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By Roger Choudhury

Investment Underground screened for companies that Warren Buffett would buy for Berkshire Hathaway (NYSE:BRK.A), (NYSE:BRK.B) and Wesco (NYSEMKT:WSC) with an eye for retaining a stake in the long-run. These companies are endowed with wide moats and sustainable competitive advantages relative to their peers. We sorted those for the highest return on invested capital, which would permit an investor's stake to create the most value in excess of the cost of capital. In a valuation analysis, we'd use a discount rate of 10% for each. Here are our findings:

Philip Morris (NYSE:PM) returned 35.29% on invested capital in 2010. The same figure in 2009 was 31.25%. The company made $67.7 billion in revenues and $7.2 billion in profits in 2010. These are respective increases of 9.1% and 14.4%. In 2010, the EBT margin was 15.25%, but in 2009 and 2008, the margins were 36.92% and 38.66%. EPS was $3.92, which implies a P/E of 16.1. The company expects EPS to rise by 10% to 12.5% in FY 2011.

Since the earnings release on February 10, PM shares are up 6.65%. The company has a current ratio of 1.07, and a debt to equity ratio of 3.81.

Roche (OTCQX:RHHBY) returned 19.41% on invested capital in 2010, after posting 15.83% for the same item in 2009. Revenues fell by 3.88% in 2010, after increasing 6.78% in 2009. However, profits rose by 11.33% in 2010, but fell 13.2% in 2009. Also, the EBT margin was 22.8% in 2010, which was an improvement from 20% in 2009. EPS came in at 2.53 CHF ($2.737), implying a P/E of 13.2.

Roche pays a dividend once a year in March. Investors of record on March 7 will get a payment on April 14. The Board of Directors authorized a dividend increase of 10% to 6.60 CHF per share.

Yum Brands (NYSE:YUM) showed a ROIC of 24.5% in 2010, after returning 27.56% in 2009. Revenues came in at $11.3 billion in 2010, which was an increase of 4.68%, after falling 3.93% in 2009. Profits grew by 8.12% to $1.15 billion in 2010, after increasing by 11.1% in 2009. The respective EBT margins were 14.05% and 12.88%. YUM shares trade under a P/E multiple of 21.4, given an EPS of $2.38 in 2010.

The company expects EPS growth of at least 10% in 2011. Also, it expects operating profit growth of 15% in China driven by double-digit percentage growth in units, system sales growth of at least 12%, and same-store-sales growth of at least 4%, and moderate G&A leverage. Yum! Restaurants International expects operating profit growth of 10% driven by new unit development of 3% to 4%, system sales growth of 6%, same-stores-sales-growth of at least 2% to 3%, and margin improvement and G&A leverage.

The company also raised its quarterly dividend to $0.25 per share, which is a current yield of 1.9%.

Strayer Education (NASDAQ:STRA) pulled in $637 million in revenues in 2010, which was an increase of 24.37%, after showing growth of 29.19% in 2009. Profits grew by 24.92% to $131 million. In 2009, profits grew by 30.03%. The respective EBT margins were 34.08% and 33.94%. In 2010, EPS was at a healthy $9.70, which implies a P/E of 14.2.

Based on the enrollment growth announced for the 2011 winter term and the planned investments in opening new campuses, the company estimates 1Q 2011 EPS should be in the range of $2.65 to $2.67. Also, the company announced that it will open 2 new campuses for the 2011 spring term, one of which is in a new market. The first new campus is located in Indianapolis, Indiana, a new market for Strayer University. The second new campus is located in Dallas, Texas, representing the University's third campus in that market. Including the 3 new campuses successfully opened for the 2011 winter term in Cincinnati and Dayton, Ohio and Milwaukee, Wisconsin, the Company has now opened 5 of the 8 new campuses planned for 2011.

STRA shares have a current yield of 2.9%. In 2010, the company returned 71.76% on invested capital, and in 2009, the same figure was 57.44%.

Campbell Soup (NYSE:CPB) has a current yield of 3.4%, and has paid dividends since 1902. Shares are also up 8.2%, over a 5 year period. Currently, the market cap is over $11 billion. Over the trailing 12 months, ending on January 31, 2011, the EPS is $2.34. This implies a P/E of 14.3. Campbell revised its full-year fiscal 2011 guidance and now expects net sales to be between 1% and -1%, adjusted EBIT to decline between 3% and 5% and EPS to decline between 1% and 3% from the fiscal 2010 adjusted base of $2.47.

Net sales came in at $7.6 billion with an EBT margin of 15.3%, from January 2010 to January 2011. In comparison, Sara Lee (SLE) and Heinz (NYSE:HNZ) had EBT margins of 5% and 12.6%, respectively. As of October 2010, ROIC was 20.38%, but for its peers above, the ROICs were 17.95% and 13.35% (for the most recent 12 months of operations). Campbell’s D/E is 3.5.

On February 18, Douglas R. Conant, Campbell's president and CEO, said:

The overall competitive environment remains challenging throughout the food industry, particularly in the U.S. In U.S. soup, as planned in the second quarter, we maintained strong levels of advertising and promotional support to defend our consumer base. As a result of this support, externally measured consumer takeaway volume at retail in U.S. soup grew during the quarter. However, our high levels of promotional spending in the quarter did not deliver planned sales lifts and negatively impacted margins. As we stated at the end of the first quarter, in the second half we will more heavily leverage advertising and brand building initiatives while reducing our reliance on trade promotions. We expect that improved price realization will lead to better profitability and strengthen our financial position in anticipation of higher cost inflation going forward.

