Berkshire Hathaway’s annual letter to shareholders was released Friday. In the letter, Buffett states that the firm continues to look for large acquisitions. Even with its recent purchase of H.J. Heinz Company (NYSE:HNZ), Berkshire still has some $30 billion left in cash. What companies might Buffett acquire?
Buffett likes boring companies Buffett certainly doesn't like flashy, high-flying companies. He’s largely shunned the tech industry in general. Instead, Buffett favors consumer staples, insurance companies and utilities. His ownership of Geico and Fruit of the Loom, along with his large The Coca-Cola Company (NYSE:KO) stake, are characteristic of Buffett’s investment strategy.
Buffett is famously a student of Ben Graham -- the father of value investing. Under that school of thought, investors buy good companies trading at low valuations. Low price-to-earnings ratios, for example, and low price-to-book values are favored metrics. (PE ratios compare a company’s prior earnings to its share price, while price-to-book ratios compare assets to the stock price.)
Along with that, Buffett likes companies with wide moats. Coke’s secret recipe, for example, makes its business not easily replicated.
So that said, all potential Buffett targets should be trading at reasonable (or cheap) valuations and be involved in stable businesses that aren’t easily replicated. And since Buffett is only working with about $30 billion, giants like General Electric Company (NYSE:GE) are out of the question.
Buffett has long been linked to Archer Daniels Midland Company (NYSE:ADM) Buffett owns shares in Archer Daniels Midland Company (NYSE:ADM), the food processing company, but he’s long been linked to a potential outright takeover. In July 2011, Buffett told Bloomberg that ADM was “the kind of company we look at.”
As of Friday, Archer Daniels Midland Company (NYSE:ADM) currently trades a PE ratio of about 15 -- less than the 17.27 that the broader S&P 500 currently trades at. Archer Daniels Midland Company (NYSE:ADM)’s price-to-book ratio stands at 1.10; compare that to, say, Netflix’s price-to-book ratio of roughly 14.
Archer Daniels Midland Company (NYSE:ADM) specializes in food processing -- a simple business that doesn’t seem to be going away anytime soon (people need to eat after all), and it’s one of the largest businesses of its kind. With a market cap near $21 billion, Buffett could afford it, even if he had to pay a large premium.
The only thing that may preclude Buffett from purchasing it is how explicit he’s been in suggesting that he would be interested in the company.
Maybe Buffett could go after a defense name In the same Bloomberg interview that Buffett mentioned Archer Daniels Midland Company (NYSE:ADM), he also said he liked General Dynamics Corporation (NYSE:GD).
General Dynamics Corporation (NYSE:GD) fits most of the requirements: its market cap is about $24 billion, its price-to-book is a relatively modest 2.10, and it operates in an industry -- defense -- that isn’t likely to vanish overnight.
Yet, there are some things that might keep Buffett away. For example, the company currently has no PE ratio. In January, General Dynamics Corporation (NYSE:GD) reported a $2 billion loss on a write-down of the company’s IT department. As the U.S. government moves to rein in its spending, big defense contractors like General Dynamics Corporation (NYSE:GD) could be pinched.
Of course, shares of defense names, including General Dynamics Corporation (NYSE:GD), have fallen to reflect perceived budget cuts. Trading near $68, shares are solidly off their 52-week high of $74.54. If Buffett acts now, he might be able to snag a bargain.