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.