Genworth Financial Inc (GNW), Bunge Ltd (BG): Do You Own These Potential Buffett Targets?

Page 1 of 2

Although most companies appear largely focused on dividends and buybacks these days, some still see the merits of a growth-inducing acquisition.

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 (NYSE:PKG) just-announced $2 billion (in cash and assumed debt) acquisition of rival Boise Inc. (NYSE:BZ). 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 United Parcel Service, Inc. (NYSE:UPS) package at your doorstep explains why this industry isn’t going anywhere.

Investors loved the deal, bidding up shares of Boise Inc. (NYSE:BZ) nearly 40% and even the acquirer, Packaging Corp Of America (NYSE: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 account.

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:

1). An opportunity to boost market share beyond the pro forma 9% (7% for Packaging Corp Of America (NYSE:PKG) and 2% for Boise Inc. (NYSE:BZ)) in what is still a fragmented industry.

2). Robust projected EBITDA: more than $1.1 billion annually on that $6 billion revenue base.

3). An opportunity to earn more than $4 a share in 2014, according to DA Davidson. That’s up from $2 a share in 2012.

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:

1). A strong global brand name (Heinz)

2). A history of consistent, stable cash flow (all of them)

3). An industry that can earn greater returns through infrastructure investment (BNSF)

4). A high level of recurring revenues (insurers such as Berkshire’s GEICO).

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, Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) 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: American International Group Inc (NYSE:AIG) (which I discussed a few months ago), Protective Life Corp. (NYSE:PL) and Reinsurance Group of America Inc (NYSE: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 airlines.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!