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Summary

  • I will be using a multi-step process to search for companies that have value characteristics that could possibly make them attractive to Berkshire Hathaway.
  • I focus on companies that have similar value characteristics to the top holdings of the Berkshire Hathaway portfolio.
  • My Search culminated with only one company passing my value screen, and other tests.

In this article, I will be screening for stocks based solely on the value characteristics of the Top 5 holdings of the Portfolio of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), which accounts for 67.74% of the total portfolio. There are two reasons I conducted this screen, the first reason for this screen is to identify companies that are undervalued relative to their industry, and their historical valuation. The second reason for this screen is the comments I received on not including valuation in my first article for potential targets.

Step #1: Common Characteristics

For this step, I looked at each of the five stocks that make up the top five holdings of Berkshire Hathaway's portfolio, and those five are listed in the table below. [Portfolio Data from WhaleWisdom.com] I looked at the five companies below to find characteristics that I could enter into the Zacks.com stock screener to get my initial starting list. Below the table is a bulleted list of my criteria I entered in the stock screener. After entering the criteria below, and eliminating those companies with a greater than $40 billion market cap, I found that 79 companies met all the criteria and those companies would be the start of my search. The reason I chose $40 billion is that if a company had a market cap that large, any acquisition would use the majority of the cash that Berkshire Hathaway has.

% of Portfolio

(NYSE:WFC)

WELLS FARGO & CO

21.79%

(NYSE:KO)

COCA-COLA CO

14.62%

(NYSE:IBM)

INTERNATIONAL BUSINESS MACHINES

12.90%

(NYSE:AXP)

AMERICAN EXPRESS CO

12.44%

(NYSE:WMT)

WAL-MART

4.19%

Value Screener Criteria

  • Market Cap: >20000 [$20 Billion]
  • Exchange: Not Equal to OTC
  • PE [ttm]: <25
  • PE [F1] -Forward PE: <25
  • Dividend Yield: >.50
  • PEG Ratio: <3
  • Price/Cash Flow: <20
  • Price/Book: <15
  • Price/Sales: <4

Step #2: Eliminations

Elimination #1: Railroads

Out of the 79 companies there were two rail companies included, CSX Corp (NYSE:CSX) and Norfolk Southern (NYSE:NSC), therefore, I excluded them from consideration because Berkshire Hathaway already owns BNSF Rails.

Elimination #2: Insurance & Financials

Because Berkshire Hathaway owns GEICO insurance, and has a large position in American Express, I decided to exclude all insurance and financial companies from my list of 79, and those companies are listed in the table below.

SUNTRUST BKS

(NYSE:STI)

SUN LIFE FINL

(NYSE:SLF)

AMERIPRISE FINL

(NYSE:AMP)

AON PLC

(NYSE:AON)

AFLAC INC

(NYSE:AFL)

BB&T CORP

(NYSE:BBT)

ALLSTATE CORP

(NYSE:ALL)

MARSH &MCLENNAN

(NYSE:MMC)

DISCOVER FIN SV

(NYSE:DFS)

STATE ST CORP

(NYSE:STT)

TRAVELERS COS

(NYSE:TRV)

ACE LIMITED

(NYSE:ACE)

Elimination #3: Discount Retailers

I chose to eliminate discount retailers from my list of 79 because Berkshire Hathaway has a large position in Wal-Mart, and it would not make sense for Berkshire to buy other competing discount retailers. There were two discount retailers included in the list that I eliminated, and they were Target, and TJX Companies.

Elimination #4: Recently Sold Company

One of the companies on my list was Kraft Foods Group (NASDAQ:KRFT), which Berkshire Hathaway owned prior to its split into two companies, however Berkshire sold its position, therefore, and I do not believe it would be a target.

Elimination #5: Non- US Companies

In a Reuters article from earlier this year Warren Buffett was quoted saying, "Though we invest abroad as well, the mother lode of opportunity resides in America." Therefore, I excluded any companies that were headquartered outside the United States. There were 19 companies from my value screen with headquarters outside the United States and they are in the table below.

