Warren Buffett is the most respected and successful investor in history and one of the richest person in the world. Buffett studied under the legendary Benjamin Graham at Columbia University. Graham had a major impact on Buffett's life and investment strategies.
Warren Buffett follows a value investing strategy that is an adaptation of both Benjamin Graham's and Phillip Fisher's approaches. His investment strategy of discipline, patience and value consistently outperforms the market and his moves are followed by thousands of investors worldwide. Buffett seeks to acquire great companies trading at a discount to their intrinsic value, and to hold them for a long time. He will only invest in businesses that he understands, and always insists on a margin of safety. Regarding the types of businesses Berkshire likes to purchase, Buffett stated, "We want businesses to be one that we can understand; with favorable long-term prospects; operated by honest and competent people; and available at a very attractive price."
I find essential to analyze which are Buffett's top holdings and check some facts about each of his picks. I like how Warren invests and I think lots of his picks are compelling for a long term equity investing, as I personally have done with Coca-Cola (KO) and IBM (IBM).
Coca-Cola: My opinion -- Buy
Warren Buffett allocates 19.7% of his portfolio in Coca-Cola.
I think that KO is taking advantage from price increases, strong volumes and a more favorable product mix. I also think that the market is very encouraged by the double-digit volume growth in India, as well as by high single-digit growth in China. Many analysts believe that shares are undervalued at 17.3x KO's 2012 forecast, compared to a five-year average annual range of 15.9-20.5. The stock also appears favorably valued based on price/sales and price/cash flow multiples.
In the most recent earnings report, KO reported that revenues rose 5.9% year/year to $11.14 billion vs. the $10.8 billion consensus; The key was that the company reported worldwide volume growth of 5% for the first quarter. Volume growth in the quarter was well-balanced around the world, with solid growth in key developed markets, including North America (+2%), Japan (+3%) and Germany (+3%) as well as strong growth in key emerging markets such as India (+20%), China (+9%) and Brazil (+4%). The market see that KO's business is very solid and it will keep growing. Management explained:
We continued to see growth in sparkling beverages, with global volume up 4% in the quarter, sparkling beverage volume growth across every geographic operating group and gains in global volume and value share. Worldwide still beverage volume grew 9% in the quarter, with growth across most beverage categories, including packaged water, ready-to-drink tea and coffee, energy drinks and sports drinks ... Q1 reported operating income increased 10%, with comparable currency neutral operating income up 5%, despite a 3% impact due to the cycling of lower commodity costs in the prior year period, as well as the effect of one less selling day in the current year quarter. After adjusting for the impact of cycling lower commodity costs in the prior year period, our comparable currency neutral operating income grew 8% in the first quarter ... In Q1, net share repurchases totaled $845 million, including accruals for stock options and treasury shares that did not settle prior to the close of the quarter. These repurchases are in line with the targeted range of $2.5 to $3.0 billion in net share repurchases for the full year.
Coca-Cola has a portfolio of globally recognized brands and that creates the Company's "moat." Coca-Cola markets four of the world's top five nonalcoholic sparkling beverage brands, including Coke, Diet Coke, Sprite and Fanta, thus boasting of a high level of consumer acceptance. The company owns 15 brands which generate more than $1 billion in revenue and significant free cash flow. Similarly, the company also commands a leading place in the juices or still beverages category, with its flagship brands such as Minute Maid, Simply and POWERade. In 2011, Coca-Cola also introduced a wide variety of brands like Coke-Zero in Uganda and Fanta Powder in India; and beverage products like Frugos Sabores Caseros juice in Latin America and Real Leaf green tea based drink in Vietnam. Moreover, the company possesses one of the largest distribution networks in the world which gives it a huge competitive advantage.
In terms of valuation, shares offer room for further appreciation. Coca-Cola's current trailing 12-month earnings multiple is 19.9x compared to the industry average of 20.5x. Over the last five years, Coca-Cola's shares have traded in the range of 13.0x to 23.5x trailing 12-month earnings. Based on 2012 average analyst earnings estimate of $4.1, the stock is trading at 18.9x compared to the industry average of 20.9x. I think the shares can go to the low 80s.
