In the early years of a Warren Buffett-owned Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), it was impossible to determine where the famed investor's capital was headed. The young investing extraordinaire-in-the-making was interested in unheard-of, uninteresting companies that was no one paid attention to. But now, with billions in cash and a great deal of public scrutiny, Buffett has far fewer choices for his investments. He can't drop $10 million and expect any meaningful return for his company and shareholders. For him to continue to impress the world with his all-knowing investing prowess, Buffett has to fire what he calls the elephant gun. The ammo is billions of dollars, and the targets are companies we all know well. In 2010, Buffett told us the gun was loaded, and his trigger finger was itchy. Where will he shoot?
Let's go huntin'
Berkshire Hathaway has a wonderful problem of having too much money and not enough places to put it. When Buffett and his team go fishing, it isn't for trout, it's for sailfish. It's not that he wants to limit his playing field to large caps and megacaps -- Buffett has often said he would be able to produce annual returns in excess of 50% if he had a smaller capital pool to deal with. He's also mentioned he wished he could go around and buy a basket of single-family homes. But with around $40 billion in cash on the balance sheet, that's way too many open houses with cucumber sandwiches and ginger spritzers.
The last time Buffett fired the gun was at Burlington Northern. In a $34 billion acquisition during 2009, Berkshire became the owner of the largest rail transporter of coal and grain. The deal has paid off handsomely, as it usually does for the king of sweetheart deals. Using that $34 billion as a baseline, let's see what companies Buffett may be interested in buying.
Well, screening for public companies in the $25 billion-to-$50 billion range gives us more than 500 companies to choose from. But few represent the wide-moat, cash-generating businesses Buffett has flocked to in the past.
One interesting pick is General Mills (NYSE: GIS). This is a Buffett-esque pick because of its wide moat and strong pricing power. Buffett has commented in the past about the wonderful pricing power of breakfast cereal. The company has a phenomenal portfolio of brand names and prints cash year after year. At a $25 billion market cap, General Mills may be on the smaller end of companies in Buffett's scope, but with a forward P/E of around 13 times earnings, it's cheaper than another Buffett foodie favorite, Kraft (NYSE: KFT), which has held a top place in Berkshire's portfolio for some time. With the upcoming spinoff, though, it's unclear what Berkshire intends to do with its position of 59 million shares. Kraft trades at a little over 15 times earnings.
Shippin' and dippin'
Another wide-moat company potentially in Berkshire's crosshairs is FedEx (NYSE: FDX). This company possesses most, if not all, of the typical Buffett requisites for an investment. FedEx is an industry leader in a business that's very, very difficult (and expensive) for new entrants. The company will benefit from an economic turnaround, which hasn't quite happened yet but could be on the horizon in the next few years. The company has an EV/EBITDA of less than 5 and a return on equity of more than 13.5%. It's a fairly priced, if not somewhat cheap, company with a good return that could benefit from Berkshire's ability to make additional capital injections and outdo UPS.
A private matter
Of course, in addition to the hundreds of public companies within range on the elephant gun, there are many, many more private companies. A company such as Mars, which Buffett has dealt with in the past in its acquisition of Wrigley, would be a natural fit for the Berkshire portfolio.
A major acquisition is on deck for Berkshire, have no doubts. Keep an eye on the Oracle's statements in the coming months. If you find a business you think he may be readying to purchase, it couldn't hurt to buy a few shares. And if he doesn't buy it, you now own shares of a conservative, cash-generating business that can only help your portfolio.
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