Warren Buffett transformed Berkshire Hathaway(NYSE: BRKA)(NYSE: BRKB) from a failing textile company to a massive trillion-dollar conglomerate during his 60 years as CEO. At the heart of the transformation is an investment philosophy based on buying great companies at a reasonable value and holding them for the long term, preferably forever.
In the final years of his tenure as CEO, Buffett found few major investment opportunities, allowing Berkshire’s cash hoard to grow to nearly $400 billion. Greg Abel has shown a willingness to begin deploying relatively small portions of that capital in his first months as CEO, and recently agreed to a deal that would put about $8.5 billion of Berkshire’s cash to work in an acquisition that follows in Buffett’s footsteps.
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Meet Berkshire Hathaway’s Next Company
On May 31, Berkshire Hathaway announced plans to acquire Taylor Morrison House (NYSE: TMHC) for approximately $6.8 billion in cash. When the company’s existing debt is added, the enterprise value of the deal is $8.5 billion. (Berkshire will likely pay off that debt with its pile of cash.)
Abel’s decision to purchase the construction company comes at a time when the industry is facing challenges due to high mortgage rates and high home prices. This led to bargain-basement valuations for some stocks in the industry, and Abel wasn’t afraid to take advantage of the opportunity.
The deal that closed has Berkshire paying just over 1.1 times book value and 9 times trailing earnings for the stock. Despite the premium paid over the then-current share price, it is still a lower valuation than virtually any other company in the battered industry.
But the long-term outlook for U.S. homebuilders remains strong. There is a housing shortage in the United States. A recent White House report says the United States needs 10 million new homes. That’s a great opportunity.
However, scale can be a key advantage in today’s market, as larger homebuilders can manage overhead costs and exert greater purchasing power to acquire land and materials at lower costs. To that end, Berkshire plans to combine Taylor Morrison’s operations with its own Clayton Homes to create a top-five homebuilder.
That makes Abel’s first major acquisition very much a Buffett-type move. He took the opportunity to buy a beaten-down company that was facing cyclical headwinds and required patience to reach its full value. What’s more, it’s a business that may be more valuable under the Berkshire umbrella than as a standalone company, thanks to complementary businesses within Berkshire.
What Abel’s Big Move Could Mean for Your Stock Portfolio
Berkshire Hathaway owned stakes in two other homebuilders according to its most recent quarterly update: Lennar and NVR. Both positions are relatively small, with a total value of only around $1 billion at the time of writing. If Abel is extremely bullish on real estate, he could hold on to both stakes, but considering they compete with Taylor Morrison, it would make just as much sense for Berkshire to sell them off.
Abel has shown a willingness to consolidate Berkshire’s stock holdings, eliminating many of the shares bought by former investment manager Todd Combs in the first quarter, as well as several other smaller positions. This suits Abel’s strengths as a trader first and a portfolio manager second. While Buffett was well known for his investing acumen, Abel has a very limited track record. As such, it makes sense for Abel to sell Lennar and NVR, but that doesn’t mean either are a bad investment right now.
Abel is showing a speed in negotiating deals that Buffett hasn’t shown in years. He was instrumental in the acquisition of OxyChem last year and oversaw the Tokyo Navy investment this year. That could mean focusing on acquiring relatively small companies at good values while allocating the marketable stock portfolio to fewer, much larger companies that can make a dent in Berkshire’s cash pile. The most recent example of the latter is Alphabetwhere Abel has invested more than $20 billion in cash since taking over as CEO.
Abel is certainly making Berkshire his own, but investors can clearly see Buffett’s impact in his latest move.
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Adam Levy holds positions at Alphabet. The Motley Fool ranks and recommends Alphabet, Berkshire Hathaway, Lennar, and NVR. The Motley Fool has a disclosure policy.
Greg Abel’s First Big Acquisition for Berkshire Hathaway Shows Him Following in Warren Buffett’s Footsteps was originally published by The Motley Fool
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