It’s another day that the markets are open, so it is widely assumed that Warren Buffett and his Berkshire Hathaway Inc. (NYSE: BRK-A) are out looking for deals to make. Maybe those deals are new investments for the conglomerate to buy into, or maybe it’s another one of those big “whale of a deal” acquisitions that Buffett has liked making in years past.
Credit Suisse has many different equity research teams targeting different aspects of the markets, but the firm’s HOLT team has been analyzing Buffett’s approach and process to evaluate potential acquisitions and investing ideas. While the research team is not targeting these companies for an immediate takeover by Buffett, they are evaluating the companies using many of the same metrics to see which of the companies might be attractive.
Buffett’s approach is to take equity stakes or conduct 100% outright acquisitions of companies with favorable and durable economic characteristics. Credit Suisse’s team noted that the purpose of this report was to evaluate the same Buffett process for outright acquisitions as a means of finding ideas for your own portfolio.
Credit Suisse’s HOLT team looks for stable levels of cash flow and operating income, with improving margins over a long period and with low economic leverage. Before getting into all the picks, here are some of the larger acquisitions that Buffett and Berkshire have made:
- Burlington Northern Santa Fe (BNSF) in 2010 for $36 billion
- Precision Castparts in 2016 for $35.6 billion
- Lubrizol in 2011 for $9.2 billion
- Shaw Industries in 2000 for $2.1 billion
- Clayton Homes in 2003 for $1.8 billion
- Johns Manville in 2001 for $2.2 billion
The Credit Suisse team actually had a total of 141 “Buffett Ideas” in its universe, but it featured eight companies with prominence in various business sectors.
Two Discretionary and Staples
In the consumer discretionary and staples sector, the HOLT team picks were Target Corp. (NYSE: TGT) with a $41.5 billion market cap and CarMax Inc. (NYSE: KMX) with a $12 billion current market cap.
On Target, Buffett would be taking over some 1,844 stores covering roughly 360,000 employees. Buffett has never ventured into anything that large, and it might fly in the face of how Buffett views retail in an Amazon-dominated world.
On CarMax, Buffett would be taking on about 200 stores with about 25,000 employees that could be somehow coupled up with Berkshire Hathaway Automotive Group (after the Van Tuyl acquisition) with about 85 independently operated dealerships with over 100 franchises
The HOLT team’s whales for Berkshire Hathaway in the industrials segment were J.B. Hunt Transport Services Inc. (NASDAQ: JBHT) with an $11 billion market cap and Snap-On Inc. (NYSE: SNA) with a $9 billion market cap.
J.B. Hunt is a transportation and logistics company, most commonly seen in trucks on the road, but it might tie in with the huge BNSF rail acquisition Buffett made in the past. That said, it has over 27,000 employees, and the transportation and shipping sector is very well-known for having unions. Its 2018 revenue was $8.6 billion.
Snap-on is most commonly known for its tools used by workmen, but it also makes and sells diagnostics and repair systems for professionals. Snap-on had revenues of $4.07 billion in 2018 and it is shown to have more than 12,000 employees.
Buffett used to shy away from technology and IT companies, but with a big bet first on IBM and a better and larger bet on Apple, Buffett has seen that he doesn’t have to understand the underlying technology to see there is great money that can be made. The two HOLT team picks were Amphenol Corp. (NYSE: APH) with a $30 billion market cap and FLIR Systems Inc. (NASDAQ: FLIR) with a $6.5 billion market cap.
Amphenol makes and sells electrical, electronic and fiber optic connectors and is shown to have 73,000 employees. It had $8.2 billion in 2018 sales, which Wall Street believes will be flattish for at least the next year. Barron’s recently pointed out that Amphenol is a company the public likely hasn’t heard of but that it has outperformed the S&P 500 over the past five years and that gains should continue to be seen as it targets more sensors as an expansion of the business.
FLIR Systems is considered a scientific and technical instruments company, but the company has grown with a solid reputation in thermal imaging systems (for ports, companies, military and other uses). It also has visible-light imaging systems, locater systems, measurement and diagnostic systems, and threat-detection solutions. With about 3,600 employees worldwide, it had roughly $1.8 billion in 2018 revenues.
The HOLT team’s two health care companies were not automatically the first that come to mind in the sector. One was Waters Corp. (NYSE: WAT) with close to an $18 billion market cap and Globus Medical Inc. (NYSE: GMED) with less than a $5 billion market value.
Waters manufactures and sells analytical technologies used in liquid chromatography, mass spectrometry and thermal analysis. It has over 7,200 employees, operates in 27 countries with 11 manufacturing facilities and sells products/services into over 100 countries. Waters generated revenue of $2.4 billion in 2018 and has been a steady and continual grower of revenues.
Globus Medical, a medical device company by description, targets musculoskeletal implants in spine disorders. It has roughly 1,800 employees and sales of $713 million in 2018 might not be enough for Team Buffett to care about.
It is no secret that Buffett likes financial companies and making financial transactions. He is deep into insurance, deep into bank investments, and he also has acted as a lender of last resort when things go south. Marsh & McLennan Companies Inc. (NYSE: MMC), with nearly a $48 billion market cap, is one of the HOLT team’s picks, followed by Moody’s Corp. (NYSE: MCO) with a $35 billion market cap.
Marsh & McLennan generated revenues of about $15 billion in 2018 and is expected to see sustained growth of about 5% ahead. The company is into risk and insurance services and consulting services, with about 65,000 employees. The company recently took over Jardine Lloyd Thompson with more than 10,000 employees.
Moody’s should be no stranger to Buffett-watchers. After all, he has owned a large stake for years. That said, Buffett hasn’t gone out of his way to praise the model of charging debt issuing clients to evaluate them and assign credit ratings since the debacle of the Great Recession. The company’s 2018 revenue was $4.4 billion, and it employs about 13,000 people.
Energy and Materials
The HOLT team at Credit Suisse has two companies in energy and materials that might fit traditional Buffett screens, but they weren’t giant oil and gas leaders that he has invested in on and off over the years. One such company is Packaging Corp. of America (NYSE: PKG) with a $9.4 billion market cap, and the other was Valvoline Inc. (NYSE: VVV) with a $3.5 billion market cap.
Packaging Corp. of America makes and sells containerboard and corrugated packaging products like boxes and retail packaging and displays, and it has services around them. The business is considered to be highly cyclical: more packages being sent around the United States and elsewhere means more business, but it’s expected to see less packaging business when things slow down.
The company generated $7 billion in 2018 revenues, and it is expected to see low single-digit growth ahead. It has roughly 15,000 employees and dates back to the 1800s.
Valvoline makes and sells automotive maintenance products and services, which would be best known for its motor oils and engine fluids products. The company has about 6,700 employees and did about $2.3 billion in 2018 revenues, with sales continued to see expected modest growth of 4% to 5% ahead.
Some of the other companies from the 114 names are also household names. Here are just a few of the more easily identifiable ones listed by the Credit Suisse HOLT team:
- Bristol Myers Squibb
- Cardinal Health
- Dollar General
- Eastman Chemical
- General Dynamics
- Northern Trust
- Northrop Grumman
- State Street
- Universal Health Services
- Western Union
- W.W. Grainger
A final reminder: Credit Suisse is not calling these out as the next big “whale of a deal” acquisitions that Buffett will make. The team is just employing some of the same Buffett metrics in evaluating a company for ideas for investors to own in their own portfolios.