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Could this be Berkshire Hathaway's next acquistion?

June 24, 2014 | About:

crafool

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Warren Buffett (Trades, Portfolio) is often asked about his portfolio of stocks. Buffett follows Benjamin Graham and most value investors approach to stock ownership as treating each stock position as if you own the "entire" company. It is a basic tenant. Thus, Buffett routinely answers when asked about stocks held in Berkshire's portfolio that he would "Love to own any one of them if the price is right." Well, Buffett has one stock in his portfolio that I believe he might make BRK's next acquistion. The company is Chicago Bridge and Iron.

Warren Buffett (Trades, Portfolio) began purchasing shares in Chicago Bridge and Iron (CBI) in early 2013 around the mid-$50 range. He based upon the latest SEC reports for BRk has about 9.55 million shares valued around $627 million currently and down from around $850 million. This is most likely a Buffett pick given its postion size and how the company's business compliments so much of BRK's operating businesses like Burlington Northen and Mid-America Energy (i.e utilities and oil piplines, etc.) to name just a few. CBI would be a tremendous benefit to Berkshire Hathaway (BRK.A)(BRK.B).

Since Buffett and BRK began purchasing shares of CBI, the share price has gone nearly straight up in value until recently. The company has declined in price from around $89 to its current $65.57. This nearly 26 percent decline in value has been somewhat attributed to a research report claiming CBI's accounting practices for acquiring Shaw Industries was fraudulent and that CBI was reaping large and unsustainable profits because of how they accunted for the "purchase of Shaw". So the question comes down to CBI's "purchasing accounting" treatment.

As a long-term investor (1996 bought BRK.A for $16,350 per share) of BRK and observer of Warren Buffett (Trades, Portfolio), I know that Buffett "says" things like "Accounting is the language of business". I know Buffett "does" things like sells out BRK's entire positions in Freddie Mac and Fannie Mae because "we just could not justify their accounting practices." You think Fannie and Freddie might have some complex accounting at that time prior to 2008? I think so. I also know that Buffett is probably one of the "greatest" serial acquirers of businesses in the history of American business and is prbable more than proficient into what is right and what is wrong for companies to do in their accounting of acquisitions.

Buffett purchased CBI after the Shaw acquisition and Buffett was more than aware of the companies accounting practices one would assume given that he frequently talks about reading stock/company prospectuses down to the footnotes as entertainment on a daily basis. I believe Buffett is fully aware of the accounting used as most likely his fellow partner Charlie Munger (Trades, Portfolio) (Note: How many letters, articles, and talks has Munger given on the craziness of the accounting profession and how he would handle it? A lot!) and it is probably good. I would error to the side of Buffett being in this stock over a no name research firm that doesn't even list the names or bios of its partners regarding the accuracy of the research, and if the price in the report of $37 is the right value then Buffett was completely wrong by buying in the mid-$50s and would probably buy the whole company before seeing it hit $37. Buffett likes to say that a company's falling share price bothers him as much as "the falling price of hamburger meat at the grocery store knowing that I am going to be eating hamburger in the future." Well, CBI's services to BRK given BRK's massive capital expenditures associated with the railroad tracks and bridges, oil piplines, power plant reactors including nuclear and that the entire US infastructure needs to be upgraded is a lot of "BRK hamburger". Analysts project that CBI's EPS growth will be over 15% per year for the next 3 to 5 years. CBI is projected to have operating EPS of $5.90 in 2015. Thus, CBI appears cheap, has a bright future and fits nicely in BRK's wheelhouse.

In my opinion, Buffett wants to buy CBI and it could be his next acquisition given its recent share price decline. I believe it was not too long ago that Buffett mentioned he was close to buying a company but just couldn't get it done. When asked who the company was and he would not comment because there was only a couple of them and giving the size of the purchase you could figure it out. He did say it was based in Europe. Oh, Chicago Bridge and Iron is based in Europe.

My opinion is CBI would be a great addition to BRK!!! Just my opinion.

Happy investing to all, and please do your own homework before buying, selling or holding CBI or any other stock mentioned in this opinion piece.


