Buffett May Find Harley-Davidson, Mattel Fit Purchase Criter

**jmzou** Wed May 03, 2006 10:07 am

Buffett May Find Harley-Davidson, Mattel Fit Purchase Criter
http://www.bloomberg.com/apps/news?pid=10000103&sid=aryjkWRROKfQ

Buffett May Find Harley-Davidson, Mattel Fit Purchase Criteria
May 3 (Bloomberg) -- Followers of Warren Buffett, who will welcome more than 20,000 people this weekend at Berkshire Hathaway Inc.'s annual meeting in Omaha, Nebraska, are trying to guess which publicly traded company he'll go after next.

Two potential targets may be Harley-Davidson Inc. and Mattel Inc. They are among 20 U.S. companies that meet criteria laid out by Buffett in Berkshire's annual report, such as having a market value of $5 billion to $20 billion, according to a review by Bloomberg News.

Milwaukee-based Harley-Davidson is the world's most profitable motorcycle company and El Segundo, California-based Mattel the largest toymaker, with brands including Barbie and Fisher-Price.

``What he tends to stress is a long product life cycle and how enduring the brand is,'' said David Braverman, a vice president at Standard & Poor's Portfolio Advisors in New York who twice yearly publishes a list of companies he says meet Buffett's standards. ``By that test, Harley-Davidson and Mattel make the cut.''

During four decades running Berkshire, Buffett, 75, has built a reputation by buying stakes in companies, such as Coca- Cola Co., and purchasing other companies outright, including reinsurer General Re Corp., that he deemed undervalued. Twenty shares of Berkshire bought at $2,950 apiece at the end of 1987 are worth $1.79 million today.

Shareholders attending the Berkshire meeting will hear Buffett, the world's second-richest person, and Vice Chairman Charlie Munger, 82, muse about investing. Buffett has dubbed the event, which 21,000 people attended last year, ``Woodstock for Capitalists.''

Good Returns, No Debt

Last month, Berkshire agreed to buy to buy Atlanta-based Russell Corp., which makes athletic apparel and Spalding basketballs, for about $597 million in cash.

Buffett repeats his acquisition criteria each year in Berkshire's annual report.

Companies must have at least $75 million in pretax profit, consistent earnings, ``good'' returns on equity and ``little or no debt'' to be considered. Managers must stay with the company, which should be in a ``simple'' business.

The valuation of $5 billion to $20 billion has stood since 1998. The range was $5 billion to $10 billion before then.

The Bloomberg News search looked at more than 5,000 publicly traded U.S. companies. To qualify, stocks needed a price-to- earnings ratio of 15 at most, less generous than the 17 times earnings Berkshire is paying for Russell. They also had total debt to common equity of less than 50 percent and five-year geometric earnings growth of 10 percent annually.

Wrangler and Lee Jeans

An equally weighted index of the companies selected rose at more than double the rate of the Standard & Poor's 500 Index over the past year, a 27 percent gain compared with a 13 percent increase in the S&P. Over five years, the company index has doubled, compared with a 3.6 percent gain for the S&P.

The companies include VF Corp., the maker of Wrangler and Lee jeans, and Sherwin-Williams Co., the largest U.S. paint retailer. Berkshire fully owns Benjamin Moore & Co., a rival of Cleveland-based Sherwin-Williams.

The search also produced two companies in which Buffett already has stakes: Torchmark Corp., an insurer, and Kansas City, Missouri-based H&R Block Inc., the biggest U.S. tax preparer.

Buffett's assistant, Debbie Bosanek, said he wasn't available for an interview. Harley spokesman Bob Klein declined to comment. Mattel spokeswoman Lisa Marie Bongiovanni didn't respond to phone calls and an e-mail.

S&P's Braverman publishes his list of stocks that meet Buffett's standards in the February and August issues of Business Week magazine. Forty companies were on the most recent ranking, including Johnson & Johnson, maker of the Tylenol pain reliever and Band-Aid bandages, and Altria Group Inc., maker of Marlboro cigarettes and majority owner of Kraft Foods Inc., producer of Jell-O and Oscar Mayer meats.

