And when Berkshire invested in Bank of America (BAC) in the summer of 2011, Buffett seemed to be signalling that the worst was over for it and other big banks stocks. He said in a press release that he was impressed with how BofA CEO Brian Moynihan and the rest of the management team was "acting aggressively to put their challenges behind them."
But the purchase of ketchup maker Heinz by Berkshire (BRKB) and private equity firm 3G Capital should not be considered anything remotely like the Burlington deal or BofA investment. It's not a bet on American ingenuity and industriousness. Nor is it a sign that Buffett felt a beat-up industry leader was now simply too cheap to ignore.
The Heinz deal is merely a $28 billion Valentine's Day card to a strong company that perfectly fits Buffett's investing wheelhouse.
Buffett said in Thursday's press release about the acquisition that Heinz (HNZ) has "strong, sustainable growth potential." He also saluted the company's "excellent management and great tasting products" and noted that the success of Heinz "is a testament to the power of investing behind strong brand equities."
The Oracle of Omaha may have 57 reasons why the Heinz deal makes sense ... one for each variety. But make no mistake. The health of the American economy is not one of them.
Heinz is an obvious choice for Berkshire to buy. It is similar to other makers of brand name consumer products in his portfolio such as Benjamin Moore, Fruit of the Loom, and Dairy Queen. It's an easy to understand company. No high-tech here!
But Heinz is not a company that's growing rapidly. Earnings for the current fiscal year, which ends in April, are only expected to rise 5.7%. And sales are forecast to increase by less than 1%. The fact that Heinz is able to generate even mid-single-digit profit growth on virtually no revenue gain is a sign that the company is well-managed. It's disciplined and keeping costs down. Buffett loves that.
Heinz also is shareholder-friendly. The company pays a dividend that was yielding 3.4% before the deal was announced. The yield dipped to 2.8% on Thursday because Heinz shares surged 20% on the news of the buyout.
The deal got investors into a food frenzy. Several other makers of edible goods rallied Thursday. I think it's safe to suggest that their moves could be due to investor hopes that other companies will now want to follow Buffett's lead and look to the grocery shelves for merger opportunities. Cereal makers Kellogg (K) and General Mills (GIS) each rose Thursday even as the broader market fell slightly. So did shares of ConAgra (CAG), which owns Heinz competitor Hunt's. Campbell Soup (CPB) shot up more than 2%.
Yes, merger activity has been hot this year. And it may continue. But buying food companies blindly just because you think they might become a tasty takeover target could be a big mistake. One might say you'd soon find yourself in a bit of a pickle. (Hey. At least I didn't say you need to play catch-up to Buffett!)
In fact, if you believe that the U.S. economic recovery is for real and that the market will continue to move higher, boring consumer staples companies like food makers are the last place you'd want to invest right now. The momentum is likely to remain with riskier stocks that are more sensitive to economic cycles, such as banks, tech companies and retailers.
What's more, food stocks are no longer great bargains. Even before the deal was announced, shares of Heinz and other food companies were starting to look a little rich. ConAgra, Campbell Soup and General Mills all trade at price-to-earnings ratios in the mid-teens despite having long-term profit growth forecasts in the mid-to-high single digits.
Berkshire and 3G are paying a pretty price for Heinz. It's a bit shocking actually. At $72.50 a share, the deal is valued at more than 20 times fiscal 2013 earnings estimates. That's a lot to pay for a company only expected to post earnings growth of 7% a year on average for the next few years.
Buffett can afford to overpay for something he covets. Odds are you can't.
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