Buffett Cash Makes General Mills to Grainger Targets
He has shifted his takeover strategy as Berkshire has grown to focus on “capital intensive businesses.” So-called value investors such as Buffett also purchase companies when their stock prices are low by historical standards compared with earnings.
There are 28 U.S. companies with equity values between $15 billion and $35 billion that had capital expenses accounting for at least 10 percent of net fixed assets; generated an average increase in return on invested capital in the past five years that ranked in the top 50 percent; sold for a lower price-earnings ratio than the average stock in the U.S.; and had a return on equity last year exceeding 10 percent, data compiled by Bloomberg show.
General Mills would be a fitting takeover for Buffett after the Heinz purchase because both companies have recognizable brands and sell their products in many of the same stores, said Jeff Matthews, a Berkshire shareholder and Naples, Florida-based author of “Warren Buffett's Successor: Who It Is and Why It Matters.”
Eoin Treacy's view The purchase of Heinz by such a high profile acquirer has set the media alight with speculation about who will be next. However, the more measured approach is to examine why a company like Heinz is such an attractive target. Its leverage to global consumer growth, competitive yield and leadership within its specific niche are all attractive qualities in themselves. Such companies are desirable investment vehicles for potential acquirers for a reason and are no less attractive as investments regardless of whether they will eventually be taken over by larger organisations.
The list of companies that have the types of fundamental qualities that might be attractive to an acquirer like Warren Buffett mentioned in the above article was interesting because it featured a large number I have reviewed over the last year albeit for different reasons.
In the media sector Viacom is among a small number of beneficiaries from the growth in demand in broadband access fuelled by the bull market in wireless devices. (Also see Comment of the Day on December 12th. The share has been ranging mostly below $45 since July and continues to find support in the region of the 200-day MA. A sustained move below the trend mean would be required to question medium-term potential for additional upside. CBS Corp has rallied particularly impressively over the last few months and is becoming increasingly susceptible to mean reversion.
In the food sector, General Mills ranged above its 2007 peak from 2010 until November when it broke successfully above $40. (Also see Comment of the Day on June 1st 2012). The share surged yesterday on news of the Heinz acquisition. While somewhat overbought in the short term a sustained move below $40 would be required to question medium-term upside potential.
Hershey has been trending consistently higher since 2010 and while somewhat overbought in the short term, a sustained move below the 200-day MA, currently near $72, would be required to question medium-term upside potential. (Alse see Comment of the Day on July 31st).
Yum Brands which generates more revenue from China than the USA, posted a large downside weekly key reversal in November and will need to hold above $60 if medium-term upside potential is to continue to be given the benefit of the doubt. (Also see Comment of November 30th).
In the auto and parts sector Johnson Controls is a leader in battery technology and also offers exposure to the nanotechnology sector. The share broke back above the 200-day MA in December. A sustained move below $29 would be required to question medium-term potential for additional upside. (Also see Comment of the Day on February 12 th).
Paccar and Cummins are leaders in the development of natural gas power trains (Also see Comment of the Day on October 29th). Paccar has trended steadily higher since July and has returned to test the $50 area, where some consolidation may be expected. Cummins is testing the upper side of its two-year range.
In the Wholesale sector, S&P 500 Dividend Aristocrat Grainger W.W. broke out of its almost yearlong range this week and a clear downward dynamic would be required to check medium-term scope for continued upside.
In the retail sector TJX lost momentum and entered a process of mean reversion from September (Also see Comment of the Day on August 1st). It continues to find support in the region of the 200-day MA and a sustained move below $42 would be required to question medium-term upside potential.
VF Corp is an S&P500 Dividend Aristocrat and remains in a relatively consistent medium-term uptrend where it continues to find support in the region of the 200-day MA on pullbacks. (Also see Comment of the Day on November 24 th 2011).
Gap Inc (Also see Comment of the Day on September 5th) has pulled back to test the region of the 200-day MA but it will need to continue to hold above $30 if the benefit of the doubt is to be given to the upside.
Elsewhere in the consumer sector Estee Lauder is an Autonomy and has been ranging with an upward bias for much of the last year. A sustained move below $60 would be required to question medium-term potential for a successful reassertion of the medium-term uptrend. (Also see Comment of the Day on January 14th).
The US health insurance sector continues to benefit from the changes wrought by Obamacare. Cigna completed a more than yearlong range in November and while becoming increasingly overbought continues to extend the breakout. (Also see Comment of the day on August 23rd). Cardinal Health is testing the upper side of its 18-month range while Aetna has returned to test the psychological $50 area where it has paused.
In the transportation sector Fedex successfully broke above $100 for the first time since 2007 less than a month ago and continues to extend the advance.
The above companies represent a broad cross section of the US economy and their relative strength supports the view that the recovery remains on track.