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Teaming up with a partner to purchase H.J. Heinz Co. is a new wrinkle for Berkshire Hathaway but the stock selection is pure Warren Buffett – highlighting his consistent emphasis on steady cash flow, profitability and strong brands.
Mr. Buffett has described his investment strategy as "simple, but not easy." In essence, he attempts to buy companies with the most consistent cash flow generation (not the fastest growers) during periods when valuation levels are discounted relative to their history. Subjectively, he favours companies with significant competitive advantages, notably unassailably strong brand names.
Heinz holds a 60-per-cent market share in the U.S. ketchup space (70 per cent in Canada) and its name is more or less synonymous with the stuff. A fascinating essay from Malcolm Gladwell explains why the company's recipe can't be improved on – a major competitive advantage.
Heinz also fits the bill as a consistent cash flow generator. Over the past 10 years, the standard deviation of cash flow per share at Heinz has been one seventh of the S&P Consumer Staples index. Profitability at Heinz has also been near-bulletproof. The consistency of the company's return on equity, the most common measure of profitability, is approximately twice that of the sector average.
The valuation discount at the $72.50 purchase price is less evident. Heinz trades at price earnings levels below the heady days of 2005-07 but roughly in line with the previous period at about 16 times trailing earnings.
History suggests the company will never be among the high fliers, but will continue to churn out cash flow quarter after quarter after quarter, no matter what happens with macroeconomic conditions, fickle consumers or interest rates. In other words, the potential Heinz acquisition is Warren Buffett 101.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.