Berkshire Hathaway’s Bright Future

July 29, 2015

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By VW Staff. Originally published at ValueWalk.

Berkshire Hathaway’s Bright Future by Andrew Bary, Barron’s

Warren Buffett is coming off one of the biggest investment coups of his long career with the closing of the Kraft Foods Group Inc (NASDAQ:KRFT) Foods’ purchase of H.J. Heinz Company (NYSE:HNZ) Holdings earlier this month.

Buffett’s Berkshire Hathaway invested $4.25 billion for a 50% equity stake in the $23 billion leveraged buyout of Heinz two years ago, along with a partner, Brazil’s 3G Capital. Berkshire made a second $5 billion equity investment with 3G when Kraft unveiled its deal for the ketchup maker in March. Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) now is sitting on a 25% stake in the new Kraft Heinz — some 326 million shares — worth $25 billion based on Kraft’s recent share price of $77, resulting in a gain of almost $16 billion. That’s a stunning profit in just two years. (3G has a similar gain.)

The Heinz score rivals anything ever achieved in the private-equity industry. It also demonstrates that Buffett, who is celebrating his 50th year at the helm of Berkshire Hathaway this year, is still going strong ahead of his 85th birthday in August. Berkshire is his baby, and the company is better than ever despite the lackluster performance of its big equity portfolio, which is dominated by four stocks: American Express Company (NYSE:AXP), Coca-Cola, International Business Machines Corp. (NYSE:IBM), and Wells Fargo & Co (NYSE:WFC).

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“I’m scratching my head about Berkshire,” says Jay Gelb, a Barclays PLC (NYSE:BCS) (LON:BARC) analyst. “The earnings power is stronger than ever, the company has done a series of attractive acquisitions, and it just closed on Kraft. None of that is reflected in Berkshire Hathaway’s valuation.” Gelb carries an Overweight rating and a price target of $259,500, 22% above current levels.

Downside appears limited, given the company’s rising book value and its willingness to aggressively repurchase stock at 1.2 times book value, backed by a formidable balance sheet with $58 billion in cash, or $44 billion of net cash after subtracting $14 billion of debt. The net cash position is equal to more than 10% of the company’s market value of $350 billion.

Barron’s has written frequently about Buffett and Berkshire Hathawayover the years, including a bullish 2012 piece when the shares fetched $128,000, or 1.1 times book value (“Buffett’s Latest Bargain: Berkshire Hathaway,” Nov. 12, 2012). Buffett declined to comment for this article.

BUFFETT CONTINUES to hunt for what he calls elephant-sized acquisitions that could total $35 billion or more, although he hasn’t done any big deals besides Heinz in the past few years.

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“Berkshire is cheap, and the risk-reward is favorable,” says David Rolfe, chief investment officer at Wedgewood Partners, a Ladue, Mo., firm that counts Berkshire among its largest holdings. “Buffett is giving you a road map on valuation, and we’re closer to 1.2 times book than two times.”