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A Fundamental Look at Berkshire Hathaway's Latest Moves

According to an article in yesterday's Barron's Stock To Watch Today column, Berkshire Hathaway (NYSE:BRK.A) made seven changes to its portfolio during the fourth quarter of last year. Although the article wasn't totally clear, it alleged that Warren Buffett's two new successors, Todd Combs and Ted Weschler, may have played a part in these decisions. The article also indicated that Warren Buffett is still in charge, and this seems like a reasonable assumption considering that most of the selections appeared to be classic Buffett-esque decisions. However, the Liberty Media (NASDAQ:LMCA) selection does not seem very Buffett-like, at least based on its fundamentals.

The following table summarizes the fundamentals of the seven stocks that Berkshire Hathaway took action on. Davita (NYSE:DVA) and Liberty Media were purchased. Wells Fargo (NYSE:WFC), DirecTV (NASDAQ:DTV), CVS Caremark (NYSE:CVS) and Visa (NYSE:V) were added to, and Berkshire cut its stake in Johnson & Johnson (NYSE:JNJ) from 37 million shares to 29 million. We're going to present each of these companies based on their earnings and price relationship through the lens of F.A.S.T. Graphs™. We will leave it up to the reader to judge whether or not Berkshire is continuing to invest according to its reputation.

A Closer Look at the Past and the Future Potential

Since a picture is worth 1,000 words, we'll take a closer look at the past performance and future potential of each of our seven examples through the lens of our graphs.

Earnings Determine Market Price

The following earnings and price correlated historical graphs clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings. The historical normal PE ratio line (dark blue line with*) depicts a PE ratio that the market has historically applied.

The orange True Worth line and the blue normal PE ratio line provide perspectives on valuation. The orange line reflects the fair value of each company's earnings relative to its growth rate achievement, and the blue line reflects how the market has traditionally valued the company's stock relative to its fair value. The blue line represents a trimmed historical normal PE ratio (the highest and lowest PEs are trimmed). These lines should be viewed as barometers or aids for ascertaining sound buy, sell or hold decisions. Rather than seen as absolutes, they should be seen as guides to better thinking.

About DirecTV (from its website):

DIRECTV is one of the world's leading providers of digital television entertainment services delivering a premium video experience through state-of-the-art technology, unmatched programming and industry leading customer service to more than 30.8 million customers in the U.S. and Latin America. In the U.S., DIRECTV offers its 19.7 million customers access to more than 170 HD channels and Dolby-Digital® 5.1 theater-quality sound, access to exclusive sports programming such as NFL SUNDAY TICKET™, Emmy- award winning technology and higher customer satisfaction than the leading cable companies for 11 years running. DIRECTV Latin America, through its subsidiaries and affiliated companies in Brazil, Mexico, Argentina, Venezuela, Colombia, and other Latin American countries, leads the pay-TV category in technology, programming and service, delivering an unrivaled digital television experience to more than 11.1 million customers. DIRECTV sports and entertainment properties include three Regional Sports Networks (Northwest, Rocky Mountain and Pittsburgh) as well as a 60 percent interest in Game Show Network.

The consensus of 16 leading analysts reporting to Capital IQ forecast DirecTV's long-term earnings growth at 20.6%. DirecTV has high long-term debt at 100% of capital. DirecTV is currently trading at a P/E of 13.1, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 28.8. If the earnings materialize as forecast, DirecTV's True Worth valuation would be $230.45 at the end of 2017, which would be a 31.6% annual rate of return from the current price.

About Visa Inc. (from its website):

Visa is a global payments technology company that connects consumers, businesses, financial institutions and governments in more than 200 countries and territories to fast, secure and reliable digital currency. Underpinning digital currency is one of the world's most advanced processing networks-VisaNet-that is capable of handling more than 20,000 transaction messages a second, with fraud protection for consumers and guaranteed payment for merchants. Visa is not a bank and does not issue cards, extend credit or set rates and fees for consumers. Visa's innovations, however, enable its financial institution customers to offer consumers more choices: pay now with debit, ahead of time with prepaid or later with credit products.

The consensus of 33 leading analysts reporting to Capital IQ forecast Visa Inc.'s long-term earnings growth at 20%. Visa Inc. has low long-term debt at 0% of capital. Visa Inc. is currently trading at a P/E of 21.1, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 24. If the earnings materialize as forecast, Visa Inc.'s True Worth™ valuation would be $289.89 at the end of 2017, which would be a 18.4% annual rate of return from the current price.

About Wells Fargo & Co. (from its website):

Wells Fargo & Company is a nationwide, diversified, community-based financial services company with $1.3 trillion in assets. Founded in 1852 and headquartered in San Francisco, Wells Fargo provides banking, insurance, investments, mortgage, and consumer and commercial finance through more than 9,000 stores, 12,000 ATMs, the Internet (wellsfargo.com), and other distribution channels across North America and internationally. With more than 272,000 team members, Wells Fargo serves one in three households in America. Wells Fargo & Company was ranked No. 23 on Fortune's 2011 rankings of America's largest corporations. Wells Fargo's vision is to satisfy all our customers' financial needs and help them succeed financially.

The consensus of 28 leading analysts reporting to Capital IQ forecast Wells Fargo & Co.'s long-term earnings growth at 9%. Wells Fargo is a financial company, and we do not report debt on financial companies. Wells Fargo & Co. is currently trading at a P/E of 10, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Wells Fargo & Co.'s True Worth valuation would be $75.27 at the end of 2017, which would be a 17.6% annual rate of return from the current price.

