Warren Buffett's Stock Portfolio: Part III

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

We are now up to the second half of valuing the holdings of Berkshire Hathaway (BRK.A) via the DCF valuation method, Ben Graham formula as outlined in the Intelligent Investor, and a simple multiples valuation based on PE, cash flow, sales and other metrics compared to the competition and industry.

Of the 10 companies I go through in this post, I’ll be passing on Moody’s (MCO), M&T Bank (MTB), Sun Trusts Banks (STI) and Torchmark (TMK) as I do not know how to value financial stocks.

Warren Buffett Stock Holdings : 21-30

• M&T Bank Corporation (MTB)
• Moody’s (MCO)
• NRG Energy (NRG)
• Nalco Holding (NLC)
• Nike (NKE)
• Norfolk Southern Corp (NSC)
• Procter & Gamble (PG)
• Sanofi Aventis (SNY)
• Sun Trusts Banks Inc. (STI)
• Torchmark Corp (TMK)

NRG Energy

Wholesale power generation company. Owns more than 189 active operating generation units at 48 power generation plants.

• Had a big year in 2008
• Big margins increase in 2008 and since 2005
• Increase in short term and long term debt
• Company is able to make money but its returns are on the low side.
• Mean ROA [Return On Assets] and CROIC [Cash Return On Invested Capital] of 2.7% and 5% respectively. Lower than competition
• FCF [Free Cash Flow] isn’t consistent.
• Huge increase in capex [capital expenditures] in 2008
• Large amount of taxes deferred.
• Still converts 12% of sales into FCF

Intrinsic Value Estimate

Current Price: $27.76

DCF [Discounted Cash Flow] Stock Value: $37.11

Graham Stock Value: $34

Competitor and Peer Comparison: $58

Nalco Holding

Provider of integrated water treatment applications to prevent corrosion, contamination and the buildup of harmful deposits.

• Needs to improve efficiency. 40+% margins but negative net income or low single digits at best isn’t good
• Decrease in intangibles suggests bad acquisitions and mistakes by management
• Long term debt is steady
• Been buying back stock
• FCF isn’t reliable. Lots of cash come from “other” income
• Low returns, cash and earnings growth
• Doesn’t look like something Buffett would buy

Intrinsic Value Estimate

Numbers aren’t reliable enough for a proper valuation.

Current Price: $17.52

DCF Stock Value: N/A

Graham Stock Value: N/A

Competitor and Peer Comparison: $22

Nike

Sells athletic footwear, apparel and sports products.

• Great company, leader, innovator, huge moat
• Drop in margins in 2008 but increased inventory turnover
• Low debt with plenty of cash
• Can pay off debt with FCF easily
• Don’t have to go in detail with numbers. They are just too good.

Intrinsic Value Estimate

Stability and predictability makes it easy to value.

Current Price: $56.18

DCF Stock Value: $65

Graham Stock Value: $77

Competitor and Peer Comparison: fairly valued at $56 (trades at a premium to competition)

Click to enlarge:

NKE Intrinsic Value Graph

Norfolk Southern Corp

Rail company. Another rail company in the portfolio along with Burlington Northern Santa Fe (BNI).

• Looks to be a better company than BNI
• Good top line growth
• Decrease in gross profit but managed to increase net margins
• Lots of FCF and excellent FCF growth
• Low end for CROIC at 4%
• Debt can be handled with FCF rather than taking on additional debt

Intrinsic Value Estimate

FCF growth is at 22.8% but if you look at how the value of the company has tracked the share price over the past 5-7 years, the company has been growing at the rate of its CROIC. i.e. the cash returns of its invested capital.

Current Price: $46.91

DCF Stock Value: $61

Graham Stock Value: $120 - high value due to excellent earnings growth

Competitor and Peer Comparison: $54

Click to enlarge:

NSC Intrinsic Value

Procter & Gamble

Sells consumer good that you use everyday.

• Wrote about PG briefly in the Best Stocks to retire list
• FCF growth above 18%
• CROIC at 60%! Mindblowing.
• Only negative is big drops in tangible shareholders equity
• Stable margins. Net margins even increased in 2008
• Good stable dividend

Intrinsic Value Estimate

Included a 10 year version of the intrinsic value graph to show how price and value end up meeting.

Current Price: $53.19

DCF Stock Value: $76 - increased from my previous DCF valuation

Graham Stock Value: $97 - slightly down from previous Graham calculation

Competitor and Peer Comparison: $67

Click to enlarge:

PG Intrinsic Value

Sanofi Aventis

Pharmaceutical company.

