4 Companies I Hope Warren Buffett Doesn’t Buy
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Food condiments maker Heinz will soon be jointly purchased by Berkshire Hathaway (NYSE: BRK-A) and private equity firm 3G Capital in a deal valued at $28 billion, robbing the public retail investor of another great company. The four companies outlined below represent great businesses that hopefully won’t get poached by Warren Buffett or other private equity firms.
With roughly $30 billion remaining on Berkshire Hathaway’s balance sheet after its $12 billion contribution to the Heinz deal, it could easily acquire food manufacturer J.M. Smucker (NYSE: SJM) with a market capitalization of $10 billion.
J.M. Smucker possesses many qualities of a Warren Buffett acquisition. It owns many iconic brands such as Smucker’s jelly, Jif peanut butter and Folger’s coffee. Very few competitors knock at its door. Revenue and free cash flow grew nearly 366% and 468%, respectively, over the past 10 years translating into market-beating returns of 259% for Smucker versus 100% for the S&P 500 (see chart below).
One of the qualities it lacks for a typical Buffett investment: Smucker’s return on equity of 10% is lower than the typical Buffett investment.
The famous food confectioner, Hershey (NYSE: HSY), with a market cap of roughly $18 billion as of this writing, also represents only a portion of Berkshire’s cash stash. Like Heinz and Smucker, Hershey owns a portfolio of strong iconic brands such as the various Hershey’s chocolate bars, Reese's, and Jolly Rancher. Privately held Mars Corp., along with publicly traded Kraft and Tootsie Roll, represent its only major competitors.
Hershey’s wide moat contributed to revenue and free cash flow growth of 63% and 40%, respectively, over the past 10 years. Hershey’s total return of 224% nearly doubles the 117% return of the S&P 500 during that time (see chart below). Hershey’s return on equity of 63% exceeds Heinz.
Household and personal care company Church & Dwight (NYSE: CHD), with an $8 billion market cap, probably resides on Warren Buffett’s radar screen. This company owns the famous Arm and Hammer brands. It makes laundry detergent, toothpaste, deodorant and toothbrushes. It competes with Procter & Gamble; however, Church & Dwight’s small portfolio of products makes it more nimble.
Over the past 10 years Church & Dwight’s revenue and free cash flow grew 181% and 402%, respectively (see chart below). The company’s total return of 555% exceeds the S&P 500 total return of 117%. Its return on equity of 17% resides in the low range for a typical Buffett investment; however, he has pulled surprises in the past.
Railroad equipment and parts provider Wabtec (NYSE: WAB) makes parts and accessories for a large portion of the global railroad industry. According to its 2011 Form 10K, Wabtec estimates it holds a 50% market share in North America. Its $5 billion market cap falls well within the range of affordability of Berkshire Hathaway. The fact that this company represents one of the few providers of needed parts to a crucial industry gives it a quality desirable in a Berkshire acquisition.
Investors in Wabtec enjoyed a total return exceeding the S&P 500 by seven times over the past 10 years. Its revenue and free cash flow increased 247% and roughly 700%, respectively, during that time (see chart below).
To sum up, the companies highlighted here represent businesses with wide moats, makers and sellers of needed products, efficient users of capital and owners of a portfolio of strong brands. All of this serves as a recipe for great businesses with increasing cash flow and market beating returns. I hope Warren Buffett and some of his private equity buddies don’t come in to steal them away from the retail investor.
William Bias owns shares in Berkshire Hathaway Class B. The Motley Fool recommends Westinghouse Air Brake Technologies. 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!