Is Uncle Warren Going Shopping?

Predicting what company Warren Buffett will add to Berkshire Hathaway (NYSE: BRK.A) next is a fun but frustrating mental exercise because there is often no logic to Uncle Warren’s acquisitions. After all, what other conglomerate includes a jet leasing company, a brick manufacturer, car dealerships and a large supplier of diamonds?

Yet it looks as if Warren could be gearing up for another big purchase. On March 2 Buffett told CNBC that he had sold his entire stake in ExxonMobil (NYSE: XOM). News reports indicate that Buffett owned around 41 million shares of Exxon, which were worth around $3.7 billion.

That move is similar to what Buffett did back before he bought the Burlington Northern Santa Fe, or BNSF, Railway in 2009. Before he bought the BNSF, Buffett confounded investors, including Jim Cramer, by selling off his holding in another railroad: Union Pacific (NYSE: UNP).

What’s more intriguing is that Uncle Warren himself seemed to confirm such speculations with a cryptic remark to MSNBC. After calling Exxon a “wonderful company,” he said, “We thought we might have other uses for the money.”

Okay, it sounds like Buffett is stocking up on cash to buy a company, but what company? Figuring out what Buffett might buy is harder than it sounds because the Sage of Omaha is not necessarily a classic value investor. He will pay a premium for what he considers good companies.

Second guessing a financial genius is tough, but there are some excellent companies out there at pretty low prices these days. Some possible Berkshire Hathaway acquisitions include:

• Rite Aid (NYSE: RAD). The nation’s third largest drug store operator is real cheap right now. Its shares were selling at $8.59 on April 1, 2015, but the company reported a TTM revenue of $26.58 billion and a quarterly year to year revenue growth rate of 5.26% on Nov. 30, 2014. Its revenues grew by $900 million between November 2013 and November 2014. Rite Aid is the kind of unglamorous business that Uncle Warren likes. It is cheap and is poised to take advantage of demographic changes, including the growing number of senior citizens and the large number of new people Obamacare has put on the health insurance and Medicaid rolls. Rite Aid also has some really valuable assets, including lots of real estate (4,572 stores) and its customer lists.
  • The Kansas City Southern (NYSE: KSU). We all know that Warren loves railroads and trains, and he has made tons of money from the BNSF. Historically, Buffett has often bought businesses in the same field; he owns several insurance companies and a wide variety of newspapers. Adding another railroad to his portfolio would make sense, particularly a railroad that connects directly to the BNSF and has access to a Pacific Coast port. Buying the Kansas City Southern would also give BNSF a direct connection to Mexico’s industrial heartland and additional ports on the Gulf of Mexico. The Kansas City Southern is also very profitable; it reported a quarterly profit margin of 21.95% and a year to year revenue growth rate of 4.37% on Dec. 31, 2014. Although, its share price is a little high.

• Tribune Publishing (NYSE: TPUB). Buffett loves newspapers almost as much he likes trains, and he has been buying them up lately. His current holdings include the BH Media Group, which operates 71 newspapers in 10 states, ranging from big city dailies like The Richmond Times Dispatch and The Omaha World-Herald to small town papers like The North Platte Telegraph, where your blogger once toiled as a beat reporter, and The Hickory Daily Record. Tribune Publishing is cheap right now; it had a market cap of $495.75 million on April 1, 2015. Yet buying the company would give Buffett ownership of some of the greatest names in American journalism, including The Baltimore Sun, The Chicago Tribune, The Los Angeles Times, and The Orlando Sentinel. The Los Angeles Times is the largest metropolitan daily in the United States, with a weekday readership of 5 million and 22 million unique visitors to its website a month. Those numbers alone might make Tribune a classic Buffett buy.

• eBay Inc. (NASDAQ: EBAY). Okay, this is a bit of a stretch given Buffett’s famous aversion to tech stocks. Yet once it spins PayPal off, eBay will have some attributes of a classic Berkshire Hathaway Company. It will generate a lot of float from its memberships and fees; it reported $1.272 billion in cash from operations on Dec. 31, 2014. It also operates in an unglamorous business: Internet auctions and discount retail. eBay also has a lot of loyal customers; its sites attracted 111 million unique visitors a month in the third quarter of 2014, making it the second most popular retail website in the United States after Amazon. Something else to remember is that eBay is basically a retailer and a logistics company. Berkshire is already heavily invested in online retail with companies like Oriental Trading and Star Furniture and logistics with TTI, Inc. and McLane. Buying eBay is not as much of a stretch as you might think.

 Of the possibilities here, I would say Buffett is most likely to buy Tribune Publishing because it is the biggest bargain. It would also be the best fit with his current portfolio of companies.

Disclosure: Your blogger owns shares of eBay and plans to keep them.