• Stats look good but some metrics are quite erratic
• FCF growth is up and down
• Top line isn’t so consistent
• FCF and earnings growth is relatively low
• Has outstanding returns and converts it to plenty of FCF
• Debt is not an issue
• Maybe Merck (MRK) or Pfizer (PFE) would be better?

Intrinsic Value Estimate

Not quite sure about what future products the company has but from the current snapshot of the company, I get the following figures.

Current Price: $34.53

DCF Stock Value: $47

Graham Stock Value: $18

Competitor and Peer Comparison: $36

Click to enlarge:

SNY Intrinsic Value

Disclosure: No positions in any stock mentioned

Comments

[long_on_oil:]

Very interesting reading, keep this kind of information coming.
thanks

Aug 31 08:58 AM

[johnmorrison9:]

Excellent report. It shows market and value is as different as a photo and a bimbo.

Aug 31 10:31 AM

[hksche2000:]

Nobody is perfect and, believe it or not, that includes WB.
Peter Lynch, Fidelity's Magellan Golden Boy, is the one "nobody" who broke that rule and comes to mind. But then he also and mainly was just lucky to run the M Fund during the uninterrupted behemoth WS boom, the 80's AND got out in 1990, just before the next WS bust started.
Thanks for your laborious/great work, Jae June. So many of us still keep an eye on what the WB guru is doing, especially now that we know most his money will be going to good and very important causes where, incidentally, much less money will be going to from "the usual gov't/taxpayer sources" who are broke themselves. Thanks again, JJ!

Aug 31 01:26 PM

[ex- bond tr...:]

Wonder if Warren will take a shot in the arm from Sanofi-Aventis' swine flu vaccine scientists... Not a chance. He just likes investing
in poison.

Aug 31 01:40 PM

[mkreisel:]

PFE has too many failed drug trials.

Management finally panics and throws tons of money at Wyeth.

Buffett will never buy this kind of capital destroyer.

Aug 31 02:05 PM

[Jae Jun:]

@long on oil
Thanks for reading and commenting.

@johnmorrison
yup. Price is what you pay. Value is what you get.

@hksche2000

No worries. Always meant to take a deeper look at what Buffett buys but never got around to it until now.

@ex-bond
I don't know about the "poison" remark but I do wonder why he doesn't sell some companies that obviously aren't that great.
I'm sure even his investments change but he never seems to be a seller or re-organizes his portfolio.

@mkreisel
I'm not an expert in pharma so I'll take your opinion.

Aug 31 04:50 PM

[johnmorrison9:]

I agree on the oil, may still come back some, but like gold, dollar priced crap is going up.
Thanks for your reply, and G.B.U

Aug 31 08:13 PM

[JeffDB:]

On Aug 31 04:50 PM Jae Jun wrote:

> @ex-bond
> I don't know about the "poison" remark but I do wonder why he doesn't
> sell some companies that obviously aren't that great.
> I'm sure even his investments change but he never seems to be a seller
> or re-organizes his portfolio.

I tried to do a little comparison of the Morningstar "Fair Value estimates" with those of the DCF and they come up very similar, at least with these stocks. I put them in a little spreadsheet & uploaded a bar chart which you can see here if interested:

.doc format: www.mediafire.co/downl...

.jpg: www.mediafire.com/imag...

It looks to me as if the "current price" is below Morningstar's "consider selling" price on each of the stocks, even though it is above their "consider buying" price on all but PG. Perhaps they're overly conservative in that regard, but it would seem the prices may have been an attractive "Buy" awhile back, but as the prices have increased, they moved into the "Hold" category, but haven't made it to the "Sell" point yet.

Just a thought.

In any event, thanks for the info, it is much appreciated, and your spreadsheets look like an excellent idea and a good value from what I can tell.

Sep 01 12:59 AM

[Jae Jun:]

Hi Jeff,
I've back tested my valuation methods with Morningstar and found to get very similar results.

How did you go about doing the comparison?
I assume you have the premium service?

Sep 01 01:09 AM

[JeffDB:]

Hi,

Actually, my library offers the premium service via their electronic resources. I noticed on one of your pages www.oldschoolvalue.com.../ that Morningstar was offering free premium service through Nov 21st, btw.

In any event, I do like the Morningstar info as their analyst reports* have a lot of good info to go along with the estimated fair value, but they don't have the reports or even the est fair value for quite a few companies that they do not follow for whatever reason. I'm assuming your spreadsheets will still calculate DCF for a lot of those companies that Morningstar doesn't follow even though you are pulling the raw numbers from Morningstar, is that correct? ie. small caps or others?

