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- Berkshire Hathaway has accumulated a large sum of cash reaching $84.8 billion on September 30.
- Mr. Buffett is probably looking for some attractive investments that would render reasonable income from Berkshire's vast cash holdings.
- I believe that the chemical company Westlake Chemical could be an excellent investment candidate for Berkshire Hathaway.
Berkshire Hathaway (NYSE:BRK.A) , (NYSE:BRK.B) has been able to generate strong cash flow over many years. Net cash flows from operating activities in the first nine months of 2016 have soared to $25,171 million, compared to the also impressive sum of $24,155 million in the first nine months of 2015. As a result, the company's cash and cash equivalents at the end of the third quarter have reached the astounding sum of $84,835 million, an increase of $13,105 million in the first three-quarters of 2016. The highest growth has been in its insurance business, $7,088 million, and the second in its finance business $5,561 million, as shown in the table below.
Berkshire Hathaway - Cash and Cash Equivalents (dollars in millions)
Source: Company report
As such, in an environment of very low-interest rate, it should be logical that the legendary investor Warren Buffett is looking for some attractive investments that would render the company some reasonable income from this huge cash that the company is holding.
Looking for companies that might suit Mr. Buffett's value investing principles, I have run a screen of large companies according to Buffett's principles. For the screen, I used Portfolio123's "All-Stars: Buffett" ranking system which is based on investing principles of Warren Buffett. The screen is taking into account many factors like; book value growth, operational P/E, price to book value, trailing P/E, price to Tangible book value, price to cash flow and EPS Stability.
After running the "All-Stars: Buffett" ranking system for all Russell 1000 companies, on November 4, I discovered the twenty best stocks, which are shown in the table below. (Also Read: Should Warren Buffett Buy Facebook Inc (FB) Stock?)
As I see it, Westlake Chemical (NYSE:WLK) could be a suitable candidate to be acquired by Berkshire Hathaway. Westlake Chemical is an international manufacturer and supplier of petrochemicals and building products. Its chemicals; olefins and vinyl are used in many products like tires, plastic wrap, pipes, windows and doors frames and many others.
Westlake Chemical has recorded substantial growth in the last few years, and it has solid growth prospects. The company's annual average sales growth over the last five years was at 7.10%, and the annual average earnings per share growth in that period was very high at 23.8%. The average annual estimated EPS growth for the next five years is also pretty high at 8.0%. Moreover, considering its compelling valuation metrics, Westlake stock, in my opinion, is undervalued. The trailing P/E is low at 13.26, its forward P/E is even lower at 12.84, and its price-to-sales ratio is at 1.62. The price-to-free-cash-flow ratio is at 19.61, the Enterprise Value/EBITDA ratio is very low at 5.92, and the PEG ratio is at 1.69. Moreover, the current ratio is very high at 3.50, and the debt to equity ratio is pretty low at 0.22.
In addition, most of WLK's Efficiency, Financial Strength and Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the tables below.
The stock is currently yielding 1.47%, and the payout ratio is only 18%.
Berkshire Hathaway Third Quarter Results
On November 4, Berkshire Hathaway reported its third quarter 2016 financial results, which beat earnings per share expectations by $0.09 (4.8%). BRK.B revenues of $59.07 billion for the quarter were slightly up from $58.99 billion in the same quarter a year ago. Since the beginning of the year, Berkshire’s shareholders’ equity has increased by $13.7 billion. The company reported earnings per share surprise in its last two quarters.
Berkshire Hathaway Stock Performance
BRK.B stock has outperformed the S&P 500 Index in the last five years but has been slightly below the NASDAQ Composite Index in this period. Year to date, the BRK.B stock is up 14.57% while the S&P 500 index has increased 5.84%, and the NASDAQ Composite Index has gained 4.87%. Since the beginning of 2012, BRK.B stock price has grown 998.27%. In this period, the S&P 500 Index has increased 72.01%, and the NASDAQ Composite Index has risen 101.56%.
Berkshire's valuation is good. The trailing P/E is at 16.03, and the forward P/E is at 18.98. The price to sales ratio is at 1.78, and the price to book value is at 1.35. The price to cash flow ratio is at 11.25, and the PEG ratio at 1.55. Furthermore, the average annual estimated EPS growth for the next five years is pretty high at 8.8%. (Also Read: Why Warren Buffett Should Buyback Exxon Mobil Corporation Stock Now )
Berkshire Hathaway has accumulated a large sum of cash reaching $84.8 billion on September 30. Hence, it should be logical that the legendary investor Warren Buffett is looking for some attractive investments that would render the company some reasonable income from this huge cash that the company is holding. By screening, I have shown some large companies that might suit Mr. Buffett's value investing principles. Among those companies, I believe that the chemical company Westlake Chemical could be an excellent investment candidate for Berkshire Hathaway. In any case, BRK.B's stock continues to be an excellent solution for a diversified low-risk investment with a significant capital appreciation potential.
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