Investors around the world have done well investing with Warren Buffett in Berkshire Hathaway Inc. (NYSE: BRK.A)(NYSE: BRK.B). I don’t need to break down Buffett’s accomplishments; they’re already well known.
Instead, let’s talk a little about something that I’m surprised more investors don’t do, especially those who don’t want to pick individual stocks. I think that Berkshire is so big and so diversified that it’s a decent proxy of the U.S. economy. Investors who buy shares not only get the diversification, but they also get the greatest investor of all time working for them.
Think of it like this: Berkshire Hathaway has exposure to just about every sector of U.S. business, perhaps excluding gold. Buffett pays himself an annual salary of $100,000, or 0.0005% of assets. That beats an index fund hands down, plus you’re getting the wisdom of Buffett.
While George Weston Limited (TSX: WN) isn’t exactly the same as Berkshire Hathaway, it’s still a pretty reasonable equivalent for investors looking for something similar covering the Canadian market. Let’s take a closer look at the company and why it belongs in your portfolio.
George Weston is essentially made up of two moving parts, one of which owns a bunch of other moving parts.
The company is the 100% owner of Weston Bakeries, which is one of Canada’s largest suppliers of bread, cakes, cookies, and other assorted goodies. Sales for 2014 should be approximately $2 billion, while operating income should be in the range of $250 million.
And then there’s the big asset, the company’s 46% interest in Loblaw Companies Ltd (TSX: L). Loblaw is Canada’s largest grocery chain, with more than 1,000 corporate and franchised stores located coast to coast. It has a current market cap of $23.8 billion, a number that will be important a little later on.
Loblaw isn’t just Canada’s largest grocer. It acquired Shoppers Drug Mart earlier this year, which boosted its retail presence in urban settings, an area where supermarkets are traditionally weak. It also holds an 82% interest in Choice Properties Real Estate Investment Trust (TSX: CHP.UN), which is the company’s best locations rolled into a real estate investment trust. Additionally, Loblaw also has a terrific financial services division, which is practically a bank in itself. It issues credit cards, mortgages, and even customer bank accounts.
So, to review, George Weston offers investors an opportunity to invest in food manufacturing, consumer discretionary, consumer staples, real estate, and financial services, all while buying only one company. It’s not quite as diversified as Berkshire Hathaway, but it’s a good start.
Why it’s a good buy
George Weston has a market cap of $11.75 billion. Remember, it owns 46% of Loblaw, which has a market cap of $23.8 billion. This means that the Loblaw stake alone is worth $10.93 billion.
For an additional $820 million, investors are getting the bread business (which does approximately $2 billion in revenue and $250 million in operating profit), as well as an extra 5.4% of Choice Properties, which it purchased when Loblaw spun off the REIT. At current value, that stake is worth an additional $52 million.
This is why George Weston is more attractive than just buying Loblaw shares. Once you strip out the value of its stake in Loblaw, investors are getting a bread business that earns $250 million per year for just $820 million, plus $52 million worth of shares in Choice properties. A conservative valuation of these businesses puts them at $2.5 billion. Thus, investors are getting $1.7 billion in value for free, which is approximately 15% of the current value of the company.
Conglomerates tend to trade at a bit of a discount, and George Weston is no exception. Still, the company could always acquire another food manufacturer, take Loblaw private, or do something else to unlock shareholder value. Plus, it has a higher dividend than Loblaw. If you’re looking for exposure to the sector, why not buy it at a discount to the sum of its parts?
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Nelson Smith has no position in any stocks mentioned. The Motley Fool owns shares of Berkshire Hathaway.