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Warren Buffett’s Stock Portfolio: Part 1 | Part 2

Following on from the first part of Berkshire’s Stock Portfolio covering the first 10 stocks, let’s go through the next 10.

With each DCF valuation and Ben Graham formula, cyclical downturns are adjusted slightly so as not to overly depress the intrinsic value, especially due to 2008.

Since a stock valuation deals with what you believe the future will bring based on the past and current information, if the current year is a catastrophe which isn’t likely to be replicated year over year, it is best to adjust the values to a more “normal” situation.

Warren Buffett Stock Picks : 11-20

Eaton Corporation Valuation

The company is a diversified industrial manufacturer and operates in 4 business segments.

  1. Electrical - electrical systems and components for power quality, distribution and control
  2. Hydraulics - fluid power systems and services for industrial, mobile and aircraft equipment
  3. Aerospace - intelligent truck drivetrain systems for safety and fuel economy
  4. Automotive - automotive engine air management systems, powertrain solutions and specialty controls for performance, fuel economy and safety.
  • Looking back at my previous ETN stock analysis, looks like my assumptions were over conservative.
  • CROIC has been amazing past 10 years. Management is doing a great job of using its cash.
  • Plenty of FCF
  • Debt level has been the same past few years
  • 8c from every dollar of sales converts down to the bottom line
  • Good margins prove the business can make money during a hard recession
  • Regression of earnings compared over multiple timeframes is flat meaning that growth is coming from other than organic business. Shown by the goodwill balance which I also discussed in the previous ETN stock valuation.

Intrinsic Value Estimate

Current Price: $55.06

DCF Stock Value: $76.42

Graham Stock Value:

  • 0% growth = $52.65
  • 7% growth = $134.53

Competitor and Peer Comparison: Fairly valued [click to enlarge all images]

ETN DCF Value Graph

ETN DCF Value Graph

Gannett Inc Valuation

International news and information company. Owner of newspapers and news websites.

  • Horrific year in 2008
  • Huge impairments of goodwill and PP&E
  • Printing equipment would also be of little value if resold
  • Totally contrarian investment
  • Declining sales since 2006 and so has earnings
  • Amazing CROIC despite performance. Excellent management
  • Business operations can generate FCF
  • Declining capex

Intrinsic Value Estimate

Current Price: $8.17

DCF Stock Value: $30.47 at 0% growth

Graham Stock Value:

  • 0% growth = $33.21

Competitor and Peer Comparison: Print and media industry shunned by The Street and looks undervalued.

GCI Ben Graham Spreadsheet

GCI Ben Graham Spreadsheet

General Electric Valuation

Diversified company doing business in basically everything.

  • Plenty of cash from all of its operations
  • High debt ratio and increasing past 2-3 years
  • Average CROIC of 3%
  • FCF/Sales is pretty good at 8%
  • Stable inventory turnover in line with past 10 years
  • Maybe a good company but not great

Intrinsic Value Estimate

Current Price: $14.20

DCF Stock Value: $15.64 at 5% FCF growth

Graham Stock Value:

  • 0% growth = $43.89 at 8% EPS growth

Competitor and Peer Comparison: $18.75

GlaxoSmithKline Valuation

Pharmaceutical company with principal products include medicines in the therapeutic areas, oncology and emesis (vomiting).

  • Lots of FCF but slow growth
  • Excellent CROIC above 30%. Able to make returns of over 30% from their use of cash.
  • Pharma companies also are able to drop the sales figures directly to the FCF line
  • High margins and returns as expected from drug companies
  • Big drop is tangible shareholders equity due to goodwill fr0m acquisition activity

Intrinsic Value Estimate

Current Price: $39.44

DCF Stock Value: $43.79 at default 6.5% FCF growth

Graham Stock Value: $30 - $60 depending on pipeline

Competitor and Peer Comparison: $32

GSK DCF Valuation

GSK DCF Valuation

Home Depot Valuation

Home improvement retailer.

  • Struggled with the housing bust
  • Low growth
  • Slowed down opening new stores dramatically if you look at capex further
  • Plenty of FCF
  • Average CROIC, FCF/Sales, Revenue growth, earning growth

Intrinsic Value Estimate

Current Price: $27.03

DCF Stock Value: $27.23 at default 5% FCF growth

Graham Stock Value: $26.39

Competitor and Peer Comparison: $25

HD DCF valuation

HD DCF valuation

Ingersoll-Rand Company Valuation

Operates in four segments:

  1. Air Conditioning Systems and Services
  2. Climate Control Technologies
  3. Industrial Technologies
  4. Security Technologies
  • Big increase in goodwill in 2008
  • FCF positive yet erratic at times. Median of 11% FCF growth
  • Excellent CROIC. Buffett sure does a good job of picking effective management at the helm
  • Consistency in ROA and ROE when looking at multiple timeframes
  • Revenue growth on the low side

Intrinsic Value Estimate

Current Price: $30.94

DCF Stock Value: $20 at default 11% FCF growth adjusted

Graham Stock Value: $51.30

Competitor and Peer Comparison: Fair to slight premium

IR DCF stock value

IR DCF stock value

Iron Mountain Inc Valuation

Provides information protection and storage services.

  • Lost more FCF than it made throughout the past 10 years
  • None or very low FCF growth, CROIC, returns
  • Steady increase in sales but can’t convert it to FCF
  • Doesn’t look like a Buffett pick at all

Intrinsic Value Estimate

Current Price: $29.39

DCF Stock Value: N/A

Graham Stock Value: $20.79 at 13% growth rate

Competitor and Peer Comparison: $13.40

IRM Graham Formula

IRM Graham Formula

Johnson & Johnson Valuation

Good to excellent everything as I mentioned in the JNJ analysis.

Intrinsic Value Estimate

Current Price: $61.28

DCF Stock Value: $70.27. Not much different than the $71 I got last time.

Graham Stock Value: $109.84 compared to $108 previously.

Competitor and Peer Comparison: Fairly valued compared to competitors

JNJ DCF Valuation

JNJ DCF Valuation

Kraft Foods Valuation

Manufactures and sells packaged food products, including snacks, beverages, cheese, convenient meals and various packaged grocery products.

  • Margins decreasing for more than 7 years straight
  • Inventory turnover has been improving
  • No FCF growth
  • Makes 22c of every $1 invested (CROIC=22%)
  • Growth is minimal
  • Increasing debt

Intrinsic Value Estimate

Current Price: $28.40

DCF Stock Value: N/A

Graham Stock Value: $19.96

Competitor and Peer Comparison: $24

KFT-Ben-Graham-Formula

KFT Graham Formula

Lowe’s Valuation

Another home improvement retailer.

Buffett hasn’t backed down from buying the number 1 and 2 company in an industry. He doesn’t believe that you should only buy one company from an industry for portfolio diversification purposes.

  • Better growth opportunity that Home Depot
  • Good FCF growth but CROIC is very low at 2%. Better than nothing but not effective with utilizing capital.
  • Good revenue and earnings growth
  • Gross margins increasing to date
  • Debt down to average levels
  • Tangible book value increasing
  • ROE and ROA declining past 2 years
  • Sales flat since 2007
  • The macro idea that people will continue to repair and improve houses still doesn’t work well in a recession.
  • If I had to choose LOW or HD, I would go for LOW. Or be like Buffett and get both.

Intrinsic Value Estimate

Current Price: $20.72

DCF Stock Value: $18.91

Graham Stock Value: $52.66

Competitor and Peer Comparison: $22

Disclosure: No positions in any stocks mentioned

Source: Warren Buffett's Stock Portfolio: Part II