TELUS CORP

(NYSE:TU)

MAGNA INTL CL A

(NYSE:MGA)

BANCO SANT-ADS

(NYSE:BSBR)

POSCO-ADR

(NYSE:PKX)

TE CONNECT-LTD

(NYSE:TEL)

FRESENIUS MED

(NYSE:FMS)

TYCO INTL LTD

(NYSE:TYC)

TENARIS SA-ADR

(NYSE:TS)

KONINKLIJKE PHL

(NYSE:PHG)

INFOSYS LTD

(NYSE:INFY)

FOMENTO ECO-ADR

(NYSE:FMX)

TRANSCDA CORP

(NYSE:TRP)

CDN IMPL BK

(NYSE:CM)

CHINA UNICOM

(NYSE:CHU)

EATON CORP PLC

(NYSE:ETN)

CANON INC ADR

(NYSE:CAJ)

ERICSSON LM ADR

(NASDAQ:ERIC)

DELPHI AUTO PLC

(NYSE:DLPH)

SHINHAN FIN-ADR

(NYSE:SHG)

List after Eliminations

After the above eliminations I made, my list is down to 43 companies, which are listed in the table below.

AETNA INC-NEW

(NYSE:AET)

KROGER CO

(NYSE:KR)

AIR PRODS & CHE

(NYSE:APD)

MACYS INC

(NYSE:M)

BAXTER INTL

(NYSE:BAX)

MARATHON PETROL

(NYSE:MPC)

BECTON DICKINSO

(NYSE:BDX)

NORTHROP GRUMMN

(NYSE:NOC)

BROADCOM CORP-A

(NASDAQ:BRCM)

NATL OILWELL VR

(NYSE:NOV)

CARDINAL HEALTH

(NYSE:CAH)

PACCAR INC

(NASDAQ:PCAR)

CBS CORP

(NYSE:CBS)

PPG INDS INC

(NYSE:PPG)

CARNIVAL CORP

(NYSE:CCL)

PPL CORP

(NYSE:PPL)

CHESAPEAKE ENGY

(NYSE:CHK)

PRAXAIR INC

(NYSE:PX)

CUMMINS INC

(NYSE:CMI)

REYNOLDS AMER

(NYSE:RAI)

CENTURYLINK INC

(NYSE:CTL)

RAYTHEON CO

(NYSE:RTN)

DELTA AIR LINES

(NYSE:DAL)

SANDISK CORP

(NASDAQ:SNDK)

DEERE & CO

(NYSE:DE)

STRYKER CORP

(NYSE:SYK)

DEVON ENERGY

(NYSE:DVN)

SYSCO CORP

(NYSE:SYY)

GENL DYNAMICS

(NYSE:GD)

THOMSON REUTERS

(NYSE:TRI)

GENL MILLS

(NYSE:GIS)

V F CORP

(NYSE:VFC)

CORNING INC

(NYSE:GLW)

VIACOM INC-B

(NASDAQ:VIAB)

HESS CORP

(NYSE:HES)

VALERO ENERGY

(NYSE:VLO)

INTL PAPER

(NYSE:IP)

WESTERN DIGITAL

(NASDAQ:WDC)

ILL TOOL WORKS

(NYSE:ITW)

WELLPOINT INC

(NYSE:WLP)

JOHNSON CONTROL

(NYSE:JCI)

WASTE MGMT-NEW

(NYSE:WM)

KELLOGG CO

(NYSE:K)

Step #3: Book Value Growth

It is widely known that Warren Buffett uses book value growth as a measure of performance; therefore, any potential acquisition Berkshire Hathaway would make I would think to be accretive to the book value growth of Berkshire would have to greater than that of Berkshire. I looked at the book value for each of the above companies for the last ten years to calculate the book value growth for each. [Data from Morningstar] After looking at the book value growth for the companies above, and only choosing the ones that had book value growth that was greater than the book value growth of Berkshire Hathaway.

