Although most companies appear largely focused on dividends
and buybacks these days, some still see the merits of a
In a slow-growth economy, dealmaking can lead to sales
synergies and better operating leverage. And that can boost
earnings per share (EPS) even more quickly than buybacks can.
That was precisely the rationale behind
Packaging Corp. of America's (
just-announced $2 billion (in cash and assumed debt) acquisition
. The deal will create a $6 billion (in sales) behemoth in the
cardboard box industry.
Cardboard boxes? Why should anyone care about such a low-tech
old-line industry? The answer: e-commerce. That
package at your doorstep explains why this industry isn't going
Investors loved the deal, bidding up shares of Boise nearly
40% and even the acquirer, PKG, by nearly 10%. The deal was
attractively priced, at 6.7 times trailing earnings before
interest, taxes, depreciation and amortization (EBITDA), or just
five times EBITDA when planned synergies are taken into
That's a price Warren Buffett would love. In fact, everything
about this deal would appeal to the Oracle of Omaha.
The combined entity will have:
- An opportunity to boost market share beyond the pro forma
9% (7% for PKG and 2% for Boise) in what is still a fragmented
- Robust projected EBITDA: more than $1.1 billion annually on
that $6 billion revenue base.
- An opportunity to earn more than $4 a share in 2014,
according to DA Davidson. That's up from $2 a share in
Don't be surprised if Buffett eventually pounces on this
company, as it has the key characteristics he looks for. In the
interim, with the ink already dry on a deal early this year to
acquire H.J. Heinz, Buffett is likely still on the prowl in
search of his next prey.
Berkshire Hathaway's Recent Acquisitions
The process of studying Buffett-style businesses is extremely
worthwhile. It can lead you to great companies that represent
solid intrinsic value, even if they are never acquired.
As a quick recap, Buffett likes businesses that have:
- A strong global brand name (Heinz)
- A history of consistent, stable cash flow (all of
- An industry that can earn greater returns through
infrastructure investment (BNSF)
- A high level of recurring revenues (insurers such as
Frankly, it's the absence of recent major insurance
acquisitions that is a bit curious. After all, Buffett built his
initial fortune by acquiring insurance companies before he
ventured into other industries.
Insurance companies are some of the best deals on the market
right now, as many of them still trade below tangible book value.
And considering that book value will rise more quickly as
interest rates (and interest income) move higher in coming years,
Berkshire Hathaway (NYSE: BRK)
could afford to pay up to 1.25 times book value and still garner
excellent long-term returns. Here's a quick list of insurers that
fit the bill:
Below Book Insurers
My favorite insurers:
(which I discussed a few months ago),
Protective Life (
Reinsurance Group of America (RGA).
The other fertile area for value investors: high free cash
flow. If you're looking to mimic Buffett, then you need to
exclude companies he would never buy anyway, such as
Notably, a handful or regional banks make the list. The appeal
of these banks is in the projected consolidation of the banking
industry. The major banks are now too large (in the eyes of
regulators) to make more acquisitions. And the smallest banks are
being squeezed by a rising tide of regulatory and capital
compliance. That puts the mid-size regional banks in the sweet
spot, and they will likely look to make accretive acquisitions
that bolster their franchises.
Would Buffett look to acquire regional banks? He's a huge fan
(and a major shareholder) of
Wells Fargo (WFC)
, but he's shown little interest in smaller banks thus far.
The remaining group of companies look perfect for Buffett.
In fact, Buffett had been building a growing position in
Archer Daniels Midland (ADM)
, as I noted in this article.
He subsequently closed that position with a nice profit, and
he should now check out rival
, which in my view, holds better value. (I'll have more to say
about Bunge in a separate column in coming weeks).
Lastly, you'll note that both Reinsurance Group of America and
Genworth Financial (GNW)
appear on two separate tables here, as they both sport high free
cash flow yields and trade below tangible book value. Those deep
value metrics have surely caught the eye of Buffett and his
Risks to Consider:
It's unwise to buy a stock simply on hopes of a buyout, and
the company should instead have appeal on its own intrinsic
Action To Take -->
Value never goes out of style. Although the current bull market
has been especially kind to high-growth stocks, it is value
stocks that tend to deliver the steadiest gains for risk-averse
long-term investors. These companies all have proven track
records, and sport impressive valuations.