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All Contents © 2018The Kiplinger Washington Editors
By Will Ashworth
| August 16, 2017
The calls for Warren Buffett to start paying a dividend continue to get louder as Berkshire Hathaway Inc. (BRK.A, BRK.B) piles up the cash.
With almost $100 billion in cash as of June 30, Buffett faces a similar problem that successful money managers face when they have too much money to invest and not enough good opportunities to put the funds to work. It’s a problem that could become quite severe if Buffett doesn’t hurry up the pace of M&A transactions — something I discussed before its Aug. 4 earnings release.
I thought Berkshire Hathaway would deliver more than $107 billion in cash in Q2 2017; its cash stash came in at $99.7 billion, a stone’s throw from triple digits. You can expect the company to go over $100 billion in the third or fourth quarter barring any significant deals that close in time.
Frankly, it might be wiser for Buffett to spin off $30 billion of the excess cash plus McLane Company, its wholesale distribution business. The separately traded company would be run by his chosen (but yet unnamed) successor, which would allow it to begin succession planning while buying some smaller businesses that might not fit the Berkshire Hathaway M&A criteria.
What businesses might those be? Here are seven companies Warren Buffett should buy now, all of them with market values of less than $20 billion.
Prices and data are from the original InvestorPlace story published on August 14, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Middleby Corporation (MIDD) is in the food business, but you’ve likely never heard of it because it has spent the past 20 years buying other companies that manufacture products for the food service industry, then successfully integrating them into its business.
In the previous three years, Middleby has made 12 acquisitions, adding more than $500 million in annual revenues. Operating three segments in commercial food service (55% of revenue), food processing (15% of revenue), and premium residential (30% of revenues), Middleby has increased revenues and adjusted EBITDA every year since 2006.
MIDD has been able to consistently grow free cash flow, up 18.8% annually over the past 10 years — by buying leading brands such as Viking, Turbo Chef, Toastmaster and CookTek, and increasing the operating efficiency of those businesses through synergies with the existing Middleby companies.
This company is growing internationally, too; 2016 revenues outside the U.S. reached $797 million, or 35% of its overall revenue, up from 28% in 2011. Expect that percentage to hit 50% within the next three to five years.
Over the past five years, Middleby stock is up 27.3% annually, just under double the S&P 500. Even if Buffett doesn’t buy, expect outperformance to continue.
Warren Buffett owns airport stocks, so why not airport operators?
Grupo Aeroportuario del Pacifico (PAC) is the largest private company operating airports in Mexico. Approximately 32.2 million passengers passed through its 12 airports in 2016 — almost one-quarter of the total passengers. It also operates the Montego Bay airport in Jamaica and is bidding for the rights to run Kingston’s international airport.
In 2016, PAC increased its market share in Mexico to 26%, 170 basis points higher than a year earlier. The company operates five out of 10 of Mexico’s busiest airports, including Guadalajara at 11.4 million passengers (28% of annual revenue), behind only Cancun and Mexico City in passenger traffic.
Between 2006 and 2017, Grupo Aeroportuario grew revenues by 16.1% annually. Over the past five years, PAC’s operating income has increased by 26.2% annually.
With Mexican airlines expanding their fleets and U.S. low-cost carriers introducing new flights, revenues and profits will continue to grow. Buffett doesn’t own any Mexican companies that I’m aware of, but this would be a good place to start.
Carrying on with the travel theme that I discussed earlier with PAC, I see InterContinental Hotels Group (IHG) fitting in nicely with Berkshire Hathaway’s airline investments.
Sure, the U.K.-based hotel management company isn’t the capital-intensive business Buffett generally likes, but it does have a strong group of hotel brands that include InterContinental and Kimpton at the higher price point and Holiday Inn and Candlewood Suites at the lower end.
Most importantly, it continues to grow.
Over the past 12 years, IHG has increased room revenues and earnings per share by 5% and 18%, respectively.
IHG makes money by increasing revenue per available room (RevPAR) and by adding rooms to its network. It has 5,200 hotels open and almost 780,000 rooms, with only eight of these owned by the company. Moreover, it boasts 1,513 hotels in its global pipeline, adding approximately 230,000 rooms.