BV Growth

Berkshire Hathaway

BRK.B

39.1

41.58

49.2

54.61

49.37

86.96

67.1

70.21

80.32

94.93

10.36%

WESTERN DIGITAL

WDC

2.34

3.29

5.24

7.84

12.18

14.32

20.55

23.61

31.17

33.3

34.32%

NATL OILWELL VR

NOV

7.39

12.03

14.31

18.68

30.26

33.73

37.39

41.56

47.41

51.89

24.18%

CORNING INC

GLW

2.68

3.6

4.63

6.03

8.65

10.01

12.41

13.91

14.62

15.13

21.21%

CUMMINS INC

CMI

7.69

9.95

13.35

16.86

16.04

18.74

23.61

28.6

34.79

40.23

20.18%

MARATHON PETROL

MPC

-

-

-

-

-

-

-

26.62

35.12

36.77

17.53%

HESS CORP

HES

20.29

22.46

25.86

30.49

37.74

40.9

49.42

54.46

61.75

75.99

15.80%

STRYKER CORP

SYK

6.85

8.15

10.29

13.1

13.39

16.57

18.34

20.17

22.62

23.93

14.91%

BROADCOM CORP-A

BRCM

4.77

5.99

7.64

7.51

7.38

7.85

10.82

11.97

13.78

14.41

13.07%

SANDISK CORP

SNDK

11.91

13.71

24.24

22.12

15.22

17.13

24.66

29.4

30.09

30.93

11.19%

BAXTER INTL

BAX

6.01

6.89

9.58

10.9

10.04

11.97

11.31

11.74

12.7

15.58

11.16%

AETNA INC-NEW

AET

15.38

17.81

17.52

20.06

17.75

22.06

25.73

28.94

31.76

38.72

10.80%

VALERO ENERGY

VLO

14.79

24.22

30.77

33.62

30.27

26.08

26.43

29.49

32.66

36.34

10.50%

V F CORP

VFC

5.66

6.31

7.3

8.16

8.08

8.65

8.9

10.23

11.63

13.8

10.41%

GENL DYNAMICS

GD

17.95

20.23

24.29

29.25

25.79

32.21

35.79

37.12

31.96

41.03

9.62%

SYSCO CORP

SYY

4.01

4.36

4.93

5.37

5.68

5.85

6.47

8.06

8

8.86

9.21%

KROGER CO

KR

4.83

6.05

6.95

7.27

7.98

7.56

8.54

7.1

8.11

10.42

8.92%

BECTON DICKINSO

BDX

12.12

13.14

15.68

17.92

20.26

21.69

23.65

22.48

21

26

8.85%

DEERE & CO

DE

12.88

14.2

16.2

16.13

15.3

11.39

14.9

16.75

17.64

27.46

8.78%

PRAXAIR INC

PX

11.11

12.11

14.1

16.41

13

17.34

19.05

18.38

20.47

22.47

8.14%

JOHNSON CONTROL

JCI

9.12

10.49

12.54

15.01

15.87

13.61

14.95

16.23

17.04

17.99

7.84%

CHESAPEAKE ENGY

CHK

9.9

13.34

21.27

23.57

27.48

16.93

18.65

20.57

18.83

19.47

7.80%

PACCAR INC

PCAR

9.63

10.24

11.96

9.07

13.36

14.02

14.68

15.03

16.54

18.73

7.67%

DEVON ENERGY

DVN

28.13

33.45

39.46

49.45

38.64

34.86

44.62

53.08

52.41

50.49

6.72%

KELLOGG CO

K

5.47

5.51

5.19

6.49

3.79

5.96

5.86

5.03

6.65

9.77

6.66%

PPL CORP

PPL

11.21

11.62

13.42

14.93

13.55

14.57

16.98

18.72

18.01

19.78

6.51%

ILL TOOL WORKS

ITW

12.9

13.45

15.91

17.19

14.99

17.58

18.83

20.71

23.21

22.55

6.40%

PPG INDS INC

PPG

20.78

18.28

19.85

25.35

20.3

22.65

22.68

21.39

26.46

35.57

6.15%

AIR PRODS & CHE

APD

19.55

20.5

22.35

25.52

23.75

22.68

25.94

27.57

30.48

33.35

6.11%

CARNIVAL CORP

CCL

18.64

19.87

21.8

23.85

24.33

28

29.15

30.67

30.84

31.64

6.06%

RAYTHEON CO

RTN

23.29

23.97

24.97

29.41

21.95

26

27.17

24.13

24.47

35.03

4.64%

GENL MILLS

GIS

-

7.68

8.11

8.05

9.28

7.88

8.23

9.87

9.9

10.41

3.88%

THOMSON REUTERS

TRI

15.07

15.35

16.37

21.25

22.26

23.22

23.22

19.82

20.6

19.42

2.86%

WELLPOINT INC

WLP

70.1

40.56

39.64

42.42

42.1

55.28

63.04

68.62

78.11

84.44

2.09%

WASTE MGMT-NEW

WM

10.44

11.09

11.63

11.39

12.03

12.93

13.18

13.18

13.69

12.29

1.83%

CENTURYLINK INC

CTL

25.28

27.55

27.73

30.82

31.59

31.62

31.62

33.67

30.83

29.46

