Tags: Sterman | Buffett | financial | energy

StreetAuthority's Sterman Tracks Down Buffett's Next Big Elephant

By    |   Friday, 29 August 2014 11:11 AM

What will Warren Buffett do with his record $55 billion pile of cash? By analyzing Buffett's past investments, StreetAuthority analyst David Sterman believes he has a pretty good idea of the next new targets.

Sterman says it's likely a strong bet that Buffett could turn toward familiar sectors such as banks or insurers for his next big deal, but that there a few familiar brands in other industries that could also pique his wallet.

"At the end of the day, the main point is not which companies Buffett buys. Instead, it's what constitutes a great acquisition. In effect, if such companies are good enough for Buffett, then they are good enough for the rest of us," he writes.

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Sterman screened only for U.S. companies in trying to ascertain those that could meet Buffett's typical smell tests, since the Berkshire Hathaway chairman rarely ventures out of America in his acquisitions.

First, he came up with 400 companies in the S&P 400, 500 and 600 that could be acquired for $5 billion to $25 billion — Buffett's likely price range since less than $5 billion is probably too small, and he typically likes to keep $20 billion on hand for emergencies or sudden opportunities.

Second, Sterman eliminated companies that did not have a history of strong free cash flow, another Buffett pre-requirement, which pared the list to 166 companies.

"Lastly, Buffett likes bargains. He'll likely only consider companies trading for less than 10 times trailing free cash flow," Sterman explains.

The results yield a bloc of financial services firms — banks and insurers — that all fit Buffett's typical requirements: Regions Financial, Fifth Third Bancorp, Sun Trust Banks, New York Community Bancorp, Torchmark Corp., Principal Financial, KeyCorp, Progressive, Huntington Bancshares and Unum.

"And the reason to own banks and insurers is about to get a lot more compelling. These firms hold considerable cash balances. That means an eventual uptick in interest rates will cause their interest income to soar," Sterman notes.

But if Buffett concludes he already has enough exposure to the financial sector because of his existing huge holdings in Wells Fargo and American Express, Sterman says there a few remaining choices in other industries with the right franchises and the right valuation that still meet Buffett's strict criteria.

He identified them as Xerox Corp., Cardinal Health, C.R. Bard, Omnicom Group and Rock-Tenn Co.

The Motley Fool predicts Buffett's Berkshire Hathaway will bet big on energy.

"Berkshire Hathaway Energy already operates 16,400 miles of natural gas pipelines through its subsidiary Northern Natural Gas. Pipelines would be a perfect fit for Berkshire," The Fool notes.

Robert W. Baird & Co. predicts Berkshire Hathaway might be eyeing pipeline giant Plains All American Pipeline and its general partner Plains GP Holdings, according to The Fool.

"Why would Buffett find Plains All American appealing?" The Fool asks. "Well, for one thing, Plains All American owns a fleet of 7,400 oil and natural gas liquids (NGLs) rail cars. This provides potential synergy opportunities with other Berkshire companies such as Union Tank Car and Burlington Northern Santa Fe railway. This is especially true given that oil tanker car volumes are expected to increase 20-fold from 2010 to 2015 or 2016, according to Toby Kolstad, president of the consulting firm Rail Theory."

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What will Warren Buffett do with his record $55 billion pile of cash? By analyzing Buffett's past investments, StreetAuthority analyst David Sterman believes he has a pretty good idea of the next new targets.
Sterman, Buffett, financial, energy
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2014-11-29
Friday, 29 August 2014 11:11 AM
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