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Could Berkshire Hathaway Buy Johnson Controls, Marsh Next?

"We now have eight subsidiaries that would each be included in the Fortune 500 were they stand-alone companies. That leaves only 492 to go. My task is clear, and I'm on the prowl." — Warren Buffett, 2011 Letter to Shareholders

Many of you reading this are, no doubt, avid followers of Warren Buffett. Those who are not may benefit greatly from reading his recent letter to the shareholders, which he traditionally crafts at the end of each fiscal year. I recommend you read it. It is chock full of insight and investing wisdom. The link is provided here.

With some two-thirds of the Berkshire Hathaway (BRK.A)(BRK.B) portfolio composed of equities in the financial and consumer goods sectors, it is highly probable that any Berkshire Hathaway acquisition will occur in one these sectors. Speculation, I know, but that's what we do! I see less than a one in five chance of an acquisition occurring in the technology sector based upon the current portfolio mix and even lower odds that an acquisition might occur in any of the remaining sectors. The thrust of this article will be to "second guess" the oracle of Omaha and try to identify companies he may target for acquisition.

Using FINVIZ.com's screener, I selected companies in the financial and consumer goods sectors exhibiting the attributes Buffett values most: low price/earnings, price/earnings growth, and price to book. I also selected companies exhibiting positive growth, high return on equity, reliable dividend sound financials and quality management.

Based on my inputs with FINVIZ.com's screener, only one company emerged in the financial sector, Marsh and McClennan (MMC). This company meets two of Buffet's preferences right off the mark; first, it is a U.S. company and second, it was founded in 1871. The fundamentals are great because, well, that's what I selected for. The price/earnings ratio is 17.53, the price/earnings growth ratio is 1.24 and price to book is 2.86. Return on assets is 6.66% which is a little disconcerting, but not being superstitious, I'll deal with that. Return on equity, what I actually screened for, is 15.90%. Quarterly year-over-year revenue growth stands at 4.40% and quarterly year-over-year earnings growth is 26.10%. Marsh's debt/equity and current ratios are 49.29 and 1.51 respectively.

Similarly, one company emerged in the consumer goods sector, Johnson Controls (JCI). Like Marsh, Johnson Controls is a U.S. company and sufficiently venerable to satisfy Buffett's penchant for mature, established firms. Johnson was founded in 1885. That said, Johnson's fundamentals are sound beginning with a price/earnings ratio of 13.78, a price/earnings growth ratio of 0.65 and a price to book of 2.03. Return on equity is 15.98%. Quarterly year-over-year revenue and earnings growth are 9.20% and 9.30% respectively. Johnson's financials are sound as the debt/equity and current ratios of 51.83 and 1.17 respectively demonstrate. The dividend is modest, yielding 1.10% against a payout ratio of 27%.

Marsh, with an enterprise value of almost $18 billion is certainly within the grasp of Berkshire Hathaway. The Berkshire coffers have some $35 billion in available cash. Johnson Controls has an enterprise value of almost $28 billion. Of the 2, Marsh seems the most likely candidate. Marsh's performance relative to the S&P 500 is superior to Johnson Control's and, for that matter, superior to Berkshire's. Marsh is an insurance company and Buffett is extremely well versed in the insurance business. Buffett prefers to invest in businesses he understands, and there is little doubt that he understands the insurance business. Marsh also offers synergies with other Buffet acquisitions, particularly his insurance companies! Couple this with the additional float that would be available to Berkshire Hathaway, literally millions, if not billions in zero cost funds, and you can see why Marsh makes an attractive acquisition.

All this is pure speculation but certainly a fun exercise! I think you would agree that such an acquisition would have a significant impact on Aon (AON). Aon has striven for years to overtake Marsh as the top dog in the business. Willis Group Holdings (WSH) is being discussed as a possible acquisition target for Well Fargo (WFC). This may give Buffett pause, as he holds a significant position in Wells Fargo and an acquisition of Marsh would place Berkshire in competition with Wells Fargo if Wells Fargo acquired Willis.

As I said, all pure speculation. I would be interested in hearing what the readers think Warren may be setting his sights on.

About the author:

Dividend King
I am primarily an investor interested in creating passive income streams through dividends. I focus on finding and analyzing dividend paying stocks, MLPs and REITs that are a good fit for income investors.

I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.

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