What Will Berkshire Hathaway Inc. (BRK.B) Buy Next?

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Warren BuffettWith Burlington Northern Santa Fe still ringing in the backs of investors’ minds, Berkshire Hathaway Inc. (NYSE:BRK.B) last Thursday put $12 billion to work in a joint arrangement with 3G Capital to acquire ketchup king H.J. Heinz Company (NYSE:HNZ). The deal, which represents the largest ever takeover in the food industry, sent shares of Heinz up 20% and valued the company’s equity at a whopping $23 billion.

Perhaps the sheer size of the buy is to blame, but the news surprised investors around the world despite Berkshire CEO Warren Buffett’s repeated assertions that he was just itching to put some of Berkshire’s $47 billion in cash to work. Even now, shortly after the announcement, Buffett told CNBC, “I’m ready for another elephant. Please, if you see any walking by, just call me.”

To be sure, after the Heinz deal is complete, Berkshire will have around $35 billion left in its coffers. Since Buffett likes to keep around $20 billion in reserves on the books, that leaves $15 billion available for new acquisitions going forward.

Two guns, one for each of you…
With that much cash, Berkshire could be working as we speak to acquire another fairly large company outright. However, yesterday’s news shows even larger companies could be fair game depending on the partners involved. In addition, as Buffett commented last week, “Of course, the cash builds from month to month, so the gun is always getting reloaded.”

So the question is when, not if, Berkshire once again surprises the world with another huge acquisition. Here are a few companies, then, that could be at the top of its “to buy” list right now.

Dialing in on dialysis
While Buffett was busy putting the finishing touches on the Heinz acquisition, it turns out Berkshire was also increasing its stake in kidney disease specialist DaVita HealthCare Partners Inc (NYSE:DVA). According to recent SEC filings, after adding nearly 180,000 shares in the fourth quarter, Berkshire now owns around 15% of the well-regarded health care firm, up from a less than 3% stake at the end of 2011, and making DaVita one of Berkshire’s 12 largest positions. Given DaVita’s current market capitalization of $11.1 billion, Berkshire has more than enough cash to buy the remaining $9.5 billion in shares it doesn’t already own.

So why would Berkshire care to own DaVita? To be sure, as a medical operating company, it seems well outside Buffett’s typical comfort zone. However, the fact that Berkshire doesn’t currently own any businesses in the medical industry could be a great excuse to further expand its reach. In addition, thanks to DaVita’s $4.4 billion acquisition last year of HealthCare Partners, the company has moved to diversify operations from its previous laser focus on kidney disease and now manages 152 general health care clinics, 700 staff physicians, and a network of more than 8,300 independent doctors.

At first glance, DaVita’s trailing P/E ratio at just above 21 looks a little rich for Uncle Warren’s taste. Also, given the relatively small size of Berkshire’s position, it was likely the handywork of one of Berkshire’s younger portfolio managers like Ted Weschler or Todd Combs. Buffett, then, could still need some convincing that DaVita would be a good fit with the rest of Berkshire’s businesses. Even still, DaVita’s forward P/E of 13.5 looks much more palatable since analysts expect it to continue growing quickly — a fair assumption considering it has grown earnings at a 15.4% clip for the past decade. Additionally, if Berkshire owned DaVita outright, Buffett would undoubtedly keep existing management in place while encouraging them to continue business as usual, which would be a great thing considering DaVita has been named as one of Fortune’s most admired health care companies for the past seven years in a row.

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