Wells Fargo (WFC): My opinion -- Buy
Warren Buffett allocates 17.9% of his portfolio in Wells Fargo.
I found very interesting to read a bullish report from Oppenheimer about the bank sector. Oppenheimer noted that, while credit quality has been steadily improving for more than two years now and loans have been growing for more than a year, Q1 2012 results marked the first time since June 2010 that consensus estimates for 2012 went up, not down. The most important part of their research came when they explained that excluding the mortgage-related costs, they estimate that the group has a 55.2% efficiency ratio, indicating that there should be considerable positive operating leverage going forward.
I think that WFC shares trade better than the rest of the banking sector because they reflect a lower risk premium as negative headlines from mortgage servicing issues appear to be largely behind the industry and credit performance continues to improve. I am positive on WFC as their conservative actions in the current environment are likely to drive long-term wallet share gains and lead to multiple channels of additional revenue.
Recently, "Inside Mortgage Finance" recently released its 1Q12 mortgage-backed security (MBS) issuance data, which indicates that Bank of America (BAC) market share fell to 2% from 5% last quarter and 19% just a year ago. Of the large banks, only Wells Fargo retains over a 10% market share and currently boasts a 32% market share. I believe that WFC will likely report strong mortgage banking revenue in the quarter, especially as gain-on-sale margins remain strong.
In their last earnings report, WFC reported two cents above consensus. It came primarily on stronger core earnings of $8.6 billion as core credit costs were almost exactly in line with expectations.
International Business Machines: My opinion -- Buy
Warren Buffett allocates 17.8% of his portfolio in International Business Machines.
I like IBM's strength of its global on-demand model (responding to customer demand with flexibility and speed) and exposure to emerging markets. IBM is experiencing strong revenue growth in all geographical regions, particularly in the growth markets worldwide. IBM generates more than 50.0% of its revenue outside the U.S., with the emerging markets contributing a significant part of the growth. In fiscal 2011, revenues from the emerging markets represented 22.0% of IBM's revenues, which outperformed the revenue growth from the developed economies. IBM has been gaining a lot of traction in the emerging markets of the
Asia-Pacific and Africa, with many government agencies and private organizations from different verticals such as telecommunications, oil and gas, and banking choosing the company's services and technical support, thus ensuring steady flow of orders and market share gains across regions. To expand its operations and increase demand for its service and solutions, IBM has also opened more than 20 offices across Africa. IBM expects to increase its African investment to $12.5 billion by 2015.
Other than Africa and the BRIC countries, IBM also remains focused on increasing its footprint in Asia-Pacific region as the company continues to build data centers to exploit the potential of cloud computing through its comprehensive solutions and services. The growth markets are expected to contribute 30.0% to IBM's total revenue by 2015.
Regarding valuation, IBM's current trailing P/E is 14.3x, vs. the 21.6X average for its peer group and 13.6X for the S&P 500. Over the last five years, IBM shares have traded in a range of 9.4X to 18.3X trailing 12-month earnings. I think that IBM shares can trade with earnings multiples in the range of 16-18x, indicating possible appreciation.
American Express (AXP): My opinion -- Hold
Warren Buffett allocates 11.6% of his portfolio in American Express.
I like AXP's growth plans. American Express has potential for increased market penetration, merchant acceptance and brand recognition as the company is expanding its list of network partners. Its Global Network & Merchant Services business has been performing very well, with billed business or spending on cards growing at a compound annual rate of 25% since 1999 and grew 28% year over year in 2010, followed by a low growth of 15% in 2011 and 12% in the first quarter of 2012. Moreover, discount revenue has been witnessing an increasing trend, primarily driven by billed business volumes along with travel
commissions and fees and is one of its largest single sources of revenue. Besides, AXP card services have significantly increased its footprint in the last couple of years and delinquency rates also improved meaningfully in 2011 and so far in 2012, reflecting a gradual recovery in the card and billed business from the recent global credit crisis. After witnessing several quarters of downturn, net interest income and loan portfolio started showing improvement, further instigating growth.
