Warren Buffett's Top 5 Holdings: Are They Right for You?

Includes: AXP, KO, MDLZ, PG, WFC
by: The Analyst Hub

Following is a list of top ten holdings by Warren Buffett:





Value ( mn )


Coca Cola Co





Wells Fargo & Co





American Express Co





Procter & Gamble Co





Kraft Foods Inc




Here is my brief analysis and take on Warren Buffett’s top five holdings:

Coca-Cola Company (NYSE:KO) is a leading global beverage manufacturer. The company sells over 3,000 beverage products in over 200 countries around the world. On a global basis, sparkling beverages make up roughly 80% of Coca-Cola's unit case volume sales. By geography, the company generates roughly 75% of its sales outside of North America.

My Take: Buy

Growth trends in emerging markets, focus on cost savings and strong cash generation, all add up to an attractive long term growth story for investors in Coca-Cola. Its innovative marketing programs have continued to push and drive the growth of the brand. One example of the program is of pushing Coke with food, adding usage occasions and thus lifting per capita consumption. The brand continues to lay a high emphasis on retail presence and capturing displays and secondary placements across all channels.

The main concern facing the company right now is increase in commodity prices. It had recently announced that it will raise prices for carbonated drinks by 3-4% from July. From a competition perspective, PepsiCo’s (NYSE:PEP) stepped up marketing and brand investments, combined with the rising commodity costs would put higher COGS (Cost of Goods Sold) pressure on Pepsi than on Coca-Cola that does not have to step up brand and marketing investments as much. According to consensus estimates, Coca-Cola’s expected EPS for current year is $3.86 and next year is $4.28.

Wells Fargo & Company (NYSE:WFC) is one of the largest banking institutions in the United States with total assets of approximately $1.2 trillion. Through its subsidiaries, it provides retail, commercial, and corporate banking services. The company operates in three segments: Community Banking; Wholesale Banking; and Wealth, Brokerage, and Retirement. It is headquartered in San Francisco, California, and operates more than 10,000 branches.

My Take: Buy

WFC has been gaining market share since its integration with Wachovia. Majority of gains have been customers looking at moving from small and community banks to the safety of large cap banks like WFC. Its overall checking accounts have grown by 6% in 1Q11. WFC’s current elevated expense levels are expected to decrease, specifically those related to the Wachovia integration.

The company’s Mortgage modification strategy is yielding healthy results for the bank. It focuses on reducing monthly payments, which provides cash flow relief to customers. This is done by lowering the interest rate to very low levels and gradually increasing it later, allowing WFC to gain a higher coupon rate after the initial low rate.

WFC also launched Project Compass about a year ago, in response to anticipated regulatory changes, business mix shift, and tough top line environment. The project is about gaining efficiencies via productivity increases and technology rather than via decreasing on client-facing personnel or across the board cost cutting.

WFC is currently maintaining higher focus on the non-banking segments like asset management, brokerage and insurance distribution. According to consensus estimates, WFC’s EPS is expected to be $2.76 for the current year (Dec11) and $3.4 for next year (Dec12).

American Express (NYSE:AXP) is the leading global payments and travel player. The main products of the company are charge and credit payment cards, and travel related services offered to consumers and business. The company also provides network services, merchant acquisition and processing for the company’s network partners and its proprietary payments business. Geographically, the business is concentrated in the US (70% of revenues) and Europe (10% of revenues).

My Take: Buy

As we had mentioned in our previous coverage of the bank, Fee based revenue streams are gathering momentum, tracking a $3bn target. The three key initiatives under this are (1) Amex Business Insights: where Amex is offering competitive intelligence and analytics for its merchant partners, about competitor pricing and customer trends (2) Loyalty Partner: A ‘coalition rewards’ solution with 35mn customers in Germany and India (3) Acertify: Online fraud management for business, facilitating PCI compliance. AXP also expanded its product line by launching a reloadable prepaid card with no activation or maintenance fee. This product gives AXP access to a new customer base that does not rely on a charge or a credit card for their financial needs.

As per data released in May, AXP has maintained a high level of balance transfer offers at 19%, a trend being seen across industry. The bank also increased its proportion of premium offers to 37% of the total card mailings in May, decreasing its General Market offers (no fee card with rewards) to 63% of card mailings, from 83% in April.

American Express has the industry leading charge off rate of 3.2%, improved from 6.3% a year ago. Charge Offs and 30 day+ delinquencies are showing a healthy improvement. AXP’s payment rate at 31% in May is also the highest of the primary issuers in the country. Moreover, despite having the highest payment rate, it also has a growing loan rate, steadily contributing to the upswing of the business. Managed loans in May were up by 1.8% m-o-m compared to all other bank’s average of 1% m-o-m. According to consensus estimates, EPS is expected to move up from $3.84 in current year to $4.15 by Dec 12.

The Procter & Gamble Company (NYSE:PG), founded in 1837 and headquartered in Cincinnati, Ohio, provides consumer packaged goods in the United States and internationally. The company operates in three global business units (GBUs): Beauty and Grooming, Health and Well-Being, and Household Care.

My Take: Hold

Macroeconomic uncertainty will continue to be a headwind for P&G. Unemployment remains at 9.1% vs. the five-yr average of 7.1%. Though the company has invested efforts in improving its presence in the value category, its revenue is concentrated on premium value products, which is a distinct disadvantage in the cost conscious customer of today. As a reflection of this, P&G’s dollar sales for the 12 weeks ending 12 Jun grew 0.6%, compared to 1.6% in the March period.

Some of its major innovations in 2010 have failed to meet the targeted objectives. Pampers Dry Max encountered consumer perception problems. The Pantene restage suffered adversely by pulling key SKUs from shelves as well as confusion regarding drastic repackaging. On the positive end, Gillette Fusion Pro Glide and Crest Pro Health Line in oral care were a hit with the consumers. As per the consensus estimates, the stock carries a mean price target of $71.28. We recommend a Hold on the stock till we see stronger indications of economic turnaround.

Kraft Foods, Inc. (KFT), is the world’s second largest food company with annual revenues of $49.2 bn. It operates in six segments: Confectionary, Biscuits, Beverages, Cheese, Convenient Meals and Grocery. Its products are available in 170 countries and the company employs approx. 127,000 employees worldwide. Geographically, it is spread in North America (49% of net revenues), Europe (23% of net revenues) and developing markets (28% of net revenues).

My Take: Hold

One year post the Kraft-Cadbury merger, Cadbury is not meeting its top line growth objectives and is behind its debt reduction plans. The amount of debt on Kraft’s balance sheet stands increased to $28 bn, from $27.4 bn a year ago. The gum category business is showing weakness, in line with the general macroeconomic trend.

Overall, gross margins have decreased by 400bps, indicating the emphasis that needs to be placed on operational efficiency and productivity. Kraft, on its part, has launched 6-sigma efforts and is searching for a new COO. Its advertising budgets are at 5% of sales, greater than industry average of 4%, but far less than peers like General Mills (NYSE:GIS) (6-7%) and Kellogg (NYSE:K) (9-10%).

On the positive end, its geographical distribution has improved with developing markets contributing close to 30% of sales (vs. 10% in 2001). This gives Kraft greater access to consumers with a higher disposable income and a greater need for packaged goods due to higher urbanization. According to consensus estimates, Kraft Foods carries a mean price objective of $36.67.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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