Warren Buffett Bought These Stocks Last Quarter

 |  Includes: BK, DVA, GM, LMCA, T, VIAB, WMT
by: FAF Research

I am interested in companies that have a solid future earnings power and are managed by competent people. The characteristic that most impresses me is a company's ability to grow sales and profits over the years at rates greater than the industry average. In order to do so, the company needs to posses products or services with sufficient market potential to make possible a sizable increase in sales for at least several years. These concepts are essential to pick companies. I think it is essential to study which stocks Warren Buffett bought last quarter; you can find current Warren Buffett holdings via whalewisdom.com.

Wal-Mart (NYSE:WMT) - My opinion: BUY

Warren Buffett added to his position in Wal-Mart last quarter.

Recently, Barclays raised their target in WMT. Barclays is comfortable with an above than average 2013 EPS estimate of $5.35 and have increased confidence in the company's top-line momentum and ability to drive the productivity loop and leverage expenses. I like WMT, because the stock is still cheap and the business will keep its momentum for the foreseeable future.

In the last earnings report, WMT reported earnings of $1.09 per share, $0.05 cents better than analyst projected earnings of $1.04, while revenues rose 8.5% year/year to $113.02 billion vs the $110.25 billion consensus. I think the most interesting part came from same store sales growth. WMT reported U.S. Q1 comparable store sales of +2.6% (guided for range of flat to +2%) and Sam's Club Q1 comparable store sales of +5.3% while the company previously guided for +3-5%. In other words WMT beat its own estimates.

Management told that customers continue to trade down to lower price points and smaller sized packages, which benefit companies like Dollar General (NYSE:DG) or Dollar Tree (NASDAQ:DLTR).

Wal-Mart U.S. has reported positive comparables and a higher guidance range for the past three consecutive quarters (following two year decline). Sam's Club comparables continue to not only hold in positive territory, but have now topped guidance for the past seven quarters. This is clear evidence that the business is experiencing momentum.

I think valuation is compelling. Wal-Mart's current P/E is 13.4x compared to the industry average of 16.3x. Over the last five years, WMT shares have traded in the range of 12.0x to 18x trailing P/E. The stock is trading at a forward P/E of 12.7x compared to the industry average of 13.3x. I think WMT offer a reasonable margin of safety plus the opportunity to invest in a predictable business with solid projected earnings growth.

Davita (NYSE:DVA) - My opinion: Stay Away From Healthcare.

Warren Buffett added to his position in Davita last quarter. I do not feel comfortable with healthcare stocks. They operate in a super-regulated Industry that I cannot understand. Yes, they offer products or services that people need, but a specific government regulation or other healthcare risks outside the company could create a huge downtrend in any healthcare stocks. That is why I never invest in pharmaceutical stocks.

DVA seems to be converting its business model. Recently, DVA acquired the largest primary care medical group network. The stock received several downgrades in the past months. Recently DVA was downgraded at Feltl & Co. based on valuation, because they believe the shares will likely suffer over the near term until there is greater visibility on operational leverage.

Davita was also downgraded to Neutral at Robert W. Baird. They explain that they see fewer positive catalysts over the next six months, and the stock sells in line with historical averages, which offer limited room for price appreciation. The case for multiple expansion is tough with the bundling thesis maturing and unknown out-year Medicare risks.

Warren also picked a low P/E stock here. DVA trades at a 14x P/E compared to 13.5x Industry averages. On a P/BV basis, the shares trade at 3.7x, a 54% premium on the 2.4x industry average. The valuation on P/BV looks reasonable, given DVA high ROE of 23.5%, which is substantially above the industry average of 13.4%.

One of the strongest positives about DVA could be its strong cash flow generation. Operating cash flows increased at a 3-year CAGR (2008 2011) of 24%. Similar growth is expected in future as well, based
on the operating cash flow guidance of $0.95 / 1.05 billion. Warren loves this kind of cash flow growth. Davita repurchased shares worth $323.4 million in the first half of 2011, although it did not repurchase any shares in the second half of 2011, in order to conserve cash for acquisitions amid the volatile debt market.

