Picking stocks is not Warren Buffett's most impressive skill.
Despite Buffett's remarkable track record of acquiring equity positions in high-performing stocks, his ability to generate value for Berkshire Hathaway (NYSE: BRK-B ) shareholders by fully acquiring outstanding businesses may be his most notable talent.
Buffett and Berkshire made noise earlier this year when the company partnered with 3G Capital and agreed to purchase H.J. Heinz for over $23 billion. While any deal Buffett makes would be headline news, this deal was even more unique because of the use of debt to finance part of the transactions, and more importantly, Buffett's willingness to pay over 20 times trailing earnings for a company while the broader market was trading around 18 times earnings.
The deal paved the way for speculation over which company could be Buffett's next target after he showed that the market's lofty levels would not deter him from using his famed "elephant gun."
As we continue to count down the days until the annual Berkshire Hathaway shareholder meeting in Omaha, Neb., here are four companies that Buffett and team could acquire.
1. Energizer Holdings (NYSE: ENR ) Yes, the bunny. However, Energizer is actually much more than just a bunny with cool sunglasses and batteries. In fact, the company's Household Products division, which includes batteries, only accounted for roughly 46% of total revenues in 2012. Energizer controls other major brands like Schick and Edge shaving products, Playtex, and Hawaiian Tropic and Banana Boat sunscreen. The company is led by CEO Ward Klein, who fits what Buffett looks for in a leader. Mr. Klein has spent over 25 years at Energizer and has led the company's march into new markets.
At its current share price, the market values Energizer at just under $6 billion. This has the shares trading at under 16 times earnings, while the S&P 500 trades at 18.5 times earnings. Klein and team have been able to generate consistent free cash flow and are fighting to maintain margins during a time when consumers are price-sensitive. Headquartered in a quiet suburb of St. Louis, Mo., Energizer would fit nicely in Berkshire's massive portfolio.
2. Mattel (NASDAQ: MAT ) Could the big product at next year's meeting be a Warren Buffett Barbie? Acquiring Mattel would be a fairly large transaction -- the market currently values the company at roughly $15.5 billion. Mattel sports incredibly strong brands in Barbie and American Girl but also creates tremendous value through its license agreements with the likes of Disney and Nickelodeon.
Despite trading at almost 20 times earnings, Mattel's continued growth prospects both domestically and internationally and 3%-plus dividend yield make the current price digestible. The company has been a strong performer over the last five years with an average return on investment of almost 16%. Given the company's market position, it's possible those results will continue.
3. Brink's (NYSE: BCO ) One prime beneficiary of the current cash-heavy society is Brink's, the company famous for its armored cars that transport cash and other valuables. Despite the seemingly inevitable move away from a cash-centric society here in the U.S., the global rate of conversion may be a multi-decade process. Despite its U.S. roots, Brink's achieves around 75% of its annual revenues outside of North America.
With a market capitalization of roughly $1.3 billion, an acquisition would certainly not break Buffett's bank. Because of its struggles since the financial crisis, shares have woefully lagged the market and currently trade at just 12 times earnings. Buffett would not be alone in seeing value in the company; famous value investor Mario Gabelli has quietly amassed an over 6.5% stake in the company and could serve as an alliance during a potential buyout.
4. Textainer (NYSE: TGH ) While so many members of the business community remain scarred from the financial crisis and pessimistic about future growth opportunities, Buffett has been a consistent cheerleader for domestic and global business activity. The railroads under the Berkshire umbrella give Buffett exposure to a large chunk of domestic trade, but 95% of the world's trade still moves via ship. Textainer is in the business of leasing "intermodal containers" (those big, rectangle boxes) to shippers.
In addition to its relationships with over 400 shipping clients, Textainer's shareholder-friendly management may catch Buffett's eye. The company has raised its dividend for 23 consecutive years and currently yields over 4.5%. This isn't a company or industry that is going to experience exponential revenue growth over a short time horizon, but with a long-term investment horizon, like Buffett's, this company has the potential to create tremendous value as global trade continues its seemingly unstoppable trajectory upwards.
Again, with thousands of potential targets, these companies may never be acquired by Buffett. However, it can be helpful to play "Elephant Hunter." If we try to think like Buffett, it may open our eyes to some companies that may not be the most exciting business models, but can still offer great value to patient and long-term investors.
Heading to Omaha
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