Bloomberg reported Nov. 7, 2011, that Berkshire Hathaway (NYSE:BRK.A, BRK.B) invested $23.9 billion in the third quarter ended Sept. 30, the highest sum in more than 15 years. Most investors, when discussing why one should own Warren Buffett's company, trot out the usual refrains: insurance, railroads and equity investments. However, if you look more closely at its latest quarterly report, you'll find three not-so-obvious reasons to own its stock.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

McLane Company

On May 23, 2003, Berkshire Hathaway paid $1.5 billion to acquire McLane Company, Wal-mart's (NYSE:WMT) wholesale distribution business. At the time, McLane generated $14.9 billion of revenue from outside sources and another $7.2 billion from Walmart and Sam's Club stores. In 2011, McLane's revenues were $32.7 billion, with earnings of $369 million. For the first nine months of the year, McLane generated $24.9 billion in revenue and pretax earnings of $311 million. Approximately 30% of its revenue comes from Walmart, its former owner.

McLane Company revenue represents 24.2% of Berkshire Hathaway's overall revenue, yet it delivers just 2% of its pretax profit. Every other operating segment in the Berkshire Hathaway family generates greater profits, from fewer dollars of revenue. The only plausible reason I can think of to hang on to McLane is that many of Berkshire Hathaway's other businesses sell to Walmart and selling the wholesale business could put that relationship in jeopardy. That seems unlikely; more likely is that Buffett has some relationship with the Walton family. Whatever the reason, addition by subtraction would do wonders for its stock. (To know about bad acquisition, read: Biggest Merger And Acquisition Disasters.)

Marmon Holdings

Most people are familiar with the Pritzker family, through their ownership position in Hyatt Hotels (NYSE:H). Less probably know they also owned Marmon Holdings, a conglomerate of industrial businesses. On Christmas Day, 2007, Berkshire Hathaway announced it had acquired 60% of the Pritzker's conglomerate, for $4.5 billion. In the first quarter of 2011, it purchased an additional 16.5% of the company for $1.5 billion, bringing its total ownership position to 80.2%. Berkshire Hathaway plans to buy the remaining interest by the end of 2014. Marmon's revenues for the first nine months of the year were $5.3 billion, a 17% increase year-over-year, and its pretax revenues were $752 million, a 21% increase over the same period last year.

This ranks as one of Buffett's better acquisitions. It generates one-third the business McLane Company does, yet it makes more than double the amount of pretax earnings. You could argue that it's had to pay for those earnings; after all, it's doled out $6 billion, so far, compared to $1.5 billion for all of McLane. The difference being, Marmon's future profitability prospects are much greater. This is a shining star. (To know more about good M&A, check out: The Latest, Greatest Corporate Mergers And Acquisitions.)

Other Businesses

By revenue, this is the third largest segment of Berkshire Hathaway's business, behind McLane Company and its insurance group. The same holds true for pretax earnings, where only Burlington Northern Santa Fe and the insurance group earn more. Lubrizol, which it acquired in September, is part of this group. For the first nine months of the year its other businesses contributed $2.6 billion, or 20% of overall pretax profits. Anyone familiar with Berkshire Hathaway knows almost everything but the kitchen sink is included in this group and that's the exciting thing. The rest of the businesses are relatively easy to value, but there are so many diverse companies within this segment, that there's bound to be some mispricing taking place. Dairy Queen, Business Wire, Pampered Chef; the list goes on.

Everyone focuses on the easy part, which is the insurance and the equities, but it's down here near the bottom of the business segment data, where things get interesting. I challenge you to write down the name of every business within this segment and then find a similar business that's publicly traded. You won't be able to get an exact number, but I'm pretty sure you'll find the value of public companies like Starbucks (NASDAQ:SBUX), Thomson Reuters (NYSE:TRI) and Avon Products (NYSE:AVP) are higher than what's on the books at Berkshire Hathaway. Warren Buffett's on record as saying that when he buys a business, it's for life. If he, or whomever succeeds him, ever changes their mind, the proceeds would be tremendous. As Bud Fox said to Gordon Gekko in the movie Wall Street, "The breakup value is higher."

The Bottom Line

Berkshire Hathaway, despite its critics, has plenty of untapped potential. It will continue to generate value for shareholders for many years to come, in the most unlikely of places.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How can insurance companies find out about DUIs and DWIs?

    An insurance company can find out about driving under the influence (DUI) or driving while intoxicated (DWI) charges against ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

Trading Center