By Roger Choudhury
After going through the latest filings, we screened for companies dumped by the Oracle of Omaha," Warren Buffett. Here’s what we think of his moves.
Bank of America (BAC): In Q4 2010, Buffett sold the rest of his stake of five million shares at an average price of $12.24.
In 2010, the company made a GAAP EPS of -$0.37, which is worse than 2009’s - $0.29. In 2008, that figure was $0.54. Revenues declined by 7.88% to $110.2 billion, after jumping by 64.39% in 2009. The EBT margin improved to 6.61% from 5.98%.
For 2011, the Street expects non-GAAP EPS to be between $1.05 and $1.75. In 2010, non-GAAP EPS was $0.86. Q1 2011 results are released on April 15, and the Street estimates non-GAAP EPS would be between $0.15 and $0.44 with a consensus of $0.26. In comparison, Q1 2010 posted a non-GAAP EPS of $0.28. For Q1 2011, analysts estimate BAC will generate revenues of $26.0B, an increase of 30.84% over the prior year first quarter results. BAC shares trade with a price to sales multiple of 1.2. In its heyday not too long ago, that multiple was in the low 3’s. Investors are waiting to see if the worst is over for Bank of America. There is too much uncertainty swirling about in this mortgage mess due to regulatory uncertainty. However, BofA's capital ratios have continued to increase as the company has shed noncore assets and riskier loans. If you are a long-term investor, buy BAC while it is at these depressed levels. Otherwise, don’t even touch this with a forty-nine-and-a-half foot pole.
Becton Dickinson (BDX): In Q4 2010, he sold the remainder of his stake of 1,889,889 shares at an average price of $78.81.
In FY 2010 through September, the company generated revenues of $7.37 billion (+2.95%), and GAAP EPS rose by 10.02% to $5.49. The EBT margin held steady at 22.53% from 22.89% in FY 2009. Q1 2011 produced revenues of $1.84% or -1% from Q1 2010 with non-GAAP EPS of $1.36 vs. $1.30 in Q1 2010. The next earnings release is on April 28, with the consensus non-GAAP EPS estimate at $1.30, an increase of 5.07% over Q2 2010, and revenues of $1.9 billion, an increase of 3.21% over Q2 2010.
We expect revenues to grow in the low single digits, buoyed by global demand for diabetes products. Given a P/E ratio of 16.3, we believe that BDX shares ought to be trading more closer to 17 times earnings. Internal modeling places a price target of $95. This is a buy for those looking to add a biotech flavor to their portfolio.
The company is a leading global medical technology company that develops, manufactures and sells medical devices, instrument systems and reagents. It is focused on improving drug delivery, enhancing the quality and speed of diagnosing infectious diseases and cancers, and advancing research, discovery and production of new drugs and vaccines. On March 18, the company completed its acquisition of Accuri Cytometers, Inc., an Ann Arbor, MI-based company that develops and manufactures personal flow cytometers for researchers.
Comcast (CMCSA): In Q3 2010, he started shedding CMCSK shares by selling 11,626,206 shares at an average price of $17.19. He topped it off by selling 373,794 shares at an average price of $19.15 in Q4 2010. He has no shares left.
In 2010, revenues grew by 6.10% to $37.93 billion, and GAAP EPS rose by 2.38% to $1.29. The EBT margin also improved to 16.09% from 14.28%. The next earnings release is on May 3. For Q1 2011, analysts estimate Comcast will earn $0.35 per share, an increase of 13.02% over Q1 2010, and revenues of $11.7 billion, an increase of 26.77% over Q1 2010. With a net margin of 10.3%, Comcast is not only profitable but is more profitable than the Media industry median. The company also has a debt to equity ratio of 0.67.
We believe that Comcast will continue to increase revenues at a modest pace, and that it will turn around NBC. We place a price target of $30, and so at these price levels, you should buy. CMCSA currently yields 1.8%, and CMCSK currently yields 1.9%.
Fiserv (FISV): Starting in Q3 2010, he started selling his entire stake with 489,200 shares at an average price of $50.24, and subsequently with 3,910,800 shares at an average price of $56.40.
In 2010, revenues crept up by 1.37% to $4.13 billion, and GAAP EPS rose by 6.86% to $3.27. The EBT margin also improved to 19.19% from 18.00%. With a net margin of 12.0%, FISV is not only profitable but is more profitable than the IT Services industry median. The next earnings release is on April 27. For Q1 2011, analysts estimate FISV will earn $1.04 per share, an increase of 29.73% over Q1 2010, and generate revenues of $1.0 billion, an increase of 1.47% over Q1 2010.
We remain confident that that Fiserv will grow revenue in the mid single digits, and that transaction volumes will increase as the global economy picks up. We place a price target of $68.50, which gives FISV shares room to run up 10%. More risk averse investors should consider buying this.