Another pattern from Buffett here: pick companies with high return on equity [ROE], high current and future free cash flow and stock buyback plans.

DirecTV (DTV) - My opinion: BUY

Warren Buffett added to his position in DirecTV (DTV) last quarter.

DirecTV delivered another strong quarter of financial and operating results highlighted by double-digit revenue, EPS and cash flow growth, fueled in part by another quarter of record-setting subscriber growth in Latin America. Increase in revenues was driven by strong subscriber growth coupled with 3.6% higher average revenue per user at DirecTV U.S.

Canaccord Genuity reviewed Q1/12 results and concluded that with the prospects for 2Q12 US subscriber losses now more fully in the stock price, Canaccord believes there's less risk to the shares. Overall, Canaccord continues to believe that the company will deliver the best balance of customer and operative cash flow growth among cable companies while also leading in share repurchases.

I like DTV, because the company has consistently generated the best balance of subscriber and cash flow growth. Even during the worst time of the housing crises and recession, DirecTV net adds exceeded those of its peers. One of the strongest points is the company's buyback plans. The company is engaged in the most aggressive share repurchase plans (35% of the shares since 2008), which will continue with a $6bn repurchase in 2012.

Valuation is extremely compelling here. DTV is currently trading at 10.5x projected average 2012 consensus earnings estimate. This is a huge discount to both the industry average and the S&P 500 average. With respect to the fiscal 2013 earnings estimate, the stock is trading at 8.7x, again a huge discount to both the industry average and the S&P 500. DirecTV trades at 4.9x 2012E US operating cash flow, below its cable peers from 5.5x to 6.2x.

To me DTV is a buy, because I like its long-term growth driven by its growing penetration in the lucrative Latin American markets, coupled with continuous technical improvements in the U.S. segment, which leads to better service quality. Management 's strategy to target high-end customers paid-off well as the demand for the company' s HD channels and digital-video recording services gained huge market traction. The stock is extremely cheap; I like DTV's business model and I feel comfortable with its share repurchase plans.

Liberty Media (NASDAQ:LMCA) - My opinion: HOLD

Warren Buffett added to his position in Liberty Media last quarter. It seems that Warren loves cable or media companies, as he added to DTV, LMCA and initiated Viacom (NASDAQ:VIAB).

Recently a great research company issued a strong report about LMCA that called my attention. Canaccord Genuity expects the stock price to rise towards their $101 target as the LMCA's net asset value continues to increase and the discount to the net asset value ($112) continues to decrease. Canaccord sees a strong catalyst that could come from the company's affiliate renewals with PayTV operators, such as Time Warner Cable. Another strong catalyst could come if LMCA takes control of Siri.

I give a HOLD to the stock, because I do not feel comfortable with the recent earnings report. Liberty Media recently reported Q1 results down year over year and also missed on revenues. Liberty Media's Q1 revenues decreased 55% to $440 million vs. the $482 million consensus while adjusted EBITDA decreased 77% to $110 million and operating income decreased 81% to $89 million. The decrease in revenue, adjusted EBITDA and operating income was a direct result of a significant recognition of deferred revenue and costs in the previous year at LMCA subsidiary TruePosition. I like the fact that LMCA is buying back its own shares. The company repurchased $120 million of Liberty Media stock from February 1 through April 30, 2012.

Management expressed:

Starz again posted impressive subscriber gains and accelerated its slate of STARZ Original content with the debut of its new series, Magic City. We are very pleased that Microsoft announced an investment in Barnes & Noble's digital and college businesses. This is validation of their strategy and provides a strong partner to help grow the eBook business both domestically and internationally on multiple platforms. We also entered into a forward purchase contract covering 302 million shares of SiriusXM, which is scheduled to close early in the third quarter. These shares will increase Liberty's ownership to 45.2% on an as-converted basis.

