"What will Warren buy?"
That's the question at the forefront of many people's minds today after Berkshire Hathaway revealed a gigantic $116 billion cash hoard in its annual shareholder letter over the weekend.
It's not just an academic exercise, either. $116 billion is serious money, even in 2018, and when that kind of cash goes into play, it'll have very real implications for every investor.
Naturally, every financial writer on Earth rushed to write "Buffett Will Buy XXX, So You Should Too."
It's a tempting idea. It even tempted me for two seconds or so, until this occurred to me...
With a cash pile of over $116 billion, it makes no sense whatsoever for Buffett and No. 2 man Charlie Munger to buy anything for a penny less than $10 billion.
It just would not move the needle much at all. The not-inconsiderable hassle of filing the regulatory documents for such a deal would make it not worthwhile.
I think it will be much more interesting (and profitable) for us to think about Warren might do if Berkshire was not quite as large and he had a little more flexibility.
Looking at his published acquisition criteria, he likes... the same kinds of companies I do. Businesses that are consistently profitable, simple to understand and manage, with excellent management willing to stay in place.
I sat down and spent some time thinking about what the Oracle of Omaha would - not should - buy if the size made sense.
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What I came up with could make us all (well, except for Buffett) an unreasonably large pile of money...
The First Deal Is Obvious to Me
Berkshire should form a bank holding company and buy Home BancShares Inc. (Nasdaq: HOMB) of Conway, Ark.
Chair Johnny Allison is, pound for pound, the best banker working in the United States today. When I first talked with Johnny, he told me that he thought of himself as a businessman who happens to run a bank.
He's not wrong.
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Allison has grown the bank from a "small," $25 million outfit to a powerhouse with 176 branches and over $10 billion in assets. He takes great pride in the fact that, while he has grown the bank via acquisition, he has never done a deal that didn't add to earnings and the value of the bank on day one.
You will not hear Johnny Allison and his team talking much about earn-back periods or dilution.
Allison has built an incredible team that shares the same vision of banking as he does. I've actually met some of them at the various banking conferences I attend every year.
They're an impressive group. They follow his model of cost efficiency and have been duly rewarded. As he told a panel at this year's Bank Director Conference, "I have made a lot of millionaires at this bank."
He told me a couple of years ago that his goal was to get earnings up to $2.50 a share and get Wall Street excited enough to put a 20-multiple on the stock. If Allison is successful, he'll be well-rewarded; he owns almost 5% of the bank personally. His team will, too, as they all possess a substantial amount of Home BancShares stock.
Johnny Allison and Warren Buffett are made for each other. In fact, I think Allison is the Warren Buffett of community banking.
Now, with a market cap of just $4 billion and a bunch of regulatory hurdles, Buffett is unlikely to ever make the buy - but he should.
Fortunately, we can buy one of my favorite community banks and take the ride to $2.50 a share in earnings and a $50 share price.
Here's another one of my favorite companies that Buffett will probably never get a crack at...
This Is the Definition of "Unreasonably Profitable"
It's the decidedly un-flashy Graphic Packaging Holding Co. (NYSE: GPK), the $4.7 billion-dollar packaging products company.
Graphic Packaging makes boxes for food products and personal goods. It already provides packing to Kraft Heinz Co. (Nasdaq: CO), where Berkshire owns 325 million shares worth more than $25 billion. It also does packaging for The Coca-Cola Co. (NYSE: KO), a company in which Berkshire Hathaway owns about $18 billion worth of stock.
In other words, Berkshire owns a lot of companies that ship things in boxes... so why not just bring it all in-house with one deal?
Because, in this case, it can't.
Graphics Packaging recently combined with the U.S. paper consumer packaging business of International Paper Co. (NYSE: IP) in a deal that creates $6 billion in revenue business. It got the business at an unreasonably good, "Buffett-esque" price, too, paying just 8.6 times earnings before interest, taxes, depreciation, and amortization (EBITDA), and 6.3 times EBITDA after considering cost savings. The deal is structured as a partnership, in which Graphic Packaging will own 70.5% of the business.
This company has miles and miles of runway for growth.
Stuff comes in boxes no matter where you buy it or how it gets to your home. Graphics Packaging's management is very "shareholder-friendly" and recently raised the dividend. It has also been buying back stock, and the total share count has decreased by 22% since 2011.
It has also shown some distinctly Buffett-like acumen when it comes to doing deals.
Since 2012, it has done 11 deals, spending $980 million to acquire packaging companies that had combined revenue of $1.39 billion.
Even more impressive, these acquired companies now produce $187 million annually of EBITDA, for a yield each year of almost 20% on every dollar spent.
That is the very definition of unreasonably profitable.
And yet, it's too small for Warren.
But it's not too small for us to take advantage of the fact that, now and for the foreseeable future, people buy stuff, and stuff comes in boxes.
Graphics Packaging is a leader in making those boxes, and I'm expecting it'll grow earnings by more than 20% a year for the next five years.
Warren has $116 billion to invest, so he has to make really big deals to make it worth the time and effort.
We don't have that problem. So, instead of doing what Warren does, we can think like Warren thinks and rack up long-term profits like he did in the earlier stage of his illustrious career.
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.