Fiserv is the leading global provider of information management and electronic commerce systems for the financial services industry, driving innovation that transforms experiences for financial institutions and their customers. Fiserv is ranked # 1 on the FinTech 100 survey of top technology partners to the financial services industry.
Iron Mountain (IRM): In Q3 2010, Buffett sold his entire holding of 8 million shares at an average price of $22.33.
In 2010, revenues inched up by 3.78% to $3.12 billion, but GAAP EPS fell into negative territory to -$0.27. However, the profit margin improved to 59.90% from 57.82%. With a net margin of -1.6%, IRM is less profitable than the Commercial Services & Supplies industry median. The next earnings release is on April 25. For Q1 2011, analysts estimate IRM will earn $0.27 per share, an increase of 116.43% over the prior year first quarter results. For the first quarter 2011, analysts estimate IRM will generate revenues of $790.3 million, an increase of 1.77% over the prior year first quarter results. IRM shares trade well above our fair value estimates, and it should be near trading no more than $30 per share. Also, the company will continue to be hurt by the lackadaisical global economy.
Iron Mountain Incorporated provides information management services that help organizations lower the costs, risks and inefficiencies of managing their physical and digital data.. Founded in 1951, Iron Mountain manages billions of information assets, including business records, electronic files, medical data, emails and more for organizations around the world.
CarMax (KMX): In Q4 2010, Buffett unloaded the remainder of his stake in the company by selling 7,725,900 shares at an average price of $21.73.
For the FY ended 28 February 2011, CarMax’s revenues increased 20% to $8.98 billion, and GAAP EPS rose by 32.5% to $1.67. The next earnings release is on June 22. For Q1 2012, analysts estimate that the company will earn $0.48 per share, an increase of 8.08% over Q1 2011, and generate revenues of $2.5 billion, an increase of 11.06% over Q1 2011. The company also has a debt to equity ratio of 1.79.
In 2010, U.S. light vehicle sales volume rebounded 11%, to nearly 11.6 million. For the automotive retailers sub-industry, S&P believes that the bottom has been reached in the current sales cycle. We agree, and place a price target of $37, which offers modest capital appreciation. Buy KMX. CarMax currently operates 104 used car superstores in 50 markets.
Lowe’s (LOW): In Q4 2010, Buffett sold 6.5 million shares at an average price of $23.08. He owns zero shares, currently.
In FY 2011 through January, revenues grew by 3.38% to $48.81 billion, after dropping by 2.09% in FY 2010 and decreasing by 0.11% in FY 2009. The EBT margin improved to 6.61% from 5.98%. GAAP EPS increased by 17.36% to $1.42, after dropping by 18.79% in FY 2009. In FY 2012, analysts expect between non-GAAP EPS to be between $1.65 and $1.79, or increases between 14.5% to 24.3% from the non-GAAP EPS of $1.44 posted in FY 2010. Revenues are also expected to be between $50.3 billion and $53.1 billion, or an increase between 3.0% and 8.7%. The next earnings release is on May 16, when analysts forecast between $0.34 and $0.40, or increases between 8.8% and 17.6% from the non-GAAP EPS of $0.34 for Q1 2010.
LOW shares trade with a price to sales multiple of 0.8. From 2001 to 2006, the multiples were 1.7, 1.2, 1.5, 1.3, 1.3, and 1.0, respectively. It is within the realm of reasonable possibilities for Lowe’s to grow revenues and EPS in the high single digits, so we would say that these shares are undervalued, and should be near 1.0 times sales per share. Keep an eye out for Q1 2011 earnings. The company also has a debt to equity ratio of 0.36. For our full valuation of Lowe’s click here.
Moody’s (MCO): In Q3 2010, Buffett sold 1,910,120 shares at an average price of $22.96, and in Q4 2010, he sold 458,506 shares at an average price of $26.89. He currently holds 28,415,250 shares at an average price of $26.89.
In 2010, the company grew revenues by 13.06% to $2.03 billion, and GAAP EPS surged by 27.22% to $2.15. Profit margins also remain high at 70.24%. The next earnings release is on April 27. For Q1 2011, analysts estimate MCO will earn $0.54 per share, an increase of 12.95% over Q1 2010, and generate revenues of $519.9 million, an increase of 9.08% over Q1 2010.
With the expected issuance of more debt and rising demand for analytical and consulting services, we expect Moody’s revenues to grow handsomely as it did in 2010. However, MCO shares trade above our fair value estimates, and we believe a P/E of 16.4 is highly unjustified for MCO. Sell MCO.
Nike (NKE): In Q3 2010, he initiated the sale of 3,998,071 shares at an average price of $73.01. He followed up in Q4 2010 by selling 3,642,929 shares at an average price of $84.35. He owns nada now.
