Could Warren Buffett buy out Rolls-Royce?

Whenever I think of investing in a stock like Rolls-Royce, I think it helps to consider what Warren Buffett might think of it.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Billionaire investor Warren Buffett is famous for going in big when he makes an investment. With the kind of money he has to invest at Berkshire Hathaway, small amounts of stock aren’t going to cut it.

He’s often bought out whole companies, and that got me thinking. Could Buffett buy Rolls-Royce Holdings (LSE: RR.)? And if he could, is it the kind of company he might go for?

After recent share price gains, Rolls-Royce now has a market-cap of £12.8bn. To make a successful bid, a buyer would presumably have to offer more than that, but it’ll do as a baseline valuation.

Piles of cash

At the end of 2022, Berkshire Hathaway had cash on hand of $35.8bn (£30bn). So yes, there’s easily enough to buy Rolls-Royce from what is essentially petty cash.

Incidentally, in the latest 2022 letter to shareholders, Buffett pointed out that “Berkshire will always hold a boatload of cash,” adding that “We will also avoid behavior that could result in any uncomfortable cash needs at inconvenient times.”

It’s hard to see any company owned by Warren Buffett running into a debt crisis. So what would it take to acquire Rolls on a debt-free basis?

Falling debt

At December 2022, net debt was significantly reduced at £3.3bn. Thanks to disposals and improving cash flow, Rolls had got it down from £5.2bn a year previously.

That means to buy out Rolls-Royce at the current share price and pay down its debt, any wannabe Buffett would need to stump up £16.1bn. Again, the Berkshire Hathaway cash pile would easily cover that.

But what valuation does it represent? Current price-to-earnings (P/E) valuations don’t really mean much. At least, not at this point in a company’s recovery, when it’s hopefully still well below its long-term earnings potential.

Earnings growth

Looking at forecasts, analysts expect earnings at Rolls to grow strongly over the next three years. And that would bring the stock’s P/E down as low as 15.5 by 2025. It doesn’t account for the debt part of the potential buyout though.

Adjusting for debt, our mooted takeover would be based on an effective forecast P/E of around 19.5. That’s known as an enterprise value P/E, and helps us compare companies with different levels of debt more meaningfully.

Now I judge it very unlikely that Buffett would consider an approach for Rolls-Royce. But I do think that looking at what he’d have to pay to acquire the company is valuable for private investors.

Is Rolls a buy?

Like Buffett, when I ponder buying shares, I consider whether I’d be comfortable owning the whole company.

Do I think an enterprise value P/E of nearly 20 is fair value for Rolls-Royce right now? With its long-term earnings potential, I reckon it is. But I don’t rate it as screaming cheap. After all, I’m going on risky three-year forecasts here.

There’s also some way to go before solid earnings start flowing again. And we need to see further debt reduction being funded by operational cash flow.

But yes, for me, Rolls-Royce shares look like a decent long-term buy now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

1 heavyweight FTSE 100 share I’d buy as London retakes its crown

Some Footsie firms are extremely large, but that doesn't mean they couldn't get even bigger. Here's one such FTSE 100…

Read more »

Investing Articles

I’d buy 5,127 National Grid shares to generate £250 of monthly passive income

With a dividend yield of 6.5%, Muhammad Cheema takes a look at how National Grid shares can generate a healthy…

Read more »

Investing Articles

The FTSE 100’s newest member looks like a no-brainer to me!

This Fool explains why she sees the newest member of the FTSE 100 as a great opportunity after its recent…

Read more »

Investing Articles

Empty Stocks and Shares ISA? Here’s how I’d start earning a second income from scratch

Like the thought of earning extra cash tax free? Our writer explains what he'd do to begin earning passive income…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

No savings at 25? I’d start by investing £3k in these 3 red-hot FTSE 100 shares

Harvey Jones thinks these three FTSE 100 stocks would be a great way to kickstart a portfolio of UK shares.…

Read more »

Young Black woman using a debit card at an ATM to withdraw money
Investing Articles

Up 35% from this year’s low! Here’s where I think Lloyds shares are headed in H2 of 2024

My Lloyds shares are already doing well this year but that’s not guaranteed to continue. What factors could turn the…

Read more »

Investing Articles

Approaching £5, is there still growth ahead for the Rolls-Royce share price?

The Rolls-Royce share price has been flying in the last year. But is there more growth ahead or should investors…

Read more »

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

Could Raspberry Pi be a growth share to buy and hold?

Our writer explains why he thinks a newly-listed UK growth share could have a bright future -- and considers whether…

Read more »