Rating: 4.0/5 (4 votes)

Voters:

Comments

CarstenPrause
CarstenPrause - 2 months ago

This article is interesting. However, due to the small size of the position taken I would think that either Ted Weschler or Todd Combs made that purchase. I don't think Buffett himself pulled the trigger on this company. Still could be an acquisition target but most likely Ted or Todd did the legwork on this one.

crafool
Crafool - 2 months ago
Carsten,

You may be correct regarding the purchase by Ted or Todd for someone did have to buy it at BRK. I would point out that Buffett has stated that both Ted and Todd's positions in the past would be under $350 million. His positions would be generally be larger. This position has a cost basis around $500 million. So the initial size squares with a Buffett pick. The company's operations also square into his wheel house given his decisions to buy Mormon, Burlington, oil pipelines, Conoco Philips, hold Philip 66, Mid-America Energy, etc.(i.e. Todd was a hedge fund manager of financial and insurance related stocks.).



In my opinion, CBI's position size is more a function of the company's low market capitalization, trading volume, buying competition from others like highly successful hedge fund manager David Tepper (Trades, Portfolio), Appaloosa lManagement and Buffett's own price discipline that allowed the stock to run away from him and his buying stopped. The stocks current decline in price is why I believe he might start buying again as well as possibly acquire the company.

We will all see. Happy investing!

vgm
Vgm - 2 months ago

Crafool,

I'd agree with Carsten and say it's pretty certain CBI was a Ted/Todd purchase. Other picks like DTV, DVA, GM, VZ are clearly theirs also and are generally well in excess of $350M. Buffett's picks are in the multi-billion range like IBM etc.

crafool
Crafool - 2 months ago

Vgm and Carsten,

First, you guys maybe correct regarding the decision maker that purchased the stock, but I do caution you to not hold the "Rule of Thumb" for position size and decision maker too hard. I say this because many investors just don't understand that Buffett just cannot call his trader at Goldman Sachs and order he/her to buy him say $1.5 billion dollars of CBI today. As you may or may not know, stocks have "normal or average trading volumes". These levels prevent him from just grabbing stock all at once without spiking it upward.

Let's look at CBI during 1Qtr2013, this is the period that Buffett and Berkshire picked up their first shares. Berkshire showed that it had accumulated about 6.5 million shares. Now, CBI looking at the charts had total estimated 108 million shares trade during that entire 3-month period. Thus, BRK was in the neighborhood of 7% of the daily volume. At as little as 7% of the daily volume, CBI saw its share price rise during this short 3-month period from around $46.33 a share to $62.73 a share. This represents a HUGE appreciation in CBI's share price of over 35%!!!

Now, let's say he wanted to get a larger position in the stock like mentioned by Vgm of $1.5 to $2.5 billion. If he did that he would have become close to say in the middle then Buffett would have had to increase his position from 6.5 million shares to 36.7 million shares. His percentage of average daily volume would have gone from around 7% to 26.57% of daily volume. If just his 7% volume saw CBI's share price rise by 35%, what would 26.57% volume do to it? All things being equal, jump the stocks share price by 138% or so!!!

The point is that trying to say since the position was not originally a $1 billion or so trade does not rule out that Buffett pulled the trigger. Berkshire's size is one of its largest handicaps. Buffett need the credit crisis to enable him to put to work such large sums of money without the constraints that his volume creates as it affects price. He unfortunately cannot just put in a limit order and get into $1 billion dollar position in a day.

I guess we will have to wait and see later if he talks about it in an interview or as I propose announces that BRK is buying it.

happy investing!

vgm
Vgm - 2 months ago

Crafool,

Thanks. Yes, I do understand the argument on volumes, though your explanation was helpful. With IBM, for example, the first announcement (if memory serves) was Buffett's $10B purchase. So it can be done, obviously. He can also request confidentiality on his partial purchases, as he builds a position.

I continue to believe CBI was a Ted/Todd move. Buffett rarely talks about these things, so we may never know for sure, but we do know for sure that DVA and DTV were not Buffett, since Ted and Todd talked about them on CNBC a couple of months ago. And I'd guess GM was not either, based on Buffett's reluctance on the automobile industry. Likewise VZ.

Thanks for the stimulating and thoughtful article. A very enjoyable analysis.

Good luck!

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