Warren Watch: No proof Kellogg is Buffett's next 'elephant'

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Posted: Sunday, April 13, 2014 12:00 am

Omaha companies get an extra point when Warren Buffett is thinking about buying them, and Kellogg Co. has a longtime cereal plant near 96th and F Streets in Omaha.

But that doesn't mean Berkshire Hathaway Inc. plans to buy the cereal maker, despite recent speculation that spiked Michigan-based Kellogg's share price.

The immediate cause was a flurry of options-buying that Bloomberg reported was similar to activity just before Berkshire and Brazilian investment group 3G Capital bought H.J. Heinz Co. last year.

A packet of Heinz ketchup is featured on the visitors guide sent to Berkshire shareholders for their May 3 annual meeting, signifying Berkshire's 50 percent ownership. But there's no mention of Frosted Flakes or Tony the Tiger.

Kellogg, worth about $24billion, would be an “elephant,” in Buffett's acquisition-hunting parlance.

Buffett is known to favor companies with strong brand names, and Kellogg has a pantry full of them.

When the Bloomberg story came out, demand for shares caused a one-day price increase of 6 percent to $66.39 each, just below Kellogg's all-time high price of $67.32 per share last July 15. It was the biggest one-day increase since April 2009.

Some of the options trading that preceded the Heinz deal resulted in insider trading penalties for two Brazilian brothers.

The Kellogg trading, 45 times the four-week average, was “absolutely the kind of options action that could signal takeover activity,” said Christopher Rich, head options strategist at JonesTrading Institutional Services LLC in Chicago. “Here's another low-volatility food company that tends to be quiet and not move around a lot, and we see this kind of stock and options trade and they get spooked.”

Bloomberg noted that a similar flurry of options trading in Campbell Soup Co. in December prompted trading speculation, but nothing has happened.

Kellogg and Berkshire did not comment.

Kellogg's biggest shareholder is the W.K. Kellogg Foundation. If it sold its Kellogg shares, it would need other investments to generate revenue for its charitable activities.

Buffett doesn't do hostile takeovers, so it seems unlikely that he would be party to a buyout that the Kellogg Foundation would oppose.

The Buffett touch

Berkshire missed Buffett's performance yardstick in four of the past five years, prompting some “losing his touch”-type stories recently.

Among those coming to Buffett's defense is CNBC stock observer Jim Cramer, who thinks Buffett's “luck's about to change.”

“Whenever I see an article that criticizes the stock holdings of Warren Buffett's Berkshire Hathaway, I know it's time to break out his portfolio and look it over for some terrific ideas,” Cramer said. “Just when it starts to seem like Buffett may have lost his touch, that's when his bets really start to pay off.”

Cramer said Berkshire's investments in Wells Fargo, Coca-Cola, IBM, Procter & Gamble, Exxon Mobil, U.S. Bancorp, DirecTV, DaVita Healthcare and Walmart are the “antidote to the madness infecting the market, or at least the Nasdaq, right now.”

Buffett has pointed out that Berkshire has beaten the Standard & Poor's 500 index in every five-year period since 1965, except the last one.

In his latest letter to Berkshire shareholders, Buffett said Berkshire beat the S&P over the seven-year “stock market cycle” between 2007 and 2013, averaging 10.2 percent a year versus the S&P's 8.7 percent.

“Through full cycles in future years, we expect to do that again. If we fail to do so, we will not have earned our pay,” Buffett wrote. “After all, you could always own an index fund and be assured of S&P results.”

One reason the S&P beat Berkshire over the past five years is that Berkshire's share price did not drop as sharply in the 2008-09 downturn. Both have gained since, but the S&P's percentages have been bigger because it started from a lower point.

Meanwhile, stock analyst Marcus Padley wrote in the Sydney (Australia) Morning Herald that it's futile to expect Buffett-sized investment success by trying to emulate him.

“He is the only one with the cortex and the neural channels, developed over decades of focus, that, when faced with a potential investment, say 'yes' when it's right and 'no' when it's wrong more often than anyone else,” Padley wrote.

