Showing posts with label Berkshire Hathaway acquisition criteria. Show all posts
Showing posts with label Berkshire Hathaway acquisition criteria. Show all posts

Thursday 1 August 2013

How does Buffett make his picks? His 5 investment criteria.


● Free cash flow of at least $250 million.

● Net profit margin of 15% or more.

● Return on equity of at least 15% for each of the past three years and the most recent quarter.

● One dollar’s worth of shareholder equity created for every dollar of retained earnings over the past five years.


● Market capitalization of at least $500 million.


One more criterion is added to eliminate overvalued stocks: comparing our five-year discounted cash flow estimate with the current price.



"Many stock options in the corporate world have worked in exactly that fashion: they have gained in value simply because of management retained earnings, not because it did well with the capital in its hands. " ~ Warren Buffet
Warren Buffet once stated - "Unrestricted earnings should be retained only where there is a reasonable prospect - backed preferably by historical evidence or, when appropriate by a thoughtful analysis of the future - that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors." Hence for a booming business, the primary goal is to create 1$ in market for every 1$ of the retained earnings.

Read more at Buzzle: http://www.buzzle.com/articles/retained-earnings-calculation.html

Thursday 1 March 2012

Boosting Berkshire Hathaway Profits: Through organic growth and through purchasing some large operations.



-  I also included two tables last year that set forth the key quantitative ingredients that will help you estimate our per-share intrinsic value. I won’t repeat the full discussion here; you can find it reproduced on pages 99-100. To update the tables shown there, our per-share investments in 2011 increased 4% to $98,366, and
our pre-tax earnings from businesses other than insurance and investments increased 18% to $6,990 per share.

Charlie and I like to see gains in both areas, but our primary focus is on building operating earnings. Over time, the businesses we currently own should increase their aggregate earnings, and we hope also to purchase some large operations that will give us a further boost. 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.


Comment:  In managing Berkshire Hathaway, Buffett's primary focus in on building operating earnings.  He expects his existing companies can increase their aggregate earnings.  He hopes to boost these earnings further through purchasing some large operations.

Sunday 18 July 2010

Reasons to dislike excess cash on a company's balance sheet.




5 Stocks That Are Cheaper Than You Think


There are a lot of reasons to dislike excess cash on a company's balance sheet. The simple fact is that most CEOs are not Warren Buffett and so capital allocation is probably not one of their foremost skills.
As a result, bad things can happen when companies start building huge stockpiles of cash. One of the worst possibilities is that the CEO decides it's time to take over the world and shareholder value gets kneecapped as the head honcho negotiates a bunch of large, overpriced acquisitions. Also potentially damaging are big share buybacks. Though these are typically pitched as shareholder friendly, management teams often end up throwing big bucks around when the company's stock is anything but cheap.
More innocuous, but suboptimal nonetheless, is allowing the cash to sit around gathering dust. Particularly with safe, secure investments yielding next to nothing these days, cash that a company has no plans for really does absolutely nothing for shareholders.
However, gobs of cash on the books may also obscure the true value and performance of a company. For investors who dig into the numbers, that may create opportunities others are overlooking.
Cash, the master magician
There are two primary areas where cash might throw investors off the scent of a good investment: valuation and 
return on equity.
The value of a company with a ton of cash should be calculated in two separate pieces: the value of the excess cash and the value of the operating business. For obvious reasons, the cash should be valued dollar for dollar, while the operating business can be valued any number of ways.
Any investor who assumes the valuation reflects the operating business alone and tries to calculate, say, a price-to-earnings ratio based on the full price tag will end up thinking that the market is giving the business a much heftier valuation than it actually is.
Meanwhile, a company's return on equity is meant to reflect the returns that a business can generate in relation to the capital that's been invested in the business. Extra cash that a company keeps around is capital that hasn't been invested in the business and yet still inflates the company's equity. That drags down the company's overall return on equity.
So with a wave of its hands and a tap of its wand, the illusionist Excess Cash can simultaneously make a company look more expensive and less profitable.
A cash-rich quintet
There are a lot of companies sitting on a ton of cash right now. Here are five that might look a lot more appetizing to investors if they unloaded their cash hoard.
Company
Net Cash
Current P/E
Ex-Cash P/E
Current ROE
Ex-Cash ROE
Google (Nasdaq: GOOG)
$26.5 billion
21.6
18.4
18.4%
58.2%
Cisco (Nasdaq: CSCO)
$23.9 billion
19.4
16.1
15.8%
34.3%
eBay (Nasdaq: EBAY)
$4.5 billion
10.9
9.2
17.2%
25.0%
Dell (Nasdaq: DELL)
$6.2 billion
17.0
12.0
25.2%
NM*
Western Digital (NYSE:WDC)
$2.4 billion
5.5
3.7
29.7%
65.0%
Source: Capital IQ, a Standard & Poor's company, and author's calculations.
P/E = price-to-earnings ratio.
*NM = not meaningful; Dell's net cash exceeds its equity value.
It's hard to classify Google's ex-cash P/E as "cheap," but when we consider the amount of cash the company is holding, the valuation definitely looks more reasonable. What's more striking, though, is how much of an impact Google's cash has on its equity returns. Without the drag from its cash, Google's capital-light, highly profitable business model is shown in high relief.
Stripping out Cisco's cash, we actually end up with a below-market multiple on what I consider one of the very best tech companies, if not one of the very best companies, period. Cisco may be a different story than the rest of the companies here, though, since it's one of a select few companies -- Oracle (Nasdaq: ORCL) being another -- that has made great use of acquisitions to grow and prosper. So it may actually behoove investors if the company keeps some cash available for takeovers.
While Google and Cisco are largely looked at as currently successful companies, the valuations for both eBay and Dell reflect the market's perception that both businesses are facing tough times. With brutal competition from the likes of Hewlett-Packard (NYSE: HPQ)in what's become largely a commodity business, I find it hard to get too excited about Dell. eBay, however, not only carries a lower valuation than Dell, it also packs more excitement -- particularly when it comes to the PayPal-driven payments side of its business.
But perhaps the most intriguing stock here is Western Digital, which isn't exactly a growth company working in an exciting, new technological field. In fact, it's quite the opposite. The market sees flash and other solid-state storage from companies like SanDisk as a mortal threat to WD's core disk drive business.
However, when we strip out the cash that WD already has on its books and consider the extremely healthy cash flow that the company is producing, I come to the same conclusion my fellow Fool Eric Bleeker reached when looking at WD competitor Seagate: It may just be too cheap to pass up.
Now it's your turn to chime in. Do you think cash-hoarding companies are throwing investors off the scent of good investments? Head down to the comments section and share your thoughts.
While these cash-rich companies may have piqued my interest, my first love will always be companies that pay healthy dividends.



Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned.