Why did Warren Buffett Buy Duracell

Why did Warren Buffett buy Duracell? Berkshire Hathaway (NYSE:BRK) announced in November 2014 that Berkshire will buy global battery manufacturer Duracell from Procter and Gamble (NYSE:PG) in exchange for the $4.7 billion of P&G shares held by Berkshire.

On the surface, this seems like a fair valuation for a stabilized company with limited growth prospects. Berkshire’s $4.7 billion price tag is equivalent to 10-11x 2014 EBITDA.

If we dig deeper, however, we see that this deal makes enormous sense for Berkshire shareholders financially. We need to make two adjustments to the $4.7 billion price tag:

  1. As part of the transaction, P&G will recapitalise Duracell with $1.8 billion in cash – this implies that Berkshire’s net price is really $4.7 billion less $1.8 billion or $2.9 billion
  2. Berkshire has a large deferred tax liability relating to its stake in P&G. With a cost basis on only $336 million, at a $4.7 billion valuation Berkshire’s deferred tax liability on just the P&G stake is roughly 35% * ($4.7 billion – $336 million) = $1.5 billion. Such a trade will effectively remove the deferred tax liability from Berkshire’s books, increasing net asset value by $1.5 billion

If we make both adjustments to the $4.7 billion headline number, Warren Buffett’s purchase price for Duracell is really closer to $4.7 billion – $1.8 billion – $1.5 billion = $1.4 billion (or only 3-4x EBITDA!!). Warren Buffett got Duracell at a steal.

Duracell is also a wide-moat business with significant brand value. According to P&G’s annual report, Duracell maintains an impressive 25% market share in the global battery market. This is not an easy industry to get into given the economies of scale needed to operate profitably. It is also relatively stable, albeit potentially in decline given the advent of rechargeable electronic devices. There is some uncertainty as to the future prospects of the industry, but at least Berkshire shareholders only need 3-4 years to get their money back.

Irving Kahn: Value Investor at 107 Years Old

Imagine working 5 days a week even when you are 107, almost 40 years past most people’s retirement age. That is Irving Kahn, the value investor and stock picker who works not because he has to but because he loves his work so much.

This is quite akin to Warren Buffett, who often says he ‘tap dances’ to work everyday. It is no coincidence that both have built very impressive investment track records over time.

As Charlie Munger quips in his USC Law School Commencement Address, you need to have an ‘intense interest’ in a particular subject if you want to excel in it. Success and mastery in investing requires an intense interest and willingness to spend your entire life learning as much as you can, particularly about businesses and competitive dynamics.

Irving Kahn was also a student of Benjamin Graham – one of the few investors still alive today who worked directly for this legendary father of value investing. Graham taught the ‘net-net’ approach to investing and employed a statistical approach to fish out bargains in the stock market. Irving Kahn and Warren Buffett both started out with the Graham approach when they first started investing.

Read more in Jason Zweig’s WSJ column here: The Intelligent Investor: Irving Kahn The 107-Year-Old Stock Picker.

Invert, always Invert

One of Charlie Munger’s favorite pieces of advice is to invert, always invert. He once told a large crowd that he wants to know where he will die, so he will never go there. On a more practical note, inverting is very useful in just about every facet of life, including investing. The following WSJ article illustrates the power of negative thinking well and further proves this point.

As it applies to investing, think about what could go WRONG with a particular investment. Could the product disappear completely 5 years from now? How much stickiness does it have? It is in asking questions like these that you implicitly get at a company’s competitive advantage and figure out the size of a company’s moat.

If you figure out that the worst that could happen to a particular company is only X, and X will not destroy that much value, then your downside is protected. And that is investing with an eye for a margin of safety. If heads you win and tails you don’t lose much, then you have an attractive risk/reward that you should bet on.

On the contrary, if the worst that could happen is bankruptcy with low chances of recovery and the odds are reasonable, then you may want to rethink your investment.

Ryan Morris: 28 Year Old Activist Investor

Came across a great article today on a talented young investor who decided to follow in Buffett’s footsteps and started reading his annual shareholder letters from the age of 12. What is interesting though is how he transitioned to being an activist investor: when he felt helpless as a few investments tanked in spite of all the reading that he has done. Unfortunately, there are still many factors that we cannot control in investing; being activist is one way to gain more control over the outcome. Read more here: Ryan Morris: 28 Year Old Activist Investor.

From Hedge Fund Analyst to Internet Entrepreneur: An Interview with Andrew Schrage, co-owner of Money Crashers Personal Finance

We have a special treat for you today – an interview with Andrew Schrage, co-owner of Money Crashers Personal Finance. A hedge-fund-analyst-turned-Internet-entrepreneur, Andrew has a wealth of insights into personal finance and investing and in this interview shares with us some of them.

1. For the benefit of our readers, could you give us a summary of your background / what got you to where you are now?

I graduated from Brown University with a degree in economics. I then took a position at a hedge fund located in Chicago, Illinois, but quickly became restless working in the corporate world. I decided to venture out on my own, and began working on Money Crashers in 2008. It has been very challenging, but with a lot of hard work and effort, we feel we’ve turned Money Crashers into one of the top financial resources in the world.

2. You run a popular personal finance blog in Money Crashers. What sparked your interest in personal finance and what are your goals with Money Crashers?

I’ve always had an interest in finance, which is one reason why I majored in economics, and have a sincere desire to help others.

3. What stops most people from achieving their financial goals? What are the most common mistakes that you have observed?

The primary reason that people don’t achieve their financial goals is a hesitation to take action. Either you run your finances, or they run you, and many people are complacent about becoming financially fit. They know that paying credit card interest is a waste of money, yet they simply lack the desire or motivation to eliminate this expense. If people looked at what they’re paying in credit card interest on an annual basis, I believe more would make serious efforts to gain control over their finances.

I also think that a lack of education is a major detriment. For instance, people know they should be saving for retirement, but they’re fearful of getting started because they just don’t know how to do it.

4. What do you invest in, and how do you think about investing?

Right now, I have a mutual fund and a Roth IRA. I feel that I have a well-balanced portfolio, with some money in stocks, bonds, and cash. I’ve chosen to keep a good deal of money invested in stocks, because at my age, I think it’s fine to take a few risks. As I get closer to retirement, I’ll focus more on bonds.

My overall investment strategy is to keep it simple and balanced. I also review my portfolio twice per year to make sure my money is earning as much as possible.

5. Could you give an example or two of the best investment(s) you have made so far?

A few years ago, I decided to put a decent amount of my Roth IRA into healthcare. That choice turned out to be very profitable. The individual investments I chose have performed quite well, even with the recession.

6. What are the most important lessons you took away from your own path to financial freedom?

My path to financial freedom wasn’t an easy one, and I certainly made some mistakes along the way. The biggest lesson I learned is that no one is going to manage my finances for me, so it’s my responsibility and mine alone to get them in order and keep them that way. For those looking for guidance in their quest for financial fitness, there’s no better place to start than some awesome Warren Buffet quotes that can truly guide people of all ages and backgrounds!

7. Any book recommendations?

I’ve always been a fan of Dave Ramsey, and his book “The Total Money Makeover” is a great read for anyone looking to become financially fit.

8. Any last words of advice to those who want to become financially free one day?

If you’re carrying any sort of credit card balances, do whatever you can to eliminate them. The sacrifices you need to make in order to do this are not lifelong – just until that last balance is paid off.

9. How should readers get in touch with you?

You can get in touch with us on Facebook and Twitter.

Warren Buffett Lubrizol Investment

Warren Buffett Lubrizol Investment. Why Warren Buffett acquired Lubrizol (NYSE: LZ) for 9 billion. Lubrizol is a company with great pricing power. It controls 35 percent of sales in an industry with only four major players, and has made significant improvements in its operating margins over the past few years. It also demonstrated pricing power in its ability to consistently raise prices. Buffett paid only about 5.8x EBITDA for this great company.

Buffett acquired Lubrizol for $9 billion in 2011, representing more than a 20% premium to its stock price prior to acquisition. Lubrizol is the world’s largest maker of lubricant additives. It holds 1,600 patents and sells 12,000 products in more than 100 countries.

Warren Buffett Investment in Lubrizol

He was initially skeptical about Lubrizol as it struck him as a business he did not know anything about. However, upon further research, he realized that this was a company with a durable competitive advantage, meeting a need that will likely become more important in the future. Oil additives would become increasingly important as fuel economy standards increase and consumers increasingly value fuel efficiency. This bodes well for companies such as Lubrizol, as the additives it makes that help cars burn cleaner will continue to be in high demand.

Buffett liked Lubrizol in particular because it was a low-cost player with extremely high profitability – over the past ten years, it has generated consistently high return on assets, return on shareholders’ equity and return on invested capital. It has also grown sales at 10% or more each year for the past 10 years. These indicate that Lubrizol is well-positioned to be a dominant market player in the lubricant additive market.

Warren Buffett ISCAR Investment

Warren Buffett ISCAR Investment. Why and how Warren Buffett invested in ISCAR Metalworking Companies, an Israeli company. Buffett acquired 80% of Iscar Metalworking Companies for $4 billion in cash in 2006. Iscar is an international company based in Israel, and makes precision metal-cutting tools. Its primary customers are in the auto and aerospace industries.

