Warren Buffett, or as most folks know him, "The Oracle of Omaha," is arguably the greatest investor alive. Building from an initial nest egg of just over $110 in 1942, Buffett is worth almost $83 billion today -- and he'd be worth well over $100 billion had it not been for his incredible philanthropy over the past decade.
But even the greatest investor in the world has problems. Namely, what to buy next?
Two "elephant-sized" acquisitions Buffett should consider
The company Warren Buffett heads, Berkshire Hathaway (BRK.A 0.55%) (BRK.B 0.49%), has a monstrous $112 billion pile of cash and short-term investments that it'd love to put to work via an acquisition. Mind you, this $112 billion is completely separate from the roughly $200 billion Berkshire Hathaway has invested in about four dozen securities. With Buffett having previously suggested that he'd prefer Berkshire's cash balance be closer to $30 billion, it gives Berkshire around $80 billion that it could, in theory, put to work.
Yet, Warren Buffett has been clear that he, his right-hand man Charlie Munger, and his investment team are looking for so-called elephant-sized acquisitions. Put plainly, he wants a transaction that'll move the needle, just as when Berkshire Hathaway gobbled up railroad giant Burlington Northern Santa Fe (BNSF) nearly a decade ago.
With few companies out there that would truly fit the bill, here are two stocks that I believe would be no-brainer buys for Buffett and Berkshire Hathaway.
The most logical acquisition for Buffett and Berkshire Hathaway is the largest electric utility in the U.S. by market cap: NextEra Energy (NEE 1.37%). NextEra, which I labeled as the no-brainer stock that Buffett should buy in 2018, has gained about 20% since I published my opinion last year.
The allure of NextEra Energy is its reliance on renewable energy, such as wind and solar. No company in the U.S. generated more electricity from wind or solar last year than NextEra Energy, and no company has a shot of catching it by the turn of the decade. NextEra is pumping $40 billion into renewable energy infrastructure projects by 2020, and has undertaken the "30-by-30" initiative that'll see an additional 30 million solar panels installed by 2030. All told, NextEra will be generating between 10,100 megawatts and 16,500 megawatts from wind energy by 2020, and should add 10,000 megawatts from its 30-by-30 initiative by 2030.
This green push offers two advantages to NextEra Energy. Although it's pricey upfront, it puts NextEra ahead of the curve in lowering its long-term costs. Aside from lower electricity-producing costs, the second advantage is that if environmental policy changes in Washington and shifts away from fossil fuels, NextEra will already be well ahead of its peers.
We also can't forget that electricity is a basic-need service -- and Buffett loves a solid economic moat that requires little maintenance. NextEra's Florida Power & Light subsidiary is regulated, which means that its cash flow is highly predictable since it isn't exposed to wholesale electricity costs.
Long story short, the only real obstacle here is that a buyout of NextEra would probably require a $100 billion price tag, or a little more than a 10% premium over NextEra's current market cap. Buffett might be waiting for a pullback, but I'm not certain he'll get it with such a superior electric utility. I doubt Buffett would have any issue rounding up the capital to make a $100 billion purchase, but I have reservations about Buffett's willingness to pay almost 21 times forward earnings for an electric utility that'll almost certainly set the bar for growth in the sector.
Check out the latest earnings call transcripts for Sirius XM and NextEra.
Sirius XM Holdings
Another no-brainer acquisition that would make sense for Buffett and Berkshire Hathaway is satellite radio operator Sirius XM Holdings (SIRI 1.15%). It's worth pointing out that Berkshire Hathaway already owns 137.92 million shares of Sirius XM, or about 2.9% of all outstanding shares.
What's to like about Sirius XM? How about the fact that it's a legal monopoly! Though Sirius XM faces online and terrestrial competition, there aren't any other satellite radio operators, which gives it an economic moat that's going to be tough to penetrate.
Furthermore, there are two aspects of the company's business that Buffett should find impressive. First, it's predominantly a subscription-driven service. Of the $1.5 billion in revenue brought in during the fourth quarter, $1.18 billion came from subscribers. These subscribers are far less likely to cancel their service during an economic downturn than advertisers are to scale back their spending. Sirius XM only generated 3.5% of fourth-quarter sales from advertising, whereas its terrestrial and online peers generate the bulk of their revenue from the highly cyclical ad industry.
And secondly, Sirius XM's subscriber acquisition costs should be relatively flat moving forward. While costs to acquire satellite radio talent can fluctuate from one year to the next, expenses for operating and maintaining its satellites are more or less fixed. This means as Sirius XM's subscriber base grows, so should its operating margins.
With consistent revenue and profit growth on the horizon and little competition that should strike fear into Sirius XM, Buffett should be able to gobble up Sirius XM for around $35 billion, in my opinion.