1.71%

INTL PAPER

IP

16.96

17.03

17.5

20.26

9.75

13.91

15.57

15.21

14.33

18.58

1.02%

NORTHROP GRUMMN

NOC

47.04

47.36

48.1

52.27

36.46

41.34

46.59

40.71

39.77

48.81

0.41%

CARDINAL HEALTH

CAH

18.53

20.07

20.33

20.24

21.71

24.4

14.8

16.66

18.2

17.63

-0.55%

MACYS INC

M

18.22

24.83

23.33

22.88

11.05

11.06

13.06

14.32

15.31

16.96

-0.79%

REYNOLDS AMER

RAI

10.46

11.11

11.91

12.65

10.7

11.15

11.17

10.85

9.51

9.6

-0.95%

CBS CORP

CBS

24.65

14.07

30.1

31.34

12.65

13.37

14.44

15.22

16.21

16.72

-4.22%

VIACOM INC-B

VIAB

-

-

-

-

-

-

-

15.48

14.69

11.56

-13.58%

DELTA AIR LINES

DAL

-

-

-

37.58

1.25

0.31

1.07

-1.65

-2.5

13.67

-15.51%

Semi Final List

Based on the results of my book value calculations, 13 companies had book value growth that was greater than that of Berkshire Hathaway, and are listed in the table below.

WESTERN DIGITAL

WDC

34.32%

NATL OILWELL VR

NOV

24.18%

CORNING INC

GLW

21.21%

CUMMINS INC

CMI

20.18%

MARATHON PETROL

MPC

17.53%

HESS CORP

HES

15.80%

STRYKER CORP

SYK

14.91%

BROADCOM CORP-A

BRCM

13.07%

SANDISK CORP

SNDK

11.19%

BAXTER INTL

BAX

11.16%

AETNA INC-NEW

AET

10.80%

VALERO ENERGY

VLO

10.50%

V F CORP

VFC

10.41%

Step #4: Undervalued VS Industry & Undervalued VS Historical Valuation

For my final step I took the above 13 companies and went to the Morningstar Valuation page for each to see which of the above stocks were trading at a discount to their industry, and were trading below their historical PE. After go through the process only one company was undervalued compared to its industry, and undervalued based on its historical valuation and that company was Hess Corp.

Price/Earnings

Industry Avg

S&P 500

AET 5Y Avg*

Under. Vs Industry

Under. Vs History

WESTERN DIGITAL

WDC

21.6

19.4

18.3

10.6

No

No

NATL OILWELL VR

NOV

14.6

27

18.3

14

Yes

No

CORNING INC

GLW

17.9

23.7

18.3

11.1

Yes

No

CUMMINS INC

CMI

18.7

21.1

18.3

16.3

Yes

No

MARATHON PETROL

MPC

15.2

14.6

18.3

-

No

X

HESS CORP

HES

11

31.1

18.3

13.2

Yes

Yes

STRYKER CORP

SYK

41.7

32.1

18.3

18.8

No

No

BROADCOM CORP-A

BRCM

55.2

24.2

18.3

71.4

No

Yes

SANDISK CORP

SNDK

21.6

19.4

18.3

15.9

N0

No

BAXTER INTL

BAX

20

34

18.3

17

Yes

No

AETNA INC-NEW

AET

14.5

16.9

18.3

9.8

Yes

No

VALERO ENERGY

VLO

9.4

14.6

18.3

2.7

Yes

No

V F CORP

VFC

22.9

28.8

18.3

17.8

Yes

No

Closing Thoughts

In closing, I believe that based on my process, the next large acquisition Berkshire Hathaway, based on my "Buffett Value Screen" Hess Corp could end up being a target for Berkshire Hathaway. Berkshire Hathaway has been targeting utilities and energy recently including buying NV Energy (NYSE:NVE), and in late 2013 built a substantial position in Exxon Mobil (NYSE:XOM). I believe Hess is worth a deeper look for three reasons: The first reason is that the Hess passed my screen of companies based on the largest holdings or Berkshire Hathaway. The second reason is Hess has been able to grow its book value at a faster rate than Berkshire Hathaway. Third and finally, Hess is undervalued compared to its industry and undervalued compared to its historical valuation.

Disclaimer

Source: Berkshire Value Screen, Only 1 Survivor