Warren Buffett's Heinz Acquisition

Sorry about the lack of posts but have been busy the last few months—in fact, more like the last 2 years—but hope to be more involved in the future. Another reason I have been sort of out of the market is because I find it expensive and don't really see any great opportunities.

Anyway, just saw that Warren Buffett participated with private equity group, 3G, in the acquisition of Heinz (HNZ), and thought I would post my quick thought. As most of you may know, Heinz is famous for ketchup and various food products.

Similar to the railroad, Burlington Northern Santa Fe, that Warren Buffett acquired a few years ago, this deal to participate in the Heinz buyout looks expensive (the verdict is still out on the Burlington Northern Santa Fe investment). This Fortune opinion piece sort of has similar feelings. My opinion is that Buffett is running out of good opportunities and is willing to seek out slightly-above-average opportunities given the super-low interest-rate environment.
The deal is valuing Heinz at around 20x P/E for a low-growth, albeit very stable, business. However, Buffett is only putting up a portion of the funding in return for preferred shares yielding 9%, and a sizeable chunk that is owned by the 3G private equity group is going to be funded via debt. So, leverage is going to boost the returns for the buyout group, with all the debt risk being held by the 3G private equity group while Buffett only owns preferred and common shares.
 
From a risk point of view, this is a great deal for Buffett. Overall, this will produce above-average return but nowhere near superinvestor returns he had in his younger days. The investment likely yield 1% to 2% above S&P 500 in the long run and that is kind of Buffett's goal (he has alluded to this in his shareholder letters). Obviously, newbie and amateur investors trying to earn returns like 'Buffett Prime' won't learn much from this deal. 

Comments

Post a Comment

Popular Posts

Thoughts on the stock market - March 2020

Image
Right now, DJIA has a P/E of 16.8 and forwand P/E of 15.1, whereas S&P 500 is at 20.1 with forward P/E of 15.8. Source: WSJ market Data If you ignore interest rates and inflation expectations--both of these influence valuations but depends on your macro call-- the market is not cheap. Long-term P/E is around 15. Trailing P/E is around 20% (Dow) to 40% (S&P500) higher than average. Forward P/E is in line with long term average but that assumes a strong V recovery. Consensus forecast is for profits to drop 1.2% in 2020. In 2008, it dropped 25.4% so current forecast is a very mild recession. Covid-19 coronavirus is not going to last more than a few months but these forecasts are still too rosy in my opinion. So I wouldn't rely on forward P/E. The richly valued (mostly tech or high quality) have not fallen much but the distressed ones have. So if you want to outperform in the long run, I think one’s choice right now is to: • Wait for market to fall another, say
✖ READ MORE >>>

Warren Buffett's Evolution and his Three Investment Styles

Image
A Young Warren Buffett In a comment to one of my posts , Mark Carter, who incidentally appears to have a  good blog worth checking out , asked: "Buffett Prime is 1970's to early 1990's" Could you elaborate? I have vaguely indicated how I view Warren Buffett in the past, but I thought I would detail my view of his investing behaviour. This is more of an opinion piece and many others would disagree with me (if you do, I'm curious to hear your thoughts). I don't follow Warren Buffett as closely as many value investors so I may get some facts wrong. My view is that Warren Buffett went through three different phases, with each consisting of different investment techniques. The overall investment theory remained the same—what people call value investing—but his execution, tactics, and strategy differs across the three phases. Some people may break up his career into additional periods but my feeling is that the three I will describe essentially capt
✖ READ MORE >>>

Hugh Hendry discussion at the Alternative Investment Conference

Thanks to Value Investing World for bringing this Hugh Hendry interview to my attention. I may not agree with all the things—short-term orientation of hedge funds is actually worse IMO; the sharp pencil effect doesn't always work—but Hendry is a true contrarian and worth listening. Like Marc Faber or Jim Rogers, you also can't take everything Hugh Hendry says seriously. I had always felt Hugh Hendry was firmly in the deflation camp but I get the feeling that he is now opening up to high-inflation possibilities. Otherwise, his stance appears to be similar to past opinions.
✖ READ MORE >>>