Warren Buffett's done it again.
On Monday, Buffett's Berkshire Hathaway
When the Oracle of Omaha decided to buy Burlington Northern a couple years ago, I questioned the wisdom of the move, and even suggested that the master investor was passing up real value investments in the interest of preserving his legacy. But Buffett's decision to purchase Lubrizol makes a whole lot more sense than his investment in Burlington.
Two years ago, around about the same time Buffett was buying Burlington, I spotlighted Lubrizol as a potential bargain for long-term investors:
"Over the past five years, Lubrizol generated average annual free cash flow … more than 50% greater than its reported "profit" under GAAP. … [S]elling now for just 13 times its free cash, the stock looks fairly priced for its growth prospects…"
Granted, Buffett wasn't quick enough to grab Lubrizol at that low price. (In his defense, he was otherwise occupied at the time.) But even today, Buffett is getting a pretty square deal for Lubrizol. At $9 billion, he's paying 12.2 times earnings for the company, a fair price relative to the 16 multiple at DuPont
What's it mean to investors?
Post-run-up, Lubrizol's share price today is fair. There's not much more value to be gained here by trying to hitch a ride on Buffett's coattails -- but that doesn't mean there aren't other values to investigate. In fact, just recently I wrote about a smaller specialty chemicals maker by the name of Innospec
If you like the look of this potential mini-Lubrizol, add Innospec to your watchlist.