 2009, CL grew EPS by 19.4%. In 2010, the EBT and profit margins for Kimberly-Clark are 12.9% and 33.17%. Colgate-Palmolive has an EBT margin of 21.9% and profit margin of 59.15% in the first 9 months of 2010. In 2009, the respective figures are 23.08% and 58.77%. The average profit margin for the household products industry is 13.48%. KMB has paid dividends since 1935. The current yield on KMB is 4.3% with an ex-dividend date of March 2, and payment date of April 4. KMB also came up on our list of 8 blue chip stocks for an inflation proof portfolio.
ATP Oil and Gas (ATPG) was incorporated in 1991. The company engages in the acquisition, development and production of oil and natural gas properties in the Gulf of Mexico and the U.K. and Dutch Sectors of the North Sea. At the end of 2009, the company owned leasehold and other interests in 62 offshore blocks and 104 wells, including 19 subsea wells, in the Gulf of Mexico. ATP operates 93 (89%) of these wells, including 95% of the subsea wells. It also has interests in 11 blocks and 3 Company-operated subsea wells in the North Sea. As of December 31, 2009, ATP had estimated net proved reserves of 135.2 MMBoe, of which 91.3 MMboe (68%) were in the Gulf of Mexico and 43.9 MMBoe (32%) were in the North Sea. As of December 31, 2009, the Company’s proved reserves in the deepwater Gulf of Mexico accounted for 62% of its total proven reserves.
In the third quarter of 2010, the company sold a 67% working interest in the deep operating rights of one of its Gulf of Mexico properties to a third party for an undisclosed amount resulting in a $15.0 million gain. In addition, ATP retained a 10.005% overriding royalty interest that decreases to 1.6675% following the conclusion of deepwater royalty relief.
On April 16, 2010, the company acquired Entrada (Garden Banks Block 782) for $232,100. Previous exploration drilling on Garden Banks 782 found logged hydrocarbons, and Entrada is in the vicinity of existing infrastructure owned by others.
The company presents at EnerCom’s The Oil & Services Conference today in San Francisco followed by another presentation on Tuesday, March 1 at the JP Morgan Global High Yield & Leveraged Finance Conference in Miami Beach. For our full long thesis on ATPG from last year, see here.
Hershey (HSY): delivered a ROIC of 20.42% in 2010, after returning 19.01% in 2009. Revenues also grew by 7.03% in 2010, but only showed +3.23% in 2009. Profits grew by 16.93% in 2010, after jumping 40.01% in 2009. The respective EBT margins were 14.26% and 12.67%. EPS was $2.21 in 2010, which implies a P/E of 23.9. HSY shares also have a current yield of 2.6%.
The company recently acquired a minority stake in Tri-Us LLC, which does business as Mix1, as Hershey looks to get more involved in the health and wellness community.
SandRidge Energy (SD) announced on April 4 last year that it will acquire Arena Resources for $40 per share or $6.2 billion. This represented a 17% premium for Arena shareholders.
This also positioned SandRidge as one of the largest producers of West Texas conventional oil and gas. The oil opportunities will come primarily from drilling and development of shallow, low risk reservoirs located on the Central Basin Platform, a part of the Permian Basin in West Texas. The combined company will have over 200,000 net acres in the Permian Basin and 5,700 identified locations to drill primarily in the shallow San Andres and the Clear Fork formations. Additional upside exists with down spacing and future secondary and tertiary potential. SandRidge also owns low risk natural gas properties in the Pinon Field, and significant exploration opportunities in the West Texas Overthrust.
As for business relationships, the company has a good history with Occidental Petroleum (OXY), which processes SD's oil, liquid gases and other production at its Century Plant. The company reports that almost two-thirds of SD's Permian Basin production is crude oil, with 20% natural gas and the remainder natural gas liquids. 17 of 23 rigs are operating in the Permian, with 5 at Mid-Continent and 1 at the Overthrust (Pinon).
CEO, Tom Ward, a co-founder of Chesapeake (CHK) and its COO through 2006, sold shares recently but retains a significant stake. Further, the CFO departed following losses on derivatives contracts related to oil and gas hedging. Notably, Fairfax Financial (FRFHF.PK) holds a 10% stake in the company. We think a buyout would come in around $9-10 billion including debt, or over $10 per share. We think Occidental is interested in SD's assets and it is simply a matter of price and timing.
More recently, the company sold its Wolfberry assets in the Permian basin for $155 million on January 6, 2011. The divested properties are producing ~1,600 Boe/d, and had estimated proved reserves of 2.37 MMBoe, as of December 31, 2009. The proceeds will be used to pay down outstanding borrowings under the company's credit facility. The company is aiming to raise $600 to $800 million in additional capital by the end of 2011.
The company sold its assets in Bone Spring for $110 million on December 10, 2010. With these and the initial public offering of its royalty trust, the Company expects to have raised between $500 and $550 million. You can read more of our explanation of why it’s a buyout target here.
Disclosure: I am long SD, EXC, BRK.B.