At Berkshire Hathaway’s (NYSE: BRK-B) annual meeting on April 30, Warren Buffett admitted to a lack of initial knowledge about the oil additive business shortly before agreeing to acquire Lubrizol Corp. (NYSE: LZ). But as a quick study on companies and one of the most astute investors of all time, he quickly caught on to the appeal of Lubrizol’s business.

Specifically, Buffett loved the fact that big oil companies like ExxonMobil (NYSE: XOM), BP plc (NYSE: BP) and Chevron (NYSE: CVX) are frequent and loyal customers of companies like Lubrizol. This means it’s hard to compete with Lubrizol, because of its longstanding and lucrative relationships. It also owns some patents, meaning the competition is legally prohibited from copying some of its products. The fact that he was able to acquire Lubrizol at an appealing price was icing on the cake, so on March 14 he announced plans to acquire the entire company in an all-cash transaction valued at $135 per share.

#-ad_banner-#With Lubrizol’s imminent addition into the Berkshire Hathaway umbrella of companies, the company will soon cease to be a pure play on the oil additive industry. However, there is still a standalone rival out there. Better yet, many of the characteristics that Buffett quickly warmed to are present at a key competitor.

Like Lubrizol, NewMarket Corp. (NYSE: NEU) sells petroleum additives. These additives can be used to create oil and fuel lubricants that help machines, vehicles and related equipment run better. Customers range from oil companies, oil refiners, industrial manufacturers and other chemical companies. Lubrizol has a similar client list, and both companies operate on a global scale.

There are other similarities. NewMarket boasts 1,400 patents and hundreds of trademarks to protect its additive brands and mixes. This isn’t far behind Lubrizol, which has 1,600 patents and a “substantial” number of trademarks (it doesn’t list just how many trademarks it has). Both are also active acquirers and buy out smaller rivals to further boost growth.

Both firms generate strong cash flow, which is a characteristic that Buffett highly values. For all of 2010, NewMarket generated $165.2 million in operating cash flow. Subtracting out $34.3 million in capital expenditures resulted in $130.9 million in free cash flow, or nearly $9 per diluted share.

One of the main likely reasons Buffett acquired Lubrizol is because it is a much larger firm. Buffett has said repeatedly that given Berkshire’s enormous size it needs “big game” acquisitions to substantially increase the bottom line. NewMarket generated $688.9 million in operating cash flow last year, and by subtracting $175.9 million in capital expenditures, we arrive at $513 million in free cash flow, or about $7.45 per diluted share, so this kind of deal fits into that framework. But I like the fact that NewMarket has lower capital expenditure levels equaling about 20% of operating cash flow. Lubrizol’s percentage is closer to 25%.

At the $135 per share buyout price, Lubrizol is valued at more than 18 times trailing free cash flow. NewMarket’s multiple is only slightly lower, but analysts project solid profit growth and earnings of $14.47 per share for all of 2011. This represents solid 20% growth from last year and puts the forward earnings multiple in very reasonable territory at just over 11. Free cash flow can reasonably be expected to rise by a similar amount. Again, Lubrizol is slightly more expensive at a forward P/E of about 12.

Looking at overall sales, NewMarket again looks more appealing. Lubrizol is projected to report 8% growth and close to $6 billion in sales for 2011. NewMarket should report more than $2 billion in sales, but almost 15% growth. I like NewMarket’s smaller size because it makes overall growth easier, since it is starting from a smaller base. As such, new sales can have a bigger impact on the total top line.

A final consideration is dividend yield. Yet again, NewMarket has a slight edge, with a current dividend yield of 1.5%. Lubrizol’s current yield is 1.1%. As a result, NewMarket should have slightly higher appeal to investors also interested in generating income. And again, since NewMarket is a smaller company, faster growth could also lead to more dividend increases in the future.  

Action to Take –> NewMarket’s stock rose sharply after Buffett announced he was buying Lubrizol, but shares have recently fallen close to 15% from those highs. Given the stable business, high cash flow generation, solid future growth prospects, higher dividend yield and reasonable valuation, I find NewMarket’s investment potential highly appealing.

The fact it beats a key rival acquired by Warren Buffett on a number of fronts is only icing on the cake. The stock represents a unique opportunity to get a better deal than Buffett, arguably the greatest investor the world has ever known. And very soon, it will represent one of the only ways for investors to gain pure-play exposure to the industry. The stock should be considered a solid “buy” on these merits.

P.S. — Few investors realize that a 20-year energy agreement between the United States and Russia is about to expire. This deal supplies 10% of America’s electricity. As broke as our government is, the situation is so serious that President Obama is asking for $36 billion to avert this crisis. And Republicans support him. Here’s what’s going on…