I would like to buy the stock at the $75 price. It operates in an Industry I like to invest, the company is buying back its own stock, but the last quarter results were not as I expected.

Viacom- My opinion: BUY

Warren Buffett initiated a position in Viacom .

Recently, VIAB reported a strong report. Viacom reported Q1 earnings of $0.98 per share, $0.08 better than the Capital IQ consensus estimate of $0.90, while revenues rose 2.0% year/year to $3.33 billion vs the $3.33 billion consensus. I liked that for Q1, Viacom repurchased 14.7 million shares under its stock repurchase program, for an aggregate purchase price of $700 million. As of May 2, 2012, Viacom had $5.90 billion remaining in its $10 billion stock repurchase program. See the pattern here? Warren is looking for companies that are able to repurchase its own shares.

Recently, Maxim Group initiated VIAB with a Buy and price target of $59 saying the company is buying back another 10% of its stock this year, after buying back 11% over the last two years, as it continues to be financially disciplined instead of pursuing acquisitions. Maxim estimates that the company could buy back 36% of its stock over the next four years, and is well placed to be even more aggressive. I got attracted to invest here for that reason. Lastly, Maxim's report explains that Wall Street appears to have discounted the 25% ratings slide at Nickelodeon and is aware of MTV's ratings also softening. Viacom is focused on the interaction of big TV screen and iPad as the modern day instant water cooler makes traditional programming more relevant.

Other boutique research house is bullish about VIAB. Barrington Research explains that in addition to the core cable networks, they are especially encouraged by the cost and product flow restructuring efforts that have taken place at Paramount. Barrington analyst highlight that VIAB solid complement of leading cable networks is its primary strength. Also the company is achieving increasing success in its filmed entertainment operation.

This is another compelling valuation pick from Warren. Viacom is currently trading at 11x average analyst fiscal 2012 earnings estimate. This is at a discount to both the industry average and the S&P 500 average. The stock is also trading at 9.4x forward earnings, again a huge discount to both the industry average and the S&P 500 average.

Viacom is a Strong Buy here.

Other stocks Warren Buffett added

Warren Buffett also initiated a position in General Motors (NYSE:GM) and added to his existing position in Bank of New York (NYSE:BK).

I got interested in GM, because the company is growing in both emerging markets and US. In addition, the stock is inexpensive. GM is focusing on the emerging markets, particularly Brazil, China and India, to recoup its global sales by increasing its capacity investment to meet the growing demand. Recently, the company announced it plan to buyback 1% stake in its Shanghai GM joint venture in China with Shanghai Automotive Industry Corporation (NYSE:SAIC). The automaker sold the stake to SAIC in 2010 for about $85 million. The buyback would allow both the partners to enjoy 50:50 shares in the operational side of the joint venture. Further, GM plans to develop electric cars in China through its joint venture, Pan Asia Technical Automotive Center, with SAIC in order to take advantage of high demand for EVs and enjoy national and municipal subsidies in the country. GM is trading at only 6x P/E compared with the 11.0x average for the peer group and 14.0x for the S&P 500. Over the last five years, shares have traded in a range of 5.0x to 10.3x trailing 12- month earnings. The stock is trading at a discount to the peer group. I do not feel comfortable buying GM right now.

Regarding Bank of New York, assets under custody and administration amounted to a record $26.6 trillion at March 31, 2012, an increase of 4% compared with the prior year and 3% sequentially. The increases were driven by net new business and higher market values. Assets under management, excluding securities lending assets, amounted to a record $1.3 trillion at March 31, 2012. This represents an increase of 6% compared with the prior year and 4% sequentially. The year-over-year increase primarily reflects net new business and higher market values. I think that BK is a good Company but I do not feel comfortable investing in this sector.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in (WMT), (GM) over the next 72 hours.