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At the end of its third quarter, Berkshire Hathaway had $325bn (£260bn) in cash just sitting there waiting for CEO Warren Buffett to invest. So which FTSE 100 companies could he afford to buy out? Let’s put aside the complexities of bids and go on valuation alone.
Berkshire Hathaway has enough cash to cover the market capitalisation of… well, any UK company Buffett might like the look of. Even London’s biggest, AstraZeneca, is valued at only £173bn. My two picks would look like small change.
What to look for
Buffett looks for companies that have good margins, healthy balance sheets, potential for long-term repeat business, and with shares cheap enough to provide a safety margin. I think JD Sports Fashion (LSE: JD.) might have what it takes.
In the words of CEO Régis Schultz, the first half delivered “record interim results with Group revenue of £5.0bn, and profit before tax and adjusting items of £405.6m.” Revenue rose 6.8% with an 8.3% increase in operating profit, in what’s still a very tough market.
We saw a 48.2% gross margin and a 9% operating margin. I think that’s pretty decent for a UK retailer in the current market. And JD Sports boasted £40.8m net cash.
Safety margin
Is there a safety margin in the current share price? After a five-year fall of 50%, we’re looking at a forward price-to-earnings (P/E) ratio of 10.5 for the year ending February. I might rate that fair but nothing special. But the strong upturn in earnings predicted for the next couple of years could drop that as low as six by 2027.
There’s a long time between now and then. And a potentially very competitive summer coupled with undercutting by the discounters could keep the shares under pressure. But that’s the kind of valuation I’d hope Buffett-style investors might at least take a closer look at.
He likes insurance
I wonder what Buffett might make of Legal & General (LSE: LGEN)? A P/E of 15 might not look all that attractive. But insurance stocks can be cyclical and P/E values can look higher near the bottom of a cycle. The weak outlook for the UK economy might not seem like the ideal conditions for an upswing. But inflation’s falling, and interest rates are pretty much certain to come down.
City forecasters are bullish about the sector. They reckon the Legal & General P/E could drop to under 9.5 by 2026. And this year’s predicted 8.8% dividend yield could rise to 9.5%.
Show me the cash
Liquidity’s key in the insurance business. And with first-half results the company reported a strong solvency II coverage ratio of 223% after generating a capital surplus of £897m. There was enough cash to cover a £200m share buyback too.
I do fear that the high-ish current P/E could depress the shares for some time. And the whole sector isn’t out of the economic woods yet. But I think would-be long-term Buffett emulators might do well to consider these two FTSE 100 stocks.
