Serious Money: What Should Warren Buffett Do Next?

Posted Mar 2nd 2011 9:20AM by Sheldon Liber
Filed under: Berkshire Hathaway (BRK.A), Market Matters, American Express (AXP), Serious Money, Republic Services Inc. (RSG), National Grid (NGG)

Last Friday Warren Buffett said he was anxious to pull the trigger on another large deal -- having only recently completed the Berkshire Hathaway (BRK.A and BRK.B) acquisition of the Burlington Northern Santa Fe Railroad. Since then, prognosticators far and wide have been making suggestions about his next possible moves.

Considering I wrote about the railroads the day before the BNSF announcement, I thought I would share a few ideas, old and new.

The Next Company Berkshire Should Acquire

The most intriguing idea I bring to you today is that Berkshire acquire American Express (AXP), a long-time holding currently capitalized at $52 billion (some of that BRK's). This is the right size and shape for Buffett, with a modest P/E floating around 12, a low PEG around 1.0 and -- very important to Buffett -- a double-digit return on equity. It also has a huge cash float, something Warren Buffett takes glee in, just like his insurance companies.

Among companies Berkshire already owns, I think the strongest candidate for a takeover would be Republic Services (RSG) -- the $11 billion waste-hauling company that is the second largest in the country. Buffett has been adding to his position in Republic for the last three years and the other major shareholder is fellow Berkshire board member and bridge pal Bill Gates. (UPDATE: AS stated, Buffett had been increasing Berkshires RSG position through June 2010, however, in the third quarter of 2010, Berkshire did an about face selling its 10,827,700 shares of the company, with a market value of $322 million as of 9/30/2010. Except for the purpose of increasing cash after the BNSF acquisition I could find no explanation for the sale This information was filed in November. While admitting this contradicts my thesis is hard, it would be worse to not reflect accurate information.

I feel comfortable writing about Berkshire's companies because, as a long-time follower of Warren Buffett, I've had a few successes predicting his next move. Last June, for instance, I posted a multi-part series, concluding with Serious Money: Buffett Going Global -- Part 4, where I brought up National Grid (NGG), the largest utility in the United Kingdom, as a good fit. A month later Barron's was touting the stock, without mentioning Buffett, however. (See Chasing Value: NGG, Buffett, Barron's and Me).

The company holds assets in the northeastern U.S. as well as England, just like Mid American. NGG is a $29 billion company with a P/E around 10.5 and a P/S around 1.3. The 4% dividend yield would go straight to the bottom line since Berkshire does not pay one. Buffett could buy it in an all-cash deal. If BRK.A ever started to pay a dividend, NGG would make a hearty contribution.

Advice to Buffett:

Now, if you will excuse me, I'll go a step further and actually dispense some advice to the Oracle of Omaha. Stop complaining every year in the annual reports about NetJets' financial results being a "failure" since BRK.A bought it in 1998. Just sell the company and be done with it. Furthermore, if you live to be 200, promise you will stay away from airlines. You have been down this road before, admitting your biggest mistake was U.S. Airways.

Next I would consider expanding an existing successful enterprise before considering something new. For example, insurance and energy have worked out well for Berkshire and each sector is currently managed by a highly trusted partner: David Sokol at Mid-American and Ajit Jain at Geico and General Re.

Sheldon Liber is an architect and the CEO of Chasing Value™ Asset Management, Inc., a small private investment company. He writes the columns Chasing Value™ and Serious Money and is on twitter: @ChasingValue. Disclosure: Mr. Liber owns shares and/or options of BRK.B and NGG.

Tags: american express, berkshire hathaway, BNSF Railway, buffett, featured, MergersAndAcquisitions, national grid, NetJets, Republic Services, Serious Money, warren buffett, what+will+warren+buffet+buy+next, whatwillwarrenbuffetbuynext

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Reader Comments (Page 1 of 2)

3-02-2011 @ 3:06PM

Fred said...

I douby that AXP is going to allow it. As an owner of both (B shares on BRK B) I would not like it. AXP pays a yield of 1.70% (0.72) and BRK does not.

3-02-2011 @ 3:26PM

bob said...

I think Buffet has done it, he needs no more, he eliminates what he had. I can only hope he leans not too far left, that didn't make him what he is.

3-02-2011 @ 3:52PM

william lindblad said...

