Is This Company the Next Berkshire Hathaway?

next-Berkshire-HathawayHedge fund billionaire Bill Ackman is often controversial. His very high-profile position that Herbalife (NYSE: HLF) is essentially a multi-level marketing scam is just one of many controversial stands he has taken during his career
At a recent presentation he took another high-profile stand, one that I think involves little controversy. In fact, I agree with Ackman that the company he was talking about is on its way to being the next Berkshire Hathaway (NYSE: BRK-B).
In a speech that closed the 20th annual Sohn Investment Conference, Ackman offered two stocks that he thinks are greatly undervalued.
The first, Jarden Corp (NYSE: JAH), is the name behind consumer brands like Bicycle playing cards, Coleman outdoor gear and appliance names like Holmes, Sunbeam, Mr. Coffee, Breville and many more. Ackman pointed out Jarden’s 45-fold return over the past 14 years and that investors consistently underestimate the company’s earnings.
But it wasn’t Ackman’s mention of Jarden that stuck with me. Instead, it was his discussion of Canadian company Valeant Pharmaceuticals International (NYSE: VRX), which Ackman said is “a very early-stage Berkshire.”
Ackman noted that Valeant Pharmaceuticals isn’t simply a pharmaceutical company. Instead, he called it a “platform company,” which is “incredibly talented at getting deals done.” In this way, Valeant bears a lot of similarities to Warren Buffett’s Berkshire Hathaway, which Ackman referred to as a quintessential platform company that has been “continually undervalued” for its entire history.
Ackman’s first major interaction with Valeant took place last year when he teamed up with the company in a failed attempt at a hostile takeover of Allergan (NYSE: AGN), best known for manufacturing Botox. After his Pershing Square Capital took a huge stake in Allergan, Ackman tried to steer the company toward a hostile takeover by Valeant. The attempt was ultimately unsuccessful, though Ackman was able to sell his shares of Allergan at a huge gain.
“We spent a year working with Valeant trying to take over Allergan, and one of the frustrations we had, as we got to see Valeant trading at $110 a share, was that we couldn’t buy the stock,” Ackman said. When the deal fell apart, Pershing Square bought shares of Valeant – at a higher price.
Indeed, the stock closed Thursday worth just under $220 per share, roughly double where it was when Ackman was working with the company to acquire Allergan. The stock is already up more than 50% so far this year after rising 28% during the months of January and February alone.
Ackman notes that the market tends to value companies based on the assets it already owns, resulting in the market undervaluing companies like Valeant and Berkshire Hathaway that have the “ability to make transformative transactions.”
Ackman notes three important facts about Valeant’s effectiveness.
First, that Valeant has achieved greater than 20% return on the $20 billion it has invested in acquisitions since 2008.
Second, that Valeant’s management has accelerated revenue growth at all seven of the company’s major acquisition companies.
Finally, Ackman notes that the company is very effective and efficient at achieving the acquisition synergies it forecasts.
He specifically referenced the company’s 2013 acquisition of eye care company Bausch & Lomb, a deal that valued the brand at $8.7 billion. With Valeant overseeing organic growth between 5% and 11% and more than doubling margins, the brand is now worth more than $21 billion.
Don’t be scared by Valeant’s valuation. While its 12-month trailing price-earnings ratio is a hefty 81.7, the stock trades at only 19.6 times 2015 forward earnings estimates – an indicator of rapid growth potential.
The next Berkshire Hathaway, according to Ackman, is worth more than $330 per share. That’s more than 50% higher than where it currently trades.

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