Hey Mr. Buffett, These Companies Are Just Like Heinz!

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

LONDON -- What's so special about Heinz  (UNKNOWN: HNZ.DL  ) , that Warren Buffett -- together with private equity group 3G -- will shell out $28bn to buy it?

The price is certainly no steal, valuing the company at 21 times forward earnings. That's a 20% premium to its all-time high share price, providing an unexpected bonus for investors who were shrewd enough to spot Heinz's value.

I think there are at least two companies on the LSE with similar characteristics: Unilever  (LSE: ULVR  ) (NYSE: UL  ) and Reckitt Benckiser  (LSE: RB  ) . But let's first take a quick look at Heinz itself.

The power of brands
The company is synonymous with the brand name that adorns its tomato ketchup, baked beans, and baby food. In fact, about 40% of turnover comes from products bearing the Heinz brand.

The power of strong consumer brands is double-barrelled: they provide safe and reliable cash flow in established markets, and they form a bridgehead to enter new markets. In "Buffettology," brands create an economic moat that protects a company's earnings.

Though originally a dyed-in-the-wool U.S. family firm, founded in 1869, international expansion has taken Heinz's non-U.S. sales up to 60% of its global revenues. More recently, growth has come from emerging markets. They now account for a quarter of sales, up from 5% a decade ago.

Distinguishing features
Buffett has often favored easy-to-understand companies with strong track records and solid financials. Overall, the factors that I think make Heinz worth 20% more to Warren Buffett than the market was valuing it at are:

  • Internationally recognized consumer brands
  • Growth in emerging markets
  • Solid earnings record
  • Good cash flow
  • Sound balance sheet

Unilever and Reckitt Benckiser share these characteristics.

Both claim sales in over 180 countries. Unilever's food, beverage, health and home businesses comprise brands such as WallsBen and Jerry'sDove and Lux.

RB is focusing on health and hygiene as well as its home products and has a non-strategic but financially important pharmaceuticals division. Its brands include names such as DettolFinishDurex, and Gaviscon.

Growth and safety
Unilever has the march on both Heinz and RB in its penetration of emerging markets, which generate 55% of its sales. RB is catching up with 44%, aiming to bump that up to 50% by 2015. The rise of a middle class with discretionary spending power makes for much better growth prospects in emerging markets.

RB wins on earnings record, with turnover and earnings per share rising consistently for at least the last decade. While Unilever's track record is patchier, few would doubt the solidity of its earnings power.

Both companies generate prodigious cash flow. Last year Unilever delivered 4.3 billion euros of free cash flow from a 7 billion-euro operating profit, while RB's 2.4 billion-pound operating profit generated 1.7 billion-pound free cash flow. Net gearing at the two firms is 47% and 41% respectively, with lashings of interest cover.

Not cheap, but cheaper
Unless you're Warren Buffett, you're not going to buy the whole company. The flip side is that you don't have to pay a 20% premium to get hold of the stock.

Trading on forward earnings multiples of 18 and 17 respectively, Unilever and RB are cheaper than Buffett's purchase price for Heinz. They are more expensive than the average FTSE company, but there's no doubt that, in buying Heinz, Buffett was following his own maxim that it's better to buy a wonderful company at a fair price, than a fair company at a wonderful price.

Make up for a missed opportunity
Most British investors will have missed the opportunity with Heinz. But stocks that are good enough for the Sage of Omaha should be good enough for most investors. That's why it's valuable to compare the characteristics of companies on the LSE with companies that Buffett buys, even if the chances of a bid premium are remote.

There is another stock on the LSE that the billionaire investor fancies. What's more, its share price is still at a level similar to that when he last bought the stock, and it's trading on just 12 times forward earnings.

You can find out all about this other Buffett purchase by reading this special report, which describes the history, the prospects -- and the useful 4% dividend income -- of the company in question. Just click here to learn more -- the report is free.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2263574, ~/Articles/ArticleHandler.aspx, 9/25/2016 7:04:14 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

6/7/2013 4:00 PM
HNZ.DL $72.49 Down +0.00 +0.00%
H.J. Heinz Company CAPS Rating: ****
RB $7197.70 Down -16.30 -0.23%
Reckitt Benckiser CAPS Rating: No stars
UL $47.02 Down -0.43 -0.91%
Unilever CAPS Rating: *****
ULVR $3637.32 Up +11.82 +0.33%
Unilever CAPS Rating: No stars