Buffett has money, and I do mean actual cash which allows a great deal of flexibility. Given that this economy has so many "loose ends" some small private companies might be worth a look, especially those that are in realative niche positions. An example is the rare earth field. It will take years before mining/refining operations other than China will be on line and in the interim, only a few do "re-cycle".

3-07-2011 @ 5:08PM

whatsupgoodbuddy said...

Anyone hear if Buffett bought Iraqi Dinars??

3-02-2011 @ 10:00PM

Cheryl said...

I think Warren Buffett should next buy up the U.S. Government and get rid of all the buffoons that have messed up our economy. Buffett obviously knows what he's doing and how to hire the right people and make a profit. Get rid of the greedy jerks in Washington and run this business the way it should be run. The Republicans haven't shown us A THING, and I just have to ask WHERE'S THE JOBS THEY PROMISED??? Looks like they're getting RID of jobs INSTEAD of creating them!!!! Also, their time will be up soon. They gave Obama LESS THAN 90 days to fix Bush's mess ..... the clock is ticking!!!

3-02-2011 @ 5:32PM

Rock Fossil said...

Why don't Buffet, Murdoch, Gates and Soros just get together and buy the Earth? Get it over with quickly-GREED never impressed me. In fact it disgusts me! Here, I'll even proffer a name for their new corporate holding company and I'll name it after the former middle class of this country upon whose sweat and blood the above Titans made their fortunes-"Satans Slaves". Welcome to the NEWNITED MISTAKES of AMERICA. Last one out, turn off the light (wouldn't want the ReThuglican Can'tservatives to think we don't conserve). Bollux.

3-02-2011 @ 5:44PM

RaznCane said...

@Cheryl

'They gave Obama LESS THAN 90 days to fix Bush's mess ..... the clock is ticking!!!'

Tick Tock O'Man. You've had many more days than 90.
PS. The 'mess' started during Pres Clinton's reign- remember affordable housing for EVERYONE?

3-02-2011 @ 6:15PM

DICK JENSEN said...

Buffet has become a cartoon character. He shills for his own cause or those he favors. Time for Warren to just fade away.

3-02-2011 @ 6:25PM

ronzopi86 said...

BRK.B or BRK.A The best mutual fund one can buy.Your only cost is the price of the trade,that is a good deal,no management fee's.

3-02-2011 @ 10:20PM

uncle buck said...

No doubt Warren Buffet is sitting on the edge of his seat anxiously awaiting financial advice from the geniuses posting on AOL (and I include myself, so save the obvious joke).

3-02-2011 @ 11:23PM

ratt69 said...

he shouldn"t buy any more US companies all he will do is send it to CHINA like he did the company i was working for a couple years ago.

3-03-2011 @ 12:07AM

murphyindiana2@aol.com said...

I say it will be a GMAC (Ally Bank) acquisition of just the bank and the mortgage business (perhaps after the IPO). The feds (us) are owed about $17 Billion on a company that can't be valued at more than $6 Billion. So if the company is broken up and BH gets the finance (Bank and Mortgage & Insurance) the feds could give GM back the car (Core) business in some convoluted stock swap. BH could make Ally the next GE.

Just thinking out loud??

3-03-2011 @ 12:54AM

John said...

Don't wantabee investors just follow Mr. Buffet. and jump on any investment he looks at. He could start Buffet's Burgers tomorrow and beat Micky D's in new franchise openings in a year.

3-03-2011 @ 2:42AM

Billy said...

he should buy the ny mets lol

3-03-2011 @ 7:16AM

Kyle said...

I think he'll buy NACCO (NC). Perfect fit for Buffett.

3-03-2011 @ 8:54AM

tom said...

Fox Network. He couldn't make it any worse.

3-03-2011 @ 11:35AM

wrnj69 said...

buy fox news he couldn't make it worse. sure he could he could make it like cnn or msnbc.

3-03-2011 @ 11:47AM

bobby ewing said...

What should Warren Buffett do next. I have a suggestion. He could get involved in the restoration and refurbishment of the last surviving vessel from the spanish-american war of 1812. The OLIMPIA This ship is a national historic landmark and faces an undistinguished future. It is estimated it will take 20 million to do the restoration. not to mention the number of jobs it will it will create. I am sure if he did this a bronze plack would be installed to commerate his services. A summit is planned for early 2011 to determin the ships fate.
bobby