Berkshire's (BRK.B) accounting statements usually reflect write downs on valuations on stocks that decline in price. However, value impairment was not recorded for five companies. "Berkshire's management is very confident that in time each security's market price will grow to at least the intrinsic value that existed at the dates of acquisition," stated Berkshire's Chief Financial Officer Marc Hamburg.
We agree with Buffett that these names are undervalued:
Wells Fargo (WFC): Buffett has steadily accumulated shares of Wells and now holds nearly $10.7 billion worth, or 6.5% of the company. We are not surprised by his purchases. Wells Fargo has kept it to basics: customer relationships. By focusing on the micro, it has been able to manage credit risk that translate to its more macro indicators: A fair value call at $39/share (a nearly $8/share premium to current trading price), forward P/E of 8.7, 2011 EPS target at a solid 27% and PEG of 1.54. Speaking of dividends, WFC currently yields .63%, but given the previously mentioned stats, it seems to indicate that upward mobility might play into that figure. We think shares are worth $34 per share on a discounted cash flow basis. We use a 10% discount rate for the company. As we noted last week, value investors David Tepper and John Paulson are also shareholders.
Kraft (KFT): Berkshire's loss in Kraft will not be written down. This loss is a relatively small 2-4% based off the latest closing price for Kraft stock. Buffett showed disappointment in Kraft management when it purchased Cadbury, but we think the acquisition will be a positive in the long run despite its price tag. KFT has a P/E of 22.0, P/B of 1.5, and P/S of 1.1. The respective industry averages are 17.7, 3.9, and 1.4. Between 2001 and 2007, the price to sales multiples were 1.6, 2.3, 1.8, 1.9, 1.4, 1.7, and 1.4, respectively. In 2010, EPS grew by 17.73% to $2.39, after rising by 5.73% in 2009. The company expects 11% to 13% growth in EPS in 2011. The Q1 2011 earnings statements are revealed on May 2. This is a solid consumer name that pays 3.8% dividend yield. We value shares at $33 per share using a 10% discount rate.
U.S. Bancorp (USB): Berkshire holds a nearly 70 million share stake, or 3.6% of the company. UBS, RBCCM and Oppenheimer have all rated the company as either outperform or buy in the past quarter.Currently, it trades at $26.9/share, which is at a moderate discount to the top-end targets set by the aforementioned institutions that set that target at $32, $30 and $31 respectively. A .76% dividend doesn’t necessarily match up with its solid figures and dependable, fee-based revenues. We expect larger dividends to start flowing to Berkshire in the near future.
Sanofi-Aventis (SNY): Berkshire maintains a $130 million stake in the giant drug-maker. Some of these are held as depository receipts, and shares held on non-US exchanges are found in Berkshire's annual reports. Buffett began accumulating the Sanofi stake in the second quarter of 2006. His initial purchase prices were between $44.52 and $47.51, with an estimated average price of $46.1. His holdings amounted to 488,500 shares. Berkshire added significantly to the stake in quarter 1, 2007, increasing it by 70%. Now trading below $35 per share, Buffett has agreed to write down the stake's value. Sanofi has reported a few disappointing quarters lately and takeover rumors of Dendreon (DNDN) and Mannkind (MNKD) are ever-present. We value shares at $48 apiece on a discounted cash flow basis. We use a 9.5% discount rate.
Swiss Re (OTC:SWCEY): This reinsurance giant has performed well over the last few years but recently took a hit due to its exposure in Japan. Its claims in the wake of the March 11 earthquake will likely total $1.2 billion. In January, 2008, Berkshire took a 3% stake in Swiss Re and a 20% stake in the affiliated property and casualty business. At that time, Swiss Re wrote down some 6 billion in francs for "toxic" assets. Berkshire also has a 1.3 billion life insurance asset transfer in place from January 2010. The 3%, 3 billion franc stake in Swiss Re was repaid in November, 2010 once Swiss Re's capital position improved. We think the company is mildly oversold following the heightened uncertainty in claims outlays stemming from the crisis in Japan.