Baking and snacking, our second largest segment, delivered top and bottom line growth in the quarter. This performance reflected our consistent innovation, compelling advertising and effective promotional activities.

Hershey (NYSE:HSY) delivered a ROIC of 20.42% in 2010, after returning 19.01% in 2009. Revenues also grew by 7.03% in 2010, but only showed +3.23% in 2009. Profits grew by 16.93% in 2010, after jumping 40.01% in 2009. The respective EBT margins were 14.26% and 12.67%. EPS was $2.21 in 2010, which implies a P/E of 23.9. HSY shares also have a current yield of 2.6%.

The company recently acquired a minority stake in Tri-Us LLC, which does business as Mix1, as Hershey looks to get more involved in the health and wellness community.

Kellogg (NYSE:K) not only posted ROICs of 16.39% in 2010 and 17.25% in 2009, it grew profits by 2.89% in 2010 and by 5.57% in 2009. However, revenues have fallen for two straight years (- 1.42% in 2010, and -1.93% in 2009). EPS grew by 4.43% in 2010 to $3.30, which implies a P/E of 16.4. Also, the company expects EPS to grow to $3.33 to $3.40 in 2011.

K shares have a current yield of 2.9%. The 52 week trading range is stable: $47.28 to $56.00. Moreover, the company has a current ratio of 0.92, and a debt to equity ratio of 2.27.

Polaris (NYSE:PII) designs, manufactures, and markets motorized products for recreational and utility use. Products include all-terrain vehicles, snowmobiles, Victory motorcycles, and related parts and accessories. The company sells through a network of ~1,500 independent dealers in North America, 6 subsidiaries and 43 distributors internationally. Polaris made revenues of $1.9 billion in 2010, which was an increase of 27.16%, after tumbling 19.63% in 2009. Profits jumped by 45.66% to $147 million in 2010, after slipping by 13.95% in 2009. The ROICs were 27.1% in 2010 and 26.88% in 2009. EPS was $4.28 in 2010, implying a P/E of 18.3.

According to the company, full year 2011 earnings are expected to be in the range of $4.65 to $4.85 per diluted share, which represents an increase of 9% to 13%, when compared to full year 2010 earnings. Net income for full year 2011 is expected to increase in the range of 14% to 20% over full year 2010. Sales for full year 2011 are expected to increase 8% to 11% over full year 2010 sales.

Polaris shares have a current yield of 2.2%.

Ultra Petroleum (NYSE:UPL) is a shadow pick because it is at an inflection point. The company returned 21.96% in 2010. The company made revenues of $979 million in 2010, which was an increase of 46.89%, after plummeting 38.5% in 2009. The EBT margins in 2010 and 2009 were 73.8% and -104.4%. The respective ROEs were 51.98% and -51.88%. Shares trade under a P/E of 14 with an EPS of $3.01.

The company has 4.4 Tcfe of total proved crude oil and natural gas reserves at the end of 2010. This is a 13% increase from 3.9 Tcfe as reported at the end of 2009 in leases over 110,000 acres in the Green River Basin of Wyoming and 480,000 over the Marcellus Shale in Pennsylvania.

During 2010, the company increased its inventory of natural gas drilling locations. It began the year with 7,222 undrilled locations, and participated in 363 wells. It then added 1,286 new locations, ending the year with an undrilled inventory of 8,145 locations, which is the 13% increase from 2009.

On February 8, 2011, the Company received regulatory approval for additional five acre density development from the Wyoming Oil and Gas Conservation Commission. In effect, this offers five acre density drilling on essentially all of the lands that UPL owns interests in Pinedale. Furthermore, an additional ~1,500 five acre locations are now eligible for booking to proved reserves. This equates to over 2.5 Tcfe of net reserves.

“By removing the three year limit and incorporating the recent down spacing order in Wyoming, our proved reserves would increase to approximately 8.9 Tcfe. The PV-10 value is $11.4 billion using a $6.00 per Mcf natural gas price," stated Michael D. Watford, Chairman, President and CEO.

The Green River Basin, where UPL has significant experience producing gas and selling through the Rockies Express pipeline, is a promising multi-layer zone with deeper zones likely to add significantly to existing proved reserves. UPL has well over 100 exploratory wells in the Marcellus with a third already producing gas for sale. We think a buyout would come in around $10-11 billion including debt, or above $60 per share.

Colgate-Palmolive (NYSE:CL) returned 36.03% on invested capital in 2010. The figure in 2009 was 39.32%. The company made $15.56 billion in revenues in 2010, which was an increase of 1.55%, after a flat 2009. Profits also came in at $2.2 billion, which was a decrease of 3.84% in 2010, after rising by 17.06% in 2009. The respective EBT margins were 22.04% and 23.08%. EPS was at $4.31, implying a P/E of 17.9.

Reflecting the company’s positive outlook, the Board of Directors increased the ongoing quarterly common stock cash dividend by 9%. The increase will be effective as of Q2 2011. The new rate of $0.58 per share is up from $0.53. The second quarter dividend is to be paid on May 16, 2011 to shareholders of record as of April 26, 2011. On an annual basis, the new dividend rate is $2.27 vs. $2.03 per share previously. The current yield is 3%. The company has paid uninterrupted dividends on its common stock since 1895.

However, share price is down 3.1% since the FY 2010 earnings release on January 27. Its current ratio is 1.0, and its debt to equity ratio is 1.05.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BRK.B over the next 72 hours.

Source: 10 Warren Buffett Stocks With the Highest Returns on Invested Capital