Berkshire Hathaway’s next big acquisition

Well well well, I always enjoy reading Berkshire's annual letter around this time of year. There is always too much to learn from and digest from the Oracle of Omaha and his sidekick Charlie Munger. 

The portion of the annual letter that caught my attention was that Berkshire is currently sitting on some $120 billion in cash and would be doing one or more MAJOR acquisitions. 

 Berkshire's annual report

Berkshire's annual report

I became this gold digger because hot damn, $116 billion is impressive, distribute that capital towards a really good investment. Here are a few companies that Warren should consider, while he hasn't disclosed anything yet or hinted about making any purchases just yet, I feel the Oracle of Omaha could make these moves and I give my reasoning as to why.

L. Brands (NYSE: LB)

L Brands owns Bath & body works, Victoria's secret, and PINK brands, a retail store that focuses on women's clothing/undergarments, beauty & care products, and accessories. A very strong brand. A company up Warren Buffett's ally and within his circle of competence. 

Berkshire is majority shareholder or the parent company of numerous clothing companies. Garanimals, a clothing company focusing on children's clothing, H.H Brown shoe group and Justin brands, both shoemakers, and lastly, most notably, Fruit of the loom. 

 Ownership of Berskhire Hathaway

Ownership of Berskhire Hathaway

Pros of L Brands

L Brands is currently at a market cap of around $13 billion, a price Berkshire can outright purchase. A stock price that has been beaten these past 3 years, making this company a great undervalue play and a discounted purchase for Warren. Currently, L Brands pays a dividend of $2.40 per share, and you know how Warren loves a good dividend stock.

L brands.PNG

Furthermore, their financial statements, as well as their balance sheet, have been good. Revenues of $11.4 billion, $12.1 billion, and $12.5 billion from 2015 - 2017. Net income of $1.0 billion, $1.2 billion, and $1.1 billion from 2015 - 2017. Very tasteful to see a company's overall profits grow back then and will most likely continue to grow going into the future. 

L Brands financials.PNG
L brands net income.PNG

Lastly, L Brands is sitting on plenty of assets. About $1.9 billion in cash and cash equivalents, $1.0 billion in inventory, total assets that reach well over $8 billion.

L brands balance sheet assets.PNG

Cons of L Brands

However, L Brands has struggled to increase their dividend every year and has a payout ratio of 73% awfully too large for Warren's taste, while he does love a good dividend paying stock, he also believes that companies should reallocate that capital back into their businesses, rather than paying their shareholders. Plus, they have soooo many liabilities and debt, their ratio of assets to liabilities is 0:0. 

L Brands debts.PNG

A crazy purchase for Warren to make, nonetheless fairly interesting to see if it does happen. 

Starbucks

Starbucks is a coffee shop that specializes in coffee (duh) and pastries. The brand is international and has plenty of market penetration in comparison to an Einstein Bagel bros, Peet's coffee, Panera bread, and Dunkin Donuts.

Berkshire owns 400 million shares of the Coca-Cola company. Warren knew that Coke had a very strong brand, a moat, and was dominant in the beverage industry. Starbucks is no different, only this time, it's dominant in the coffee business. 

Pros of Starbucks

At a market cap of about $85 billion, something Berkshire can afford, the share price has been flat for the past few months since the middle of 2015. While it hasn't gone anywhere, Starbucks does have a nice dividend that they've been paying out and increasing since 2010. It is under phenomenal management. 

Starbucks chart.PNG

Their financials are also pretty impressive, growing revenues on yearly basis by over a billion, and net income by a few million.

Starbucks revenues.PNG
Starbucks net income.PNG
Starbucks assets.PNG

Lastly, their balance sheet is looking equally as fine in terms of increasing assets. Plenty of cash for cushion just in case the economy turns sour, and a great amount of inventory. 

Starbucks debt.PNG

Their debt/liabilities are under control, nothing that outweighs their assets to liabilities ratio. 

Cons of Starbucks

Starbucks faces a problem in the price fluctuation of coffee bean commodities. A few of their stores are also located inside of malls, where some locations are having decreased foot traffic and could potentially mean store closings or less net income. 

An honorable mentions

Waste management is a perfect industrial Buffett can invest in. The company is easy to understand, a utility that is needed on a daily basis, somewhat of a strong financial statement and balance sheet, and under great management.