For the nine months ended 28 February 2011, NIKE revenues increased 8% to $15.1 billion, and non-GAAP EPS grew by 12.4% to $3.16. With a net margin of 10.0%, NKE is able to keep a higher percentage of its revenues than most other companies in the Textiles, Apparel & Luxury Goods industry. The next earnings release is on June 23. For Q4 2011, analysts estimate the company will earn $1.16 per share, an increase of 9.58% over Q4 2010, and they also expect revenues of $5.5 billion, an increase of 8.62% over Q4 2010.
We expect healthy sales growth driven by international, retail, and apparel segments. Longer term, we respect Nike’s global presence, and expect steady revenue and earnings growth. After all, analysts expect 2012 non-GAAP EPS to grow 10.8% to $4.80. NKE shares trade below our fair value estimate, and we expect it to reach $105 by the end of 2012. This is a buy for long-term investors.
Nalco (NLC): In Q3 2010, Buffett sold 3,007,700 shares at an average price of $23.93, and in Q4 2010, he sold the rest of stake by selling 6,142,300 shares at an average price of $29.27.
In 2010, revenues jumped by 13.44% to $4.25 billion, and GAAP EPS shot up by 220.45% to $1.41. The EBT margin also improved to 7.18% from 3.62%. The next earnings release is on April 26. For Q1 2011, analysts estimate NLC will earn $0.31 per share, an increase of 72.29% over Q1 2010, and generate revenues of $1.0 billion, an increase of 7.76% over Q1 2010.
Despite projected long-term demand growth from established markets, we are currently wary about the company’s exposure to rising raw material and manufacturing costs. NLC shares do trade below our fair value estimates, but we are not bullish on this. You can earn better returns in more other growth industries.
Nalco is the world’s largest sustainability services company focused on industrial water, energy and air applications; delivering significant environmental, social and economic performance benefits to our customers. The company helps its customers reduce energy, water and other natural resource consumption, enhance air quality, minimize environmental releases and improve productivity and end products while boosting the bottom line.
NRG Energy (NRG): Buffett sold all of his stake in this company by selling 6 million shares at an average price of $21.84 in Q3 2010.
In 2010, revenues shrunk by 1.15% to $8.84 billion, and GAAP EPS collapsed by 46.51% to $1.84. The profit margin also worsened to 31.37% from 40.54%. The next earnings release is on May 5. For the first quarter 2011, analysts estimate NRG will earn $0.15 per share, a decrease of 31.84% over the prior year first quarter results. For the first quarter 2011, analysts estimate NRG will generate revenues of $2.1 billion, a decrease of 6.84% over the prior year first quarter results. The company also has a debt to equity ratio of 1.25.
We estimate a low single digit decline in revenues for 2011 due to continued pressure on power prices. Also, the continued development of the Marcellus shale will keep downward pressure on natural gas prices, which in turn hurts peak power prices. For good reason, NRG shares trade well above our fair value estimates. This is a loser, folks. Buy solar or oil company stocks, instead.
NRG Energy is Fortune 500 and S&P 500 Index company that owns and operates one of the country’s largest and most diverse power generation portfolios. Headquartered in Princeton, NJ, the company’s power plants provide 25,000 MW of generation capacity, which is enough to supply nearly 20 million homes. NRG’s retail businesses, Reliant Energy and Green Mountain Energy Company, combined serve more than 1.8 million residential, business, commercial and industrial customers. With investments in solar, wind and nuclear power, as well as electric vehicle infrastructure, NRG is working to help America transition to a clean energy economy.
Republic Services (RSG): In Q3 2010, Buffett dumped his entire share in the company by selling 10,827,700 shares at an average price of $30.72.
In 2010, revenues dropped by 1.13% to $8.10 billion, but GAAP EPS grew by 1.54% to $1.32. The profit margin also improved to 41.22% from 40.92%. The next earnings release is on April 28. For the first quarter 2011, analysts estimate RSG will earn $0.41 per share, an increase of 143.06% over the prior year first quarter results. In terms of revenues, analysts estimate $2.0 billion, an increase of 1.33% over Q1 2010.
The company remains vulnerable to the anemic housing market, stagnant economic growth, and higher fuel and commodity costs. RSG shares also trade below our fair value estimates. There are better opportunities out there. Sell RSG.
Republic Services is a leading provider of services in the domestic, non-hazardous solid waste industry. The company provides non-hazardous solid waste collection services for commercial, industrial, municipal, and residential customers through 376 collection companies in 40 states and Puerto Rico. It also owns or operates 223 transfer stations, 192 solid waste landfills and 78 recycling facilities. The company serves millions of residential customers under terms of contracts with more than 3,000 municipalities for waste collection and residential services. It also serves some commercial customers throughout its expansive service area.