`Competitive Advantage'

Buffett has strayed beyond acquiring companies over the years, buying, for instance, about a fifth of the world's silver and betting against the dollar. He trimmed his dollar wager in December to $13.8 billion, from $21.4 billion a year earlier after the currency's value strengthened.

The offer for Russell shows that he is still willing to dip into the equity market to expand Berkshire's business collection.

Berkshire ``can't buy a company unnoticed,'' said Aswath Damodaran, a finance professor at New York University and author of ``Investment Valuation.'' Buffett's attraction to strong brands is sensible, Damodaran said. ``A brand name is one of those competitive advantages you can hang onto for a long time.''

Although brand strength isn't specifically addressed each year in Berkshire's annual report, Buffett has said that it's an important corporate quality.

Coca-Cola Brand

``If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I'd give it back to you and say it can't be done,'' said Buffett, according to Roger Lowenstein's biography, ``Buffett: The Making of an American Capitalist.''

Berkshire had $44.7 billion in cash and equivalents at the end of last year. The company's MidAmerican Energy Holdings Co. in March bought Portland, Oregon-based PacifiCorp from Scottish Power Plc, the U.K.'s fifth-largest utility, for $5.1 billion in cash.

That was Berkshire's biggest purchase since buying General Re, the largest U.S. reinsurer, for $16 billion in 1998.

Harley and Mattel both have suffered recently. The shares of Harley have fallen 2.8 percent this year to $50.05. On April 12, the company said first-quarter sales increased at the slowest pace since 2003.

Barbie vs. Bratz Dolls

Mattel shares are down 24 percent from their March 2005 high to $16.37. Last month, the company posted its 10th straight quarter of dwindling worldwide Barbie sales as it faces competition from MGA Entertainment Co.'s Bratz line of dolls. Mattel also makes Hot Wheels cars, the Scrabble game and American Girl dolls.

Harley and Mattel are the sort of companies ``I'm sure he'd look at,'' said Andy Kilpatrick, author of the book ``Of Permanent Value: The Story of Warren Buffett.''

Harley and Mattel have attracted the attention of others who have a value-investing philosophy similar to Buffett's. Harley's second-largest shareholder as of Dec. 31 was New York-based Davis Advisors, which is run by Christopher Davis and is Berkshire's No. 5 shareholder. The third-largest Harley shareholder is Chicago-based Harris Associates LP, whose fund managers include Bill Nygren and Kevin Grant.

Harris is Mattel's No. 3 shareholder.

While Buffett followers find it to be an interesting game, predicting his next move is almost always futile, they said.

``You can't predict what he'll buy next,'' said Kilpatrick, the Buffett biographer. ``I've heard everybody guess for 20 years, and I've never heard anyone get it right.''

Companies identified by the Bloomberg search:

Assurant Inc. (AIZ US)
Boston Scientific Corp. (BSX US)
Cigna Corp. (CI US)
Cincinnati Financial Corp. (CINF US)
EOG Resources Inc. (EOG US)
H&R Block Inc. (HRB US)
Harley-Davidson Inc. (HDI US)
Lennar Corp. (LEN US)
Mattel Inc. (MAT US)
Murphy Oil Corp. (MUR US)
Newfield Exploration Co. (NFX US)
Nucor Corp. (NUE US)
Old Republic International Corp. (ORI US)
Radian Group Inc. (RDN US)
Reynolds American Inc. (RAI US)
Safeco Corp. (SAFC US)
Sherwin-Williams Co. (SHW US)
Southern Copper Corp. (PCU US)
Torchmark Corp. (TMK US)
VF Corp. (VFC US)

To contact the reporter on this story:
Nick Baker in New York at nbaker7@bloomberg.net.
Last Updated: May 3, 2006 00:16 EDT