If someone was successfully following Buffett's method, he wrote, we'd know about it.

“There are only three ways to make money out of Warren Buffett,” Padley wrote. “1. buy shares in Berkshire Hathaway; 2. write a book about him; or 3. use his name to market a product with the subtle implication he endorses it.”

Loan fund for Latinas

Warren Buffett's son Howard teamed up again with actress Eva Longoria, this time to create a $1 million small-business loan fund for Latinas, the San Antonio Express-News reported.

They have worked together on other immigration-related projects, and this time attended a hotel luncheon with San Antonio business and civic leaders marking the 20th anniversary of Accion Texas Inc., which promotes Latina business ownership.

They announced the loan fund and then joined some others who slipped out of the hotel luncheon for dessert at the nearest Dairy Queen — a division of Berkshire, of course.

Kentucky plant closing

Fruit of the Loom once was second only to General Electric among Kentucky manufacturers, but it will close its last plant in the state, a 600-employee facility in Jamestown, the Lexington Herald-Leader reported.

The Berkshire-owned company, based in Bowling Green, Ky., said the plant's textile operations would shift to Honduras by Dec. 31.

The closing is “part of the company's ongoing efforts to align its global supply chain” and better use its existing investments to provide products cheaper and faster, the company said.

“This decision is in no way a reflection on the dedication and efforts of the employees in our Jamestown facility, but is a result of a competitive global business environment,” said Tony Pelaski, executive vice president and chief operating officer, in a press release.

“Terrible, sad day for people in Russell County,” said State Rep. Jeff Hoover of Jamestown. “Some of the worst news we could possibly hear as a community, not just the 600 jobs but the effect it has on city government, the county government, the school system and local business.”

The company pays the city $1.6 million a year for a wastewater treatment plant that was upgraded a few years ago at the company's request. Bond payments are now in doubt, Hoover said.

Fruit of the Loom's history in Kentucky dates to 1851, and its first plant opened in 1932 with 100 employees. The Jamestown plant employed a peak of 3,247 people in 1990, and total Kentucky employment once topped 11,000.

The state's apparel industry, once a major employer, has gradually declined as production moved to places with cheaper labor, the Herald-Leader said.

Berkshire lists Fruit of the Loom's employment at 28,778, including Vanity Fair Brands.

China market for NetJets

China could become the biggest market for Berkshire's NetJets aviation business, Bloomberg and BusinessWeek reported.

NetJets should clear regulatory hurdles in China by June or July and will start managing private planes first, said CEO Jordan Hansell.

Private jet ownership in China is expected to grow sevenfold by 2032 and account for about 9 percent of the world's business jet fleet, the report said.

Hansell said China's military controls the country's airspace, and short-notice flights are difficult. The country needs to open up its airspace and build more infrastructure to surpass the U.S. market, he said.

BNSF Railway set to gain

Berkshire would benefit from proposed new grain shipping regulations for Alberta, Saskatchewan and Manitoba, the Financial Post of Canada reported.

The rules would give western Canada farmers more choices of rail carriers.

Berkshire's BNSF Railway stands to gain the most because the rules would allow more “poaching” of grain now carried by Canadian National Railway Co. and Canadian Pacific Railway Ltd., said Walter Spracklin, an analyst for RBC Capital Markets.

Last year's bumper crop in the region is straining shipping capacity.

Lubrizol plant in India

Berkshire's first investment in northwest India's state of Gujarat will be a chlorinated polyvinyl chloride compounding plant in Dahej by Lubrizol Corp., the Business Standard of India reported.

The $50 million plant is part of a $400 million expansion of Lubrizol's manufacturing capacity, which may include a resin plant in India.

Lubrizol executive Eric Schnur said the area has raw materials to support production for the Middle East, southern Asia and eastern Africa.

Auto parts company Wabco Holdings, partly owned by Berkshire, plans to make anti-locking and air braking systems in India, the Economic Times of Chennai reported.

Wabco Chairman and CEO Jacques Esculier said anti-locking brakes, mandatory under new government rules, will make Indian roads safer.

The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.

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