Buffett Buys Heinz at All-Time High Prices and Valuations


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As we were awaiting Warren Buffett 's new buys and sells for the fourth quarter, Buffett made big news that Berkshire Hathaway ( BRK.A )( BRK.B ) teamed up with Brazil's 3G Capital and are buying out HJ Heinz ( HNZ ) at $23 billion or $72.5 a share. This is a 20% premium from Heinz's close price yesterday.

We are happy to see that Buffett is finding more "elephant" with his elephant gun. As value investors and Berkshire shareholders, we are naturally concerned about the price of the deal. While Buffett is known for not overpaying, he did display more tolerance lately to prices. All of his recent deals including Burlington Northern, Lubrizol, and Heinz, are done at historical high prices of the companies' stocks.

Even without the 20% jump today, Heinz stock was traded at all-time high:

HNZ data by GuruFocus.com

While it is ok buy stocks at all-time high, as long as the valuation is reasonable. However, at the deal price of $72.5 a share, Heinz is traded at the highest P/E ratio. The only time that stock was traded at similar P/E was during the bubble years of 2007.

HNZ data by GuruFocus.com

The same can be said to P/S ratio:

HNZ data by GuruFocus.com

Considering Heinz' revenue and earnings are growing only at low single digits, it is hard to justify to a P/E ratio of above 20.

HNZ data by GuruFocus.com

As the world's greatest investor, Buffett definitely knows all of these. This is what he said on the price of the deal during the interview with Fox Business: "They (3G Capital) did most of the work in deciding what to pay and I went along with it. I was reluctant but I signed up."

We all know that when you overpay for something, your return will likely to be lower.

How do you think about the deal?

By the way, we have just updated Berkshire's new portfolio as of 12/31/2012. Buffett did buy some new stocks. Check it out.About GuruFocus: GuruFocus.com tracks the stocks picks and portfolio holdings of the world's best investors. This value investing site offers stock screeners and valuation tools. And publishes daily articles tracking the latest moves of the world's best investors. GuruFocus also provides promising stock ideas in 3 monthly newsletters sent to Premium Members .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing

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