(BRK.A), (BRK.B)
If there is any one of Berkshire Hathaway’s companies that Warren Buffett would love to find another of it would have to be Lubrizol Corporation.
Berkshire acquired the specialty chemical manufacturer in 2011 for $9.7 billion, and it has played an important role in Berkshire’s profits.
“Lubrizol is the second largest in terms of earnings so it’s a very important asset to Berkshire,” Buffett noted during a recent visit to Lubrizol’s headquarters in Wickliffe, Ohio. “Up until the acquisition of Precision Cast Parts [it was] the largest industrial operation we have.”
Lubrizol’s growth, which since being acquired by Berkshire has included the acquisition of Particle Science, the opening of a chlorinated polyvinyl chloride (CPVC) compounding plant in Dahej, India, and assuming the Indian government’s stake in Lubrizol India Pvt Ltd., and more.
“It’s a terrific business and it’s big, and only gets bigger,” Buffet said.
With Berkshire size matters, as small acquisitions don’t make much difference in the profits of a company the size that Berkshire has grown to. Over the past decade, Berkshire has added not only Lubrizol, but also BNSF Railway, Precision Castparts, battery-maker Duracell, and a hefty chunk of Kraft Heinz to its portfolio.
While individual Berkshire companies can grow through smaller acquisitions in the millions, tens of millions, or even hundreds of millions, those size acquisitions don’t make sense for Berkshire if they are stand-alone entities. Berkshire has to add companies with billions in market cap in order to make a difference.
Companies of Lubrizol’s size are in the range that Buffett looks for with his famed “elephant gun.”
“It’s a huge advantage to be large too in terms of moving the needle on $400 billion of market cap.” Buffett noted, referring to Berkshire’s overall size.
Buffett’s a willing buyer, but companies such as Lubrizol are not on every corner.
“I wish we had five more and they’re hard, they are very hard to find,” Buffet said. “They take decades and decades to build.”
Buffett’s reputation as a long term owner of companies who keeps key management in place is one the things that makes becoming a Berkshire company attractive. The other is no longer having to be a slave to quarterly earnings reports. Just ask the folks at BNSF Railway how much easier it is to allocate capital now that they have been freed of that burden.
“We want Berkshire to be a wonderful collection of businesses over time, because we’re not going to sell them. It isn’t like we are going to keep culling the herd.”
If you can find Buffett another Lubrizol he’s certainly ready to thank you.
“Find me another Lubrizol, I’ll send flowers to your wife on her birthday,” Buffett adds. And he means it.
© 2017 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.