Investors love watching where Warren Buffett invests for his Berkshire Hathaway (BRK.A 0.55%) (BRK.B 0.50%) conglomerate. Buffett recently announced that he has been accumulating shares in five of the top Japanese trading companies, and now owns about a 5% stake in each for a total value of about $6.25 billion.

Mitsui (MITSY 0.57%), which has a U.S. joint venture partnership with steelmaker Nucor (NUE 1.79%), is one of those investments. That, along with other benefits and synergies, is why Nucor would make a nice fit for Warren Buffett and Berkshire Hathaway. 

Last piece of a jigsaw puzzle being added

Image source: Getty Images.

Warren likes cash flow

The Berkshire Hathaway conglomerate is a cash machine. Warren Buffett uses that cash flow to invest and grow the company. Rinse and repeat. Nucor generates a substantial amount of operating cash flow. The below graph shows a long history of cash generation. 

NUE Cash from Operations (TTM) Chart

NUE Cash from Operations (TTM) data by YCharts

Steelmaking is a capital intensive business. As an independent company, Nucor must retain and reinvest much of that cash flow in the business. Nucor has returned capital to shareholders in the form of a dividend for 47 straight years, making it a Dividend Aristocrat. Leon Topalian, who took over as Nucor's CEO this year, told CNBC that the dividend practice will continue, saying: "I'm not going to be the first CEO in Nucor's history to stop that."

But cash must be retained to manage through the steel market cycles and for capital required to maintain and grow the business. Nucor has stated that its goal is to return an average of 40% of net income to shareholders through the market cycles. Berkshire Hathaway would effectively be able to use that cash how it sees fit. Besides owning many other cash-generating businesses, Berkshire has a huge cash pile that can always be tapped if needed. 

Real synergies

Berkshire's recent disclosure of a 5% stake in Mitsui leads to some intriguing possibilities. In 2010, Nucor and Mitsui formed a joint venture called NuMit, in which both parties have equal stakes. NuMit owns the steel processor Steel Technologies, LLC. 

Berkshire Hathaway's operating businesses include a building products group, which had $9.8 billion in revenue in the first half of 2020. Included in that group are large users of steel products, including MiTek, maker of steel fasteners and connectors, and mobile home maker Clayton Homes. Nucor is a maker of both the sheet and beam products those businesses need. It could supply the products that MiTek uses, and Steel Technologies can process them into the form that MiTek needs to stamp out finished parts, for example. Having them all under the same roof would make for a full supply chain to the end-user.

In addition to the operation itself, Nucor is already run the way Berkshire runs its companies. The plants operate as autonomous businesses, while the corporate headquarters remains relatively small. Nucor's culture would not have to change, which would be an advantage for both parties.  

Would it be good for shareholders?

Nucor continues to grow its business, and has plans for about $3.5 billion in growth projects to start up over the next few years. But while Nucor thrives as a business, its stock doesn't always reflect that. The cyclical nature of the business, and the commodity itself, can lead to a divergence between the share price and the operation. 

Nucor shares are currently trading near decade lows, as measured by price-to-book and price-to sales ratios. 

NUE Price to Book Value Chart

NUE Price-to-Book Value data by YCharts

This makes it a good time for Warren Buffett to get a price he could be happy with. Berkshire has $143 billion in cash and equivalents as of June 30, 2020. And Buffett has stated he's looking to invest some of it.

While there should be more value for Nucor shareholders in the future without an acquisition, particularly as new projects come on line, sometimes shares of a great business don't follow the growth of the underlying company.

If Berkshire Hathaway paid a 30% premium to current share price, or a price of around $60 per share, it still would be getting Nucor at a valuation below the long-term averages of the above metrics. A price-to-sales of under 1.0, and a price-to-book below 2.0, would historically make it a good long-term deal for Buffett, and a nice payout for shareholders.

Any catalyst coming from new growth projects is at least several years away. Until then, shareholders would have to be happy collecting a decent dividend, and watching the macroeconomic cycles drive the shares. Being able to sell Nucor shares to Berkshire and investing that money elsewhere would likely be a better outcome for shareholders.