Warren Buffett's Stock Portfolio: Part III

by: Jae Jun

Warren Buffett’s Stock Portfolio: Part 1 | Part 2

We are now up to the second half of valuing the holdings of Berkshire Hathaway (NYSE:BRK.A) via the DCF valuation method, Ben Graham formula as outlined in the Intelligent Investor, and a simple multiples valuation based on PE, cash flow, sales and other metrics compared to the competition and industry.

Of the 10 companies I go through in this post, I’ll be passing on Moody’s (NYSE:MCO), M&T Bank (NYSE:MTB), Sun Trusts Banks (NYSE:STI) and Torchmark (NYSE:TMK) as I do not know how to value financial stocks.

Warren Buffett Stock Holdings : 21-30

  • M&T Bank Corporation (MTB)
  • Moody’s (MCO)
  • NRG Energy (NYSE:NRG)
  • Nalco Holding (NYSE:NLC)
  • Nike (NYSE:NKE)
  • Norfolk Southern Corp (NYSE:NSC)
  • Procter & Gamble (NYSE:PG)
  • Sanofi Aventis (NYSE:SNY)
  • Sun Trusts Banks Inc. (STI)
  • Torchmark Corp (TMK)

NRG Energy

Wholesale power generation company. Owns more than 189 active operating generation units at 48 power generation plants.

  • Had a big year in 2008
  • Big margins increase in 2008 and since 2005
  • Increase in short term and long term debt
  • Company is able to make money but its returns are on the low side.
  • Mean ROA [Return On Assets] and CROIC [Cash Return On Invested Capital] of 2.7% and 5% respectively. Lower than competition
  • FCF [Free Cash Flow] isn’t consistent.
  • Huge increase in capex [capital expenditures] in 2008
  • Large amount of taxes deferred.
  • Still converts 12% of sales into FCF

Intrinsic Value Estimate

Current Price: $27.76

DCF [Discounted Cash Flow] Stock Value: $37.11

Graham Stock Value: $34

Competitor and Peer Comparison: $58

Nalco Holding

Provider of integrated water treatment applications to prevent corrosion, contamination and the buildup of harmful deposits.

  • Needs to improve efficiency. 40+% margins but negative net income or low single digits at best isn’t good
  • Decrease in intangibles suggests bad acquisitions and mistakes by management
  • Long term debt is steady
  • Been buying back stock
  • FCF isn’t reliable. Lots of cash come from “other” income
  • Low returns, cash and earnings growth
  • Doesn’t look like something Buffett would buy

Intrinsic Value Estimate

Numbers aren’t reliable enough for a proper valuation.

Current Price: $17.52

DCF Stock Value: N/A

Graham Stock Value: N/A

Competitor and Peer Comparison: $22


Sells athletic footwear, apparel and sports products.

  • Great company, leader, innovator, huge moat
  • Drop in margins in 2008 but increased inventory turnover
  • Low debt with plenty of cash
  • Can pay off debt with FCF easily
  • Don’t have to go in detail with numbers. They are just too good.

Intrinsic Value Estimate

Stability and predictability makes it easy to value.

Current Price: $56.18

DCF Stock Value: $65

Graham Stock Value: $77

Competitor and Peer Comparison: fairly valued at $56 (trades at a premium to competition)

Click to enlarge:


NKE Intrinsic Value Graph

Norfolk Southern Corp

Rail company. Another rail company in the portfolio along with Burlington Northern Santa Fe (BNI).

  • Looks to be a better company than BNI
  • Good top line growth
  • Decrease in gross profit but managed to increase net margins
  • Lots of FCF and excellent FCF growth
  • Low end for CROIC at 4%
  • Debt can be handled with FCF rather than taking on additional debt

Intrinsic Value Estimate

FCF growth is at 22.8% but if you look at how the value of the company has tracked the share price over the past 5-7 years, the company has been growing at the rate of its CROIC. i.e. the cash returns of its invested capital.

Current Price: $46.91

DCF Stock Value: $61

Graham Stock Value: $120 - high value due to excellent earnings growth

Competitor and Peer Comparison: $54

Click to enlarge:

NSC Intrinsic Value

NSC Intrinsic Value

Procter & Gamble

Sells consumer good that you use everyday.

  • Wrote about PG briefly in the Best Stocks to retire list
  • FCF growth above 18%
  • CROIC at 60%! Mindblowing.
  • Only negative is big drops in tangible shareholders equity
  • Stable margins. Net margins even increased in 2008
  • Good stable dividend

Intrinsic Value Estimate

Included a 10 year version of the intrinsic value graph to show how price and value end up meeting.

Current Price: $53.19

DCF Stock Value: $76 - increased from my previous DCF valuation

Graham Stock Value: $97 - slightly down from previous Graham calculation

Competitor and Peer Comparison: $67

Click to enlarge:

PG Intrinsic Value

PG Intrinsic Value

Sanofi Aventis

Pharmaceutical company.

  • Stats look good but some metrics are quite erratic
  • FCF growth is up and down
  • Top line isn’t so consistent
  • FCF and earnings growth is relatively low
  • Has outstanding returns and converts it to plenty of FCF
  • Debt is not an issue
  • Maybe Merck (NYSE:MRK) or Pfizer (NYSE:PFE) would be better?

Intrinsic Value Estimate

Not quite sure about what future products the company has but from the current snapshot of the company, I get the following figures.

Current Price: $34.53

DCF Stock Value: $47

Graham Stock Value: $18

Competitor and Peer Comparison: $36

Click to enlarge:

SNY Intrinsic Value

SNY Intrinsic Value

Disclosure: No positions in any stock mentioned