The deal represented Buffett’s first major international investment, and was an excellent one for Buffett in many ways.

Why Warren Buffett Invested in ISCAR

First, the size of the deal was the largest in Israel’s history and led the Israeli government to grant Buffett strategic investor status. This meant that Buffett would not have to pay taxes on Iscar’s earnings for 10 years. This provides Buffett with a unique advantage.

Second, Iscar’s international presence meant that it generated earnings in foreign currencies, allowing Buffett to reduce his portfolio’s dependence on the value of the declining dollar.

Third, it put Buffett in touch with a team of managers whom he described as ‘extraordinarily talented’. The company had a strong culture of trust. It also treated customers very well and ensured that orders were always delivered on time.

Fourth, ISCAR was a leader in its field and enjoys strong competitive advantages. Warren Buffett is acting in line with his winning formula of buying great companies at fair prices.

Warren Buffett PetroChina Investment (NYSE: PTR)

Warren Buffett PetroChina Investment (NYSE: PTR). Buffett invested $488 million in PetroChina and made close to 9x his investment in 5 years. The principles of value investing do not just work in the United States; they work anywhere there are markets where there is a Mr. Market who tosses irrational prices at you every day. You just have to pick the fat pitches and swing at them.

In one of the few investments in foreign companies Buffett has made thus far, Buffett bought 1.3% of PetroChina for $488 million in 2002.

Warren Buffett Investment in PetroChina

Buffett felt confident that PetroChina was undervalued – he noted in his annual letter to shareholders, “Charlie and I then felt the company was worth about $100 billion”. Buffett’s $488 million investment in 1.3% of PetroChina valued it at only $38 billion, so he believed PetroChina will significantly increase in value in the coming years. The big disparity between the market price and his estimate of intrinsic value provided a wide margin of safety for Warren Buffett and Berkshire Hathaway.

He was proved more than right – by 2007, the effects of rising oil prices and the competence of PetroChina management in expanding the company’s oil and gas reserves led the company to be valued at $275 million. Buffett thus was able to sell his holdings at $4 billion, allowing him to make many times his original investment in less than 5 years.

Warren Buffett Johns Manville Investment

Warren Buffett Johns Manville Investment. Why Warren Buffett invested in Johns Manville at 5x EBIT, at an opportune time when Johns Manville was out of favor on Wall Street.

Buffett acquired Johns Manville for $1.8 billion in 2000. Johns Manville is America’s biggest manufacturer of fiber glass building insulation, commercial roofing membranes and roof insulations, filtration media, and mats and reinforcements. As the dominant player in its field, Johns Manville enjoys barriers to entry and thus earns high returns on investment capital – this makes the investment an attractive one for Warren Buffett.

Warren Buffett Paid $1.8 Billion for Johns Manville

Buffett paid $1.8 billion for $344 million of before tax earnings – a 5x pre-tax earnings multiple implies a 19% pre-tax return. This was despite the fact that the company grew its earnings per share at an average rate of 10% over the past 10 years from 1990 to 2000. Johns Manville had been valued poorly by Wall Street because its asbestos liability caused it to file for bankruptcy in 1982.

How Buffett Found Out about Johns Manville

How Buffett sourced this deal was interesting: he read in the papers about a failed LBO deal due to a lack of financing on Friday – he called the following Monday and got the deal done. It pays to have an elephant gun and a big wallet in times like these – when Buffett can close deals when others cannot.

Warren Buffett Justin Industries Investment

Warren Buffett Justin Industries Investment. Why Warren Buffett invested in Justin Industries, a producer of bricks and boots based in Texas.

Buffett acquired Justin Industries for $570 million in cash in 2000. Justin Industries is the leading maker of Western boots and a premier brick producer in Texas and five neighboring states.

Buffett liked this investment for the following reasons:

First, Justin Industries dominated its niche market. Acme produces 11.7% of industry’s national output, and is widely regarded by the industry as the dominant player. This allows Justin Industries to earn high return on invested capital and deliver significant returns to its investors.

Second, it has strong brand recognition. Buffett reports that in a study in which Texans were asked to name a brand of brick, 75% responded Acme, while only 16% responded with the brand name of the runner-up. This creates customer stickiness and brand loyalty – demand-side factors that help Justin Industries create barriers to entry to keep away competition.

Third, Buffett was able to get the company at a reasonable price. He paid $570 million for $51 million in pretax earnings. The 11x multiple translates to a pretax return of 9%. Paying 11x EBIT may seem expensive, but the company had been growing earnings at 16% a year for the last ten years. This is another example of Buffett paying reasonable prices for companies that have significant growth potential.