Prediction: Warren Buffett Will Buy This Company (CD)

Every once in a while we like to go out on a limb and make an unlikely prediction that just might come true. Like a visit to the casino, we know the odds are against us but sometimes we choose to play anyway.

So here goes:

Warren Buffett will buy a large stake in Realogy (H).

Don’t bother looking up the “H” ticker for a quote—the stock is not trading yet. Realogy is the real estate division of Cendant Corp (CD) which is scheduled to be spun off next month.

Realogy has four main businesses. It operates full service real estate brokerages, brokerage franchises, a relocation service, and a settlement company that provides title, closing, and escrow services. The brokerage and the franchise businesses together earned 89% of Realogy’s revenue in 2005 and 85% of its EBITDA. The “H” ticker symbol stands for “house” or “home.”

Why do we think Buffett might buy a stake in Realogy? For starters we know that Buffett likes the real estate brokerage business. He owns HomeServices of America which is a subsidiary of Berkshire-controlled MidAmerican Energy.

The Oracle of Omaha has also shared his affinity for the brokerage business and expressed his desire to grow his holdings in the sector. Consider this quote from Berkshire Hathaway’s 2005 annual report:

MidAmerican owns the second largest real estate brokerage firm in the U.S. And it’s a gem. The parent company’s name is HomeServices of America, but our 19,200 agents operate through 18 locally-branded firms. Aided by three small acquisitions, we participated in $64 billion of transactions last year, up 6.5% from 2004. Currently, the white-hot market in residential real estate of recent years is cooling down, and that should lead to additional acquisition possibilities for us.

If HomeServices of America is the second largest brokerage in the country, want to guess who’s number one? (Hint.) If you guessed Realogy, you guessed correctly. With 2005 revenue of $7.1 billion and EBITDA of $1.2 billion, not only is Realogy the biggest in the business, but it’s far and away the biggest. Management estimates that it is three times as large as its nearest competitor and has a 25% market share. Realogy got a cut of one in every four domestic homes sold through a brokerage in 2005. Company brands include Coldwell Banker, Century 21, ERA, and Sotheby’s International Realty.

We know Buffett’s sitting on some $40 billion of cash, trying to find a place to put it. With a pot that size, he’s mighty interested in large acquisitions. In a few weeks the number one brokerage business in the world will be available for purchase—whereas previously it wasn’t for sale and was tied up in Cendant Corp’s collection of businesses. It makes sense for Buffett to want to own it.

Our whole prediction only works if Realogy trades at a low price post spin off. There’s no way for us to know if that will happen, and if shares are pricey, Buffett will undoubtedly stay on the sidelines. Based on Cendant’s current valuation however, we wouldn’t be surprised if Realogy spent some time in the bargain bin. That’s why we are predicting Buffett’s interest in the company. And if the housing market gets ugly and Realogy takes a beating, maybe he’ll buy the whole thing.

We remind you again that we’re going out on a limb here and the odds are against us calling this correctly. We’d also advise you not to buy a company based only on speculation of what Buffett will do. Do your research and if the company offers a risk/reward profile that works for you, then consider making an investment.