InterContinental Hotels is a stable business with growing free cash flow. I’m sure there are a number of its brands in Omaha for Buffett to check out personally.
Warren Buffett loves family-owned businesses. For instance, in 2015, he paid $400 million for Louis Moto, a German-based retailer of motorcycle parts and accessories.
There have been bigger purchases over the years, including the Pritzker family’s industrial conglomerate, Marmon Holdings, which Buffett paid $9.2 billion for over the course of six years, buying the few remaining shares in 2013.
Brown-Forman Corporation (BF.B) — a spirits and wine owner that boasts the Jack Daniel’s, Woodford Reserve and Finlandia brands, among others — is much bigger than Marmon at a current enterprise value around $21 billion. However, it has an easy-to-understand business, strong brands, a high return on equity, consistent earnings, and debt that is just 11% of its $19.4 billion market capitalization.
Over the past 10 years, Brown-Forman has delivered an annual total return (dividends reinvested) of 14%, 200 basis points higher than its next-highest peer and 700 basis points higher than the S&P 500.
Brown-Forman likely would be the biggest piece of a Berkshire Hathaway spinoff. Unfortunately, Buffett doesn’t approach companies, and the controlling Brown family aren’t interested in selling, so it’s likely a moot point.
Berkshire Hathaway owns the company that makes a good chunk of the manufactured homes sold in America — Clayton Homes accounts for approximately 35% of all the new homes sold in America under $150,000. So why not own the land upon which many of these manufactured homes are placed?
Equity Lifestyle Properties, Inc. (ELS) is a real estate investment trust. It’s one of the largest real estate networks in the U.S. with 391 properties located in 32 states and the province of British Columbia. With almost 147,000 home sites, it caters to retirees and vacationing families looking for inexpensive home ownership or reasonably priced vacation accommodation.
ELS grew its revenue from $684.3 million in 2012 to $870.4 million in 2016, a 6.2% annual increase. At the same time, it increased net income by 26% annually.
It’s not surprising, then, that Equity Lifestyle’s stock has achieved a five-year annual total return of 21.8%, more than double its residential REIT peers and 733 basis points higher than the S&P 500.
Combine Oprah Winfrey, Mindy Grossman and Warren Buffett, and you’ve got a winning combination in my estimation.
In case you hadn’t heard, Oprah owns 14.7% of the weight-loss company Weight Watchers International, Inc. (WTW), and in fact has been an owner and director since October 2015. Weight Watchers announced a strategic collaboration with the media star that saw her buy 6.4 million WTW shares for $43.2 million, join the board of directors and receive an option to buy another 3.5 million shares at $6.97 each in her role as a strategic adviser.
As of Aug. 9, Oprah’s shares are worth $457.2 million — a roughly 580% return in less than two years.
Berkshire Hathaway already owns Pampered Chef, a multilevel marketing firm that sells kitchen- and food-related products. With little overlap, the combination would provide BRK with an excellent platform for future growth.
The only difficulty with this acquisition would be that Winfrey votes with the Artal Group, a New York-based private equity firm financed through a European family office. It owns 46% of Weight Watchers. Artal is run by Raymond Debbane, whose low profile suggests a deal would not be forthcoming without Oprah’s assistance.
Berkshire Hathaway already has some substantial equity investments in financial-related businesses, including $25.1 billion in Wells Fargo & Co. (WFC) and $12.8 billion in American Express Company (AXP).
I’m not sure Warren Buffett wants to add to that.
However, if he did, I’d suggest he buy SVB Financial Group (SIVB) — the parent of Silicon Valley Bank — because its original business model of helping technology companies and their founding families grow their wealth continues to be a very lucrative and necessary financial service.
Having grown beyond a tech focus, SVB Financial now helps entrepreneurs from other industries and in other countries do the same thing.
It’s a business model that led me in December 2013 to call it one of the five best stocks to buy for the next 20 years. Since that call, SIVB is up 80% through Aug. 9, almost double the KBW Nasdaq Bank Index over the same period.
You might not have heard of it, but Warren Buffett probably has.
This article is from Will Ashworth of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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