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

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

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways 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

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

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!