AXP balance sheet is one of the strongest in the sector. American Express enjoys a strong capital position with a Tier 1 risk-based common ratio of 13.4% at the end of first quarter 2012, well above the current regulatory requirement under Basel III, 12.3% at 2011-end and 11.1% at 2010-end. Armed with excess cash and securities of $20 billion at end of the first quarter 2012 along with a strong operating cash flow, the company is sufficiently liquid to finance its $13 billion in funding maturities through March 2013. AXP will offer share repurchases and dividend growth to increase shareholder value.
I think that AXP is cheap at 13.4x average analyst earnings estimate for 2012. On a P/BV basis, the shares trade at 3.6x, which is at 44% premium to the 2.5x for the industry average. I think the valuation on a P/BV basis looks attractive, given a 12-month ROE of 26.7% against a high negative industry average.
Procter & Gamble (PG): My opinion -- Sell
Warren Buffett allocates 6.5% of his portfolio in Procter & Gamble.
Procter & Gamble appears to have been disproportionately impacted by sluggish market growth, exacerbated by market share losses which imply P&G's problems are more structural in nature. PG's volume growth slid to zero in Q3 2012 from +1% in Q2 2012, while pricing moved higher to +5% from +4% in FQ2 2012. Procter admitted its innovation is inadequate, especially in Beauty, and cited competitive pricing pressures in several areas.
I do not think Procter shares offer attractive valuation entry levels. PG's current P/E is 16.6x, compared with the industry average of 16.5x and 14.5x for the S&P 500. Over the last five years, Procter & Gamble's shares have traded in a range of 13.1x to 23.5x trailing 12-month earnings. I think the stock could trade in the P/E range of 13-14x instead of the current 16-17x.
During the past several years, Procter & Gamble has divested non-core businesses, repositioned its product portfolio toward more value offerings, significantly increased spending to reclaim and defend market share, and aggressively expanded in overseas markets. Unfortunately, the firm's stock hardly budged. In February, management responded with a massive $10 billion cost savings plan that will dramatically reduce headcount as the firm aims to return to 8% to 10% EPS growth and free up funds to reinvest in its business.
Other Stocks Buffett Likes:
Warren Buffett also holds 3.9% of his portfolio in Kraft (KFT) and 3.8% in Wal-Mart (WMT). My opinion: KFT is a Hold, while WMT is a Buy.
Recently, Kraft Foods reported Q1 (March) earnings of $0.57 per share, one penny better than market expectations while revenues rose 4.1% year/year to $13.09 billion vs. the $13.05 billion consensus. Management reiterated guidance and said: "We continue to expect 2012 Organic Net Revenue growth of ~5% and Operating EPS growth of at least 9% on a constant currency basis."
I like the fact that the company has expanded into key developing markets, such as China, Brazil, India, Mexico, Russia and Southeast Asia, encouraged by the high-growth nature of these countries. The developing countries are receiving greater support in terms of infrastructure investments and marketing outlays. In fact, in 2011, the developing market was the strongest performing segment for the company and is expected to be the key growth driver in 2012
Wal-Mart has reported positive comps -- and above the midpoint of its guidance range -- for the past three consecutive quarters (following a two-year decline). Sam's Club comps continue to not only hold in positive territory, but have now topped guidance for the past seven quarters
I remain encouraged by the positive comp sales of the company in the quarter, which were also above the company's guidance and were driven by improved traffic and product offerings. The company
regularly buybacks shares and has recently increased its dividends, thereby returning value to its shareholders. Moreover, Wal-Mart's acquisition of the majority ownership position in Massmart Holdings in Africa has expanded the company's international presence and will drive emerging markets growth.