Last week followers of investment guru Warren Buffett were busy discussing the latest acquisition made by his company Berkshire Hathaway Inc.
As is often the case, Buffett acquired a household name, in this instance it was battery maker Duracell. The deal was structured in a slightly unusual way and resulted in Buffett swapping his shares in Duracell’s parent company Procter & Gamble for outright ownership of Duracell. At a reported purchase price of $2.9 billion plus $1.8 billion in cash.
Over the years Buffett has chosen to pay-up for quality and there is a tendency for followers of Buffett who are looking to replicate his style to do the same. One “problem” with this strategy is that it fails to acknowledge that Buffett believes this is his best strategy given his opportunity set. Buffett’s opportunity set requires him to invest literally billions of dollars.
The opportunity set of individual investors is vastly different to Buffett’s and their strategy should arguably be different too.
Few and far between
Although Duracell may be a quality business, with good margins and a large global share estimated at about 25%, it’s hard to view it as a business with a particularly bright future. Most readers will have noticed their own consumption of disposable batteries has declined markedly as the proliferation of devices with rechargeable batteries increases. So Duracell is probably a good but not a great business with a strong global brand name. However, it is stable and throws off a dependable cash flow.
Those searching the ASX for similar global powerhouse fast moving consumer goods (FMCG) brands will not find many. Ansell Limited (ASX: ANN) is practically in a class of its own in this regard, however if the focus was strong domestic brand power then it is perhaps possible to replicate the “type” of business that could interest Buffett.
Tassal Group Limited (ASX: TGR) is a vertically integrated producer of branded salmon products which the group continues to expand. While Buffett has shied away from primary production, Tassal’s business model makes sense and appears to have plenty of growth ahead of it.
Bega Cheese Ltd (ASX: BGA) and Bellamy’s Australia Ltd (ASX: BAL) are two companies which add significant value through their manufacturing process and create premium priced goods as a result. Value adding to a commodity and building a brand around it is a highly desirable business model, with similarities to many of Buffett’s previous investments such as See’s Candies, Wrigley’s and The Coca-Cola Company.
Branded small household electrical manufacturer Breville Group Ltd (ASX: BRG) while not a FMCG also boasts a strong brand name and increasingly global penetration. The share price is up an impressive 202% over the last five years but appears to have run out of puff in 2014, with the shares slipping 23% over the last six months to potentially create a buying opportunity.
Motley Fool contributor Tim McArthur owns shares in Tassal Group Ltd.
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