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Warren Buffett's sweet tooth was old news long before he signed on as a partner in Mars's deal to buy Wrigley for $23 billion. Buffett bought See's Candies more than three decades ago for Berkshire Hathaway, the company he heads, and Dairy Queen is another prized possession. Coca-Cola and Kraft, the maker of Oreos, rank among Berkshire's largest stock holdings.
But judging by the jingle in his pocket, Buffett may be looking for a few more sweet deals. Berkshire had a bulging $35.6 billion in cash at the end of the first quarter. Subtracting its $6.5-billion commitment to the Wrigley buyout still leaves some $29.1 billion with which the master can indulge. So what kind of company does Buffett, who steered Berkshire from its 1965 share price of $15 to a mid-May price of $125,200, like to buy?
It takes more than empty calories to whet Buffett's appetite. He wants substantial companies, those with stock-market values between $5 billion and $20 billion. He likes companies with strong defenses, or "moats," around their businesses. Potential acquisitions must have a track record of generating superior returns on invested cash without taking on a lot of debt. And honest, level-headed leaders are a must because "Berkshire lets its businesses continue in the same successful manner with encouragement, not interference," as Buffett noted at Berkshire's annual shareholder meeting in May.
Buffett won't pay through the nose, but he'll pay extra to own the whole pie: In 2001, he shelled out 56% more than Shaw Industries' pre-deal share price to acquire the carpet maker.
Buffett hasn't asked for our help, but we've identified five companies to lighten his pocketbook. Even if he doesn't buy them, the stocks should appeal to mortals, too.
It's all about the blue box
Buffett knows a bit about bling. Berkshire owns three jewelry businesses, the best-known of which is Borsheims, an Omaha, Neb., jewelry store. So adding Tiffany & Co. to Berkshire's roster is hardly a stretch.
Tiffany's branding power is virtually unassailable. The company has been building the brand since its founding in New York City in 1837 -- the same year Tiffany introduced the blue box. "When customers buy a diamond ring, they don't really know the stone's value, so it's important that they buy from a trusted provider," says Larry Coats, co-manager of Oak Value fund. "Tiffany is able to charge a premium price for a comparable product because of that."
The little blue box has exported well. Tiffany, which generates 38% of its revenues in 17 foreign lands, added 11 overseas stores in the fiscal year that ended January 31 (it operates 192 stores worldwide). Company spokesman Mark Aaron says Tiffany is on target to add 20 international stores in 2008, including its first shops in Belgium, Ireland and Spain.
At home, the company is balancing its highbrow image with more-affordable products. A new format of smaller "Tiffany Collections" stores will carry only merchandise that sells for $15,000 or less (regular Tiffany stores carry items that cost up to $1 million). The first store will open this October in Glendale, Cal.
Despite weakness in the retailing sector, Tiffany reported a 29% boost in earnings, to $2.33 per share, and an 11% rise in sales, to $2.9 billion, in the fiscal year that ended January 31. At a mid-May price of $42, the stock (symbol TIF) trades for 16 times the $2.72 per share that analysts, on average, estimate the company will earn in the current fiscal year.
Strong moat, huge float
Get to know Paychex and you'll start to think you've died and gone to Buffett heaven. Businesses outsource their payrolls to Paychex (PAYX), which cuts checks and charges a fee per check -- a bit like the "tollbooth" business model that Buffett favors. Another peculiar Buffettism? Like Berkshire's core insurance business, Paychex makes money off the "float" -- in its case, the money that its clients send to Paychex for paying salaries. Between the time it receives the money and the time it disburses it, Paychex can invest the money.
The Rochester, N.Y., company takes 10% of the payroll-services market, putting it in second place, behind Automatic Data Processing. But Paychex dominates the market for small-to-midsize businesses; 81% of its clients employ fewer than 20 people. "They are the go-to people in the small-to-midsize market," says Matthew Gershuny, an analyst for the Parnassus funds. That not only grants Paychex a defensible niche, it also grants dibs on much of the remaining unclaimed market. "A large portion of the unclaimed market is in the under-ten-employee segment," says chief financial officer John Morphy. Paychex has also been expanding into complementary services -- such as workers' compensation administration and 401(k) record-keeping -- that it can market to its 561,000 existing clients.
POSTED BY: Mike (June 27, 2008 09:22 PM)
Paychex looks good to me based on all the criteria you provided - except one. It is expensive. At the trailing P/E ratio of about 21, value investors may just watch it until it is in the more favorable 12-14 range. Disclosure: No position PAYX.
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