The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran

NEW YORK, June 1 (Reuters Breakingviews) - The first big deal from Berkshire Hathaway BRKa.N CEO Greg Abel looks a lot like one Chairman Warren Buffett would do. Buying Taylor Morrison Home TMHC.N is a good sign that the value investing tradition will carry on, but it also suggests that a big challenge persists.

Berkshire said on Sunday that it would pay $6.8 billion for Taylor Morrison, which develops land and builds residences across 12 states. It's a relatively easy business to understand and out of favor with investors. Both are characteristic hallmarks of the Oracle of Omaha's playbook.

The return looks decent, too. Taylor Morrison is expected to earn $730 million of operating profit this year, based on estimates compiled by LSEG. Tax it at the standard 21% corporate rate and the implied return on investment would be 7% on the $8.5 billion enterprise value, including net debt. Just a couple of years ago, however, the company's operating profit was $1.2 billion. If Berkshire can get back to that figure, the return would be 11%. Any synergies squeezed out by pairing the business with, say, Berkshire's Clayton Homes or its eponymous real estate brokerage would be gravy.

Abel’s problem, like Buffett's, is that it will take dozens more Taylor Morrisons to have an impact inside the sprawling empire. Berkshire’s market capitalization is $1 trillion, and any extra profit from this deal will be hard to spot. Moreover, the transaction barely makes a dent in the company's $380 billion cash hoard at the end of the first quarter.

If Abel keeps with another Buffett tradition, he will hunt elephants patiently. Berkshire shareholders expect smart capital allocation, which helps explain a healthy valuation of 23 times estimated earnings over the next 12 months. Overly aggressive deals would trigger skepticism, and probably invite a conglomerate discount.

There’s a cost for waiting, however. Berkshire stock has underperformed the S&P 500 Index .SPX lately. Sitting on so much cash weighs on returns. Given that Buffett struggled with the problem, it's reasonable to think Abel will, too.

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CONTEXT NEWS

Berkshire Hathaway said on May 31 that it had agreed to buy homebuilder Taylor Morrison Home for $72.50 per common share, or about $6.8 billion, excluding debt. The conglomerate is paying a 24% premium to the target's closing price on May 29.