Is This Buffett's Next Acquisition?

Shmulik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On Feb. 14, the management of H.J. Heinz (NYSE: HNZ), the specialty ketchup and beans manufacturer, announced that it agreed to be acquired for $28 billion by outside investors, including Warren Buffett's Berkshire Hathaway (NYSE: BRK-A). The deal is shaping up to be the largest acquisition in the food industry ever. In response to the news, shares jumped 20% to close at $72.50.

Buffett's acquisition guidelines

Mr. Buffett isn't looking for a hyper growth machine or for "the next best story." In that sense, the baked beans-to-ketchup group is a classic Buffett company: steady, predictable growth; small repeatable purchases unaffected by economic cycles or fashion; a wide “moat” to repel rivals in the form of one of the world’s most recognizable brands; and years of emerging market growth to come. For the last five years, earnings growth has averaged 7.1% per year. Not anything particularly exciting, but fairly high and consistent. The stock pays a dividend of 2.83% a year, and it shows an annual dividend growth rate of 6.3% a year.

Sitting on a cash position of $42 billion (and counting...), Berkshire is on the hunt for other lucrative deals, both private and public. Below is a short list of prospective companies to be acquired next by Mr. Buffett.

The candidates

With 15% annual earnings growth over the last five years and a projected 9.8% for the next five, perhaps McDonald’s (NYSE: MCD) is a great choice. The current dividend yield is 3.3% and has been increasing at an annual clip of 10%. The company's growth rate has been 13.9% annually over the last five years. McDonald's has one of the most recognizable brands in the world. This gives it a vast competitive edge over other competitors in the restaurant business.

Corning (NYSE: GLW) is another company that I'm sure Mr. Buffett keeps a file on. The specialty all-glass-related company was founded in 1851, and has since mastered the art and technology of glass making. Corning is extremely dominant in its field with the company controlling nearly 50% of the glass panel market globally, and its name is associated with high-quality products worldwide.

Glass making has some serious barriers to entry as a result of heavy investments associated with plants and equipment. This fact positions Corning in an excellent spot to keep making piles of money from glass and other products. The company's quarterly revenue growth is 14% year-over-year, and it's able to maintain a very high gross profit margin of 22% due to market dominance and quality. It's now trading on the cheap at a forward P/E of only 10.

DaVita HealthCare Partners (NYSE: DVA) is a sure bet on a sick future. This is another potential Heinz-like stock in the making. The kidney dialysis market is growing at an almost certain 4% a year, as more and more of the U.S. population develops diabetes.

DaVita’s earnings growth rate over the last five years is an annual 15.1%, and the consensus annual growth rate for the next five years is 12.7%. The stock doesn’t pay a dividend, but sports a healthy quarterly revenue growth of 33% and gross operating margin of 17%. Buffett has been accumulating shares of DaVita at a steady pace in recent quarters. Perhaps this is a prelude for an imminent purchase of the company as a whole.  

Whether Berkshire Hathaway purchases any of the above mentioned companies is purely speculation. But with the financial stability, brand power and shareholder friendliness that these companies have been demonstrating over the years, perhaps you, and not just Berkshire should add them to your stock portfolio.


shmulikarpf has no position in any stocks mentioned. The Motley Fool recommends Corning, H.J. Heinz Company, and McDonald's. The Motley Fool owns shares of Corning and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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