About CVS Caremark Corp. (from its website):

CVS Caremark is the largest pharmacy health care provider in the United States with integrated offerings across the entire spectrum of pharmacy care. We are uniquely positioned to engage plan members in behaviors that improve their health and to lower overall health care costs for health plans, plan sponsors and their members. CVS Caremark is a market leader in mail order pharmacy, retail pharmacy, specialty pharmacy, and retail clinics, and is a leading provider of Medicare Part D Prescription Drug Plans. As one of the country's largest pharmacy benefits managers (PBMs), we provide access to a network of approximately 65,000 pharmacies, including more than 7,300 CVS/pharmacy® stores that provide unparalleled service and capabilities. Our clinical offerings include our signature Pharmacy Advisor™ program as well as innovative generic step therapy and genetic benefit management programs that promote more cost effective and healthier behaviors and improve health care outcomes.

The consensus of 21 leading analysts reporting to Capital IQ forecast CVS Caremark Corp.'s long-term earnings growth at 13%. CVS Caremark Corp. has low long-term debt at 19% of capital. CVS Caremark Corp. is currently trading at a P/E of 16.1, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, CVS Caremark Corp.'s True Worth valuation would be $90.45 at the end of 2017, which would be a 14.4% annual rate of return from the current price.

About Davita Inc. (from its website):

DaVita Inc., a Fortune 500® company, is a leading provider of kidney care in the United States, delivering dialysis services to patients with chronic kidney failure and end stage renal disease. DaVita strives to improve patients' quality of life by innovating clinical care, and by offering integrated treatment plans, personalized care teams and convenient health-management services. As of Sept..30, 2011, DaVita operated or provided administrative services at 1,777 dialysis facilities, serving approximately 138,000 patients. DaVita supports numerous programs dedicated to creating positive, sustainable change in communities around the world. The company's leadership development initiatives and social responsibility efforts have been recognized by Fortune, Modern Healthcare, Newsweek and WorldBlu.

The consensus of 15 leading analysts reporting to Capital IQ forecast Davita Inc.'s long-term earnings growth at 12%. Davita Inc. has high long-term debt at 64% of capital. Davita Inc. is currently trading at a P/E of 16.3, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Davita Inc.'s True Worth valuation would be $164.69 at the end of 2017, which would be a 12% annual rate of return from the current price.

About Johnson & Johnson (from its website):

Caring for the world, one person at a time... inspires and unites the people of Johnson & Johnson. We embrace research and science - bringing innovative ideas, products and services to advance the health and well-being of people. Our approximately 116,000 employees at more than 250 Johnson & Johnson companies work with partners in healthcare to touch the lives of over a billion people every day, throughout the world.

The consensus of 22 leading analysts reporting to Capital IQ forecast Johnson & Johnson's long-term earnings growth at 6.5%. Johnson & Johnson has low long-term debt at 14% of capital. Johnson & Johnson is currently trading at a P/E of 12.9, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Johnson & Johnson's True Worth valuation would be $105.27 at the end of 2017, which would be a 11.4% annual rate of return from the current price.

About Liberty Media Capital Group (from its website):

Liberty Media (Nasdaq: LMCA, LMCB) owns interests in a broad range of media, communications and entertainment businesses, including its subsidiaries Atlanta National League Baseball Club, Inc. and TruePosition, Inc., its interests in Starz, LLC, SiriusXM, Live Nation Entertainment and Barnes & Noble, and minority equity investments in Time Warner Inc. and Viacom.

We could find no analysts estimates on Liberty Media Capital Group . Therefore, in this case, we don't believe the Estimated Earnings and Return Calculator provides any relevant information based on analysts estimates. However, we did override the Estimated Earnings and Return Calculator based on the company's five-year historical growth rate of 16.2%. As the following Estimated Earnings and Return Calculator based on our override depicts, the future earnings potential of this company still does not appear to justify current valuation.

Summary and Conclusions

After examining each of these Berkshire Hathaway decisions based on fundamental values, six of the seven appear to be classic value/growth investing decisions. It is alleged that Warren Buffett was once asked if he was a value investor or growth investor. To paraphrase his response, his answer went something like this - I am neither and both. He allegedly went on to say that he would never invest in anything that he didn't believe would grow, and that he would never pay more for it than it was worth. Six of these companies, to include Johnson & Johnson, the one that Berkshire Hathaway reduced, all appear to be strong growth stories currently trading at sound valuations.

The seventh selection, Liberty Media, seems out of sorts for a classic Warren Buffett purchase. Its PE ratio seems very high, its earnings record very inconsistent, and we could find no analysts offering up any earnings forecasts. The one thing that this stock does seem to have going for it, is price momentum. The stock has been on a tear over the last three calendar years, it has risen from a low of $4.35 per share to its current $85.59 a share as of yesterday's close. That is incredible performance for sure, but does not seem to be a classic Warren Buffett value selection.

We hope that the opportunity to view these Berkshire Hathaway selections from the perspective of fundamentals and price were illuminating. Warren Buffett stands as one of the great fundamental investors of all time. Therefore, we feel that there is a lot that can be learned from studying his decisions based on evaluating each company's fundamental values.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Source: Buffett's Latest Portfolio Changes