Everyone in the business media has a suggestion or two of what stocks Warren Buffett should buy or companies Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) ought to acquire. I’ve written several articles about Warren Buffett stocks in the past year.
It’s hard not to do when Berkshire had $147 billion in cash available as of June 30. After all, the company has to do something with all that money. I’m paid to generate actionable ideas for readers.
I saw an article from October 16 in Bloomberg about Kohler, the kitchen people. The privately held business was exploring the sale of its generator division. Estimates put the business value at $3 billion.
To me, that is the ultimate Buffett business — boring and profitable. The only problem for Berkshire is that $3 billion is too small an acquisition. It has to go big or go home.
The easier route for Berkshire is to buy a big position in a large company. Building the position will take a while, but at least it’s not competing with private equity and alternative asset managers to buy companies with higher-interest debt.
In some ways, Berkshire has become a closed-end investment fund. Here are three stocks for Buffett to add to his quasi-closed-end portfolio.
Danaher (DHR)
It’s been over three weeks since Danaher (NYSE:DHR) spun off Veralto (NYSE:VLTO), its Environmental & Applied Solutions operating segment. Danaher shareholders got one new VLTO share for every three held in the parent.
Danaher did the spinoff to focus on its life sciences and diagnostics businesses. It has a history of building operating units and separating them from the parent. In 2016, it spun off Fortive (NYSE:FTV) and Envista (NYSE:NVST) in 2019.
Morningstar.com reported on Danaher’s future without Veralto shortly after the spinoff. It stated the company has some near-term headwinds that will affect its revenue and earnings growth into 2024.
However, the source is confident about Danaher’s long-term future, suggesting the company will return to normalized growth in 2025 and beyond with high single-digit revenue and low-double-digit earnings growth.
Of the 27 analysts covering Danaher stock, 21 rate it Overweight or an outright Buy with a median target price of $250, well above its current share price.
Danaher’s free cash flow in the trailing 12 months ended June 30 is $7.2 billion. Based on an enterprise value of $162 billion, it has a free cash flow yield of 4.4%. I consider anything between 4% and 8% growth at a reasonable price.
This would be an excellent addition to Berkshire’s equity portfolio.
Walt Disney (DIS)
There is no question the current situation at Walt Disney (NYSE:DIS) is less than ideal. Its shares are trading at their lowest point since 2014. CEO Bob Iger is facing a second barrage from activist investor Nelson Peltz, the company’s legacy TV assets are holding it back and a profit at its direct-to-consumer streaming business still needs to happen.
Disney shareholders might have gotten some good news on Oct. 23. Reports surfaced that India conglomerate Reliance Industries is very close to buying Disney’s India business. The sticking point is the valuation. Disney believes the assets are worth $10 billion; Reliance feels that number is more like $7 billion to $8 billion. It’s possible the sale could be announced sometime in November.
Significant issues that Iger is working on include reducing overhead, getting Disney+ profitable, and figuring out how to transition ESPN from cable to digital without losing too much of the brand’s goodwill.
There have been plenty of rumors about Apple (NASDAQ:AAPL) buying all of Disney or possibly just ESPN.
“’The sports streaming wars are heating up as Apple, Amazon, YouTube and Peacock vie to create the next ESPN,'” former media exec Aden Ikram wrote last month for Fortune. ‘Some analysts believe Apple should just acquire ESPN and put its many leagues on streaming,’” Fortune reported.
Interestingly, Buffett already had a long relationship with ABC, having first acquired shares in Capital Cities Communications in 1977, shares of ABC in 1978, and then 18% of the merged entity of Capital Cities/ABC after the former acquired the latter for more than $3.5 billion in 1985.
Berkshire and Apple together can do a deal for Disney. Stranger things have happened.
Fastenal (FAST)
I’m a hockey fan. Of course, why wouldn’t I be? I live in Canada, after all.
I did not realize that Fastenal (NASDAQ:FAST) is the official supply chain partner of the NHL. Further, the company sponsors all the NHL Global Series European games and the NHL’s primetime international broadcast series, NHL Saturday and NHL Sunday.
When I think of Fastenal, I think of it as a wholesale industrial distribution business selling industrial products to companies and organizations worldwide. However, it’s more than that. The company is also a supply chain and logistics consultant, a technology support business and many other things that sometimes get lost in the story.
One thing is clear about the Minnesota-based company: it maintains steady revenue and earnings growth.
It reported Q3 2023 results On October 12. They were good as always, with revenue 2.4% higher than last year, to $1.85 billion, while its net earnings were $295.5 million, 3.8% higher than a year ago. Its operating margin is a healthy 20.9%.
As I said, steady, if not spectacular, growth.
In the first nine months of 2023, it did something Buffett loves: it paid out $599.5 million in dividends. That was up from $534.4 million a year earlier. It has not repurchased any of its shares in 2023, unlike the first nine months of 2022, when it bought back $144.6 million of its stock.
While it did not buy back any of its stock in the first nine months, it did reduce its total debt by nearly $300 million, down to 7% of total capital from 14.9% a year earlier.
Fastenal is the quintessential Buffett stock.
On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