* FWIW, here is one page of a Morningstar report on PG: www.mediafire.com/down... One could access to all the rest of their info on PG or other companies via that free trial, though, assuming it is still active.

Also the tiny spreadsheet I slapped together for the DCF / Morningstar chart is available here: www.mediafire.com/down...

Anyway, thanks again for these posts and those spreadsheets etc.

On Sep 01 01:09 AM Jae Jun wrote:

> Hi Jeff,
> I've back tested my valuation methods with Morningstar and found
> to get very similar results.
>
> How did you go about doing the comparison?
> I assume you have the premium service?

Sep 01 12:27 PM

[whidbey:]

I suspect this is the single most valuable post in some time. The number of people holding BRK-B is amazing. They feel it is a "heritage" stock for some reason.

Many did not know that WB seems to acquire his holdings based on historical performance, and management. Very little objective analysis of markets and assets seems to be involved.

I handled a buyout sale to BH and I was a little shocked at the manner in which its was negotiated and concluded. It was a nonpublic company and therefore even more worthy of a very careful due diligence. Preliminary was very cursory and based on non-financial data for the most part. I have some of the stock in a portfolio and I will look for way out.

Sep 01 12:55 PM

[Jae Jun:]

The free morningstar trial was actually last year but I got to look at how they did things and yes, my spreadsheet will calculate the fair value of any company as long as the data is available.

Thanks for your resources. Taking a look at it now.


On Sep 01 12:27 PM JeffDB wrote:

> Hi,
>
> Actually, my library offers the premium service via their electronic
> resources. I noticed on one of your pages www.oldschoolvalue.com.../
> that Morningstar was offering free premium service through Nov 21st,
> btw.
>
> In any event, I do like the Morningstar info as their analyst reports*
> have a lot of good info to go along with the estimated fair value,
> but they don't have the reports or even the est fair value for quite
> a few companies that they do not follow for whatever reason. I'm
> assuming your spreadsheets will still calculate DCF for a lot of
> those companies that Morningstar doesn't follow even though you are
> pulling the raw numbers from Morningstar, is that correct? ie. small
> caps or others?
>
> * FWIW, here is one page of a Morningstar report on PG: www.mediafire.com/down...
> One could access to all the rest of their info on PG or other companies
> via that free trial, though, assuming it is still active.
>
> Also the tiny spreadsheet I slapped together for the DCF / Morningstar
> chart is available here: www.mediafire.com/down...
>
>
> Anyway, thanks again for these posts and those spreadsheets etc.
>
>
> On Sep 01 01:09 AM Jae Jun wrote:

Sep 01 12:58 PM

[Living4Divi...:]

What was Pfizer thinking?

They had a huge cash position and a stable steady dividend. Yet, they thought that slashing the dividend and overpaying for Wyeth would make their stock shine.


On Aug 31 02:05 PM mkreisel wrote:

> PFE has too many failed drug trials.
>
> Management finally panics and throws tons of money at Wyeth.
>
> Buffett will never buy this kind of capital destroyer.

Sep 01 03:15 PM

[bobbybutte:]

author has shown some great illustrations

howver Warren does NOT own sun trust BErkshire's Lou simpson does

Sep 01 03:43 PM

[Ricard:]

Agreed on Nalco.

On PG, I'd recheck that Graham number. PG does not have a tangible book, which is what the number is based upon, if I remember correctly. In fact, D4L has the formula on his webpage:
Price = Square Root (22.5 x Book Value x EPS)
I realize there may be other numbers attributable to Graham, and if that is the case here, please define. This is the Graham number I've become familiar with by reading Security Analysis and Intelligent Investor.

Regardless, excellent presentation, clean and easily digestible.

Sep 25 10:47 AM

[Ricard:]

BTW, complete formula is price = sqrt of (22.5 * P/TB * EPS). Since PG has no tangible book value, this number is meaningless.

This has in fact been the one number that has prevented me from buying the vast majority of US blue chips, which by this metric are way over valued. This is balanced by your CROIC calculations.

Sep 25 10:51 AM

[Jae Jun:]

Hi Richard,

Can you show me where you got the formula
price = sqrt of (22.5 * P/TB * EPS)?

Im using the formula as defined in the intelligent investor.


On Sep 25 10:51 AM Ricard wrote:

> BTW, complete formula is price = sqrt of (22.5 * P/TB * EPS). Since
> PG has no tangible book value, this number is meaningless.
>
> This has in fact been the one number that has prevented me from buying
> the vast majority of US blue chips, which by this metric are way
> over valued. This is balanced by your CROIC calculations.

Sep 29 03:24 AM