When Berkshire Buys Hershey

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In August 2016, at a rally in support of Hillary Clinton, investing legend Warren Buffett, a billionaire many times over stood on the stage and said:

“I ask Donald Trump: ‘Have you no sense of decency, sir?”

The last time those exact words were uttered on a national stage was in the spring of 1954 when Boston lawyer Joseph Welch effectively ended the political career of Senator Joe McCarthy.

El Pais

Being the calculated tactician that he is, I’m sure the “Oracle of Omaha” was hoping that his use of these famous words would do the same thing to the Trump campaign.

But they didn’t.

For once in his life things didn’t go Buffett’s way. His candidate lost.

Yet, Buffett really didn’t lose. In fact, with the Trump victory, Buffett is set to score the biggest win of his incredible investing career.

A cash windfall so large you would have to question its decency! Here’s what I’m talking about…

Is $30 Billion Enough Of A Consolation Prize?

President Trump’s big tax win is set to reduce the tax rate on American corporate income from 35 to 21 percent.

And there is going to be no bigger corporate beneficiary of Trump’s tax victory than Warren Buffett’s Berkshire Hathaway.

Thanks directly to the Trump tax cuts, it is estimated that Buffett’s company Berkshire Hathaway is going to record a $30 billion profit in the fourth quarter of 2017.¹

Yes, you read that correctly — a thirty billion dollar profit in a single quarter.

If President Trump was Buffett’s political enemy, then you would have to ask why Buffett would ever need friends…

How is this $30 billion windfall profit possible?

It relates to Berkshire’s $180 billion plus investment portfolio and the deferred tax liability attached to the unrealized gains that the portfolio is currently sitting on.

Essentially, with the corporate tax rate dropping by such a big percentage, so too does the Berkshire deferred tax liability.

You don’t need to understand the accounting mumbo-jumbo. All you need to know is that Berkshire can now keep $30 billion that would have previously gone to the tax man. And that there are no other companies sitting on an investment portfolio this big with gains like this.

So What Does Buffett Buy With All This Cash?

In addition to a $180 billion investment portfolio, Buffett’s Berkshire is already sitting on almost $100 billion of cold hard cash.

So assuming he takes advantage of this tax drop to sell off a few billion of securities, that cash hoard will increase even further.

Buffett calls his bulging bank account his “elephant gun” that he plans to bag a giant-sized acquisition with. And with the amount of ammo readily available, we can safely say that it is fully loaded.

So what might he buy?

Here is my suggestion.

I say that Buffett succumbs to his famous sweet tooth and buys the brand name powerhouse Hershey (NYSE:HSY). With a $26 billion enterprise value, Berkshire certainly has the funds to convince Hershey’s notoriously difficult trust to sell.

You know that Warren loves himself some bullet-proof consumer brand names like those that Hershey owns — KitKat, Reese’s, Twizzlers, Jolly Rancher and many others.

Buffett loves everything about this kind of business. The brand names create a powerful business moat, the cash flows are recession resistant and there is absolutely no technological risk.

But what will really get Buffett’s attention is how much cash this business can generate relative to the capital invested in the business.

This is where I think Buffett will find Hershey irresistible. On just $800 million of total shareholder equity last year Hershey had net income of $720 million.

That puts Hershey’s return on equity at an astounding 90 percent! Meaning that almost all of the cash flow Hershey generates can be returned to shareholders.

This is the mark of a business that Buffett would love to add to the Berkshire portfolio. And one that he can certainly now afford more easily than he could have had his political candidate pulled through.

Tough break!

Here’s to looking through the windshield,

Jody Chudley
Credit Analyst, The Daily Edge
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¹Berkshire Hathaway shares top $300,000 in latest milestone, Financial Times

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