Warren Buffett Stock Picks: Part 4

Warren Buffett Stock Portfolio: Part 1 | Part 2 | Part 3 | Part 4

(Download the free E-Book format of Warren Buffett Stocks Series)

This is the conclusion of the 4 part Warren Buffett stocks series.

Up till now, I’ve taken a look at the holdings of Buffett, valued each one according to my methods based on free cash flow and DCF valuation, Benjamin Graham’s formula and a simple multiples method.

In this final section of Buffett’s 2009 stock picks, I’ll go through what I know, pass on the usual financials i.e. US Bancorp, Wells Fargo and Wesco Financial, and then summarize all 41 picks and their valuations again.

Regarding Wesco, I remember vaguely reading in Munger’s book, Poor Charlie’s Almanack, that he doesn’t expect much appreciation in the stock. So if Munger says that about his own company, then that’s enough for me to believe him and move on to better value stock opportunities.

Warren Buffett’s Stock Picks: 31-41

• U.S. Bancorp (USB)
• USG Corporation (USG)
• Union Pacific Corp (UNP)
• United Parcel Service (UPS)
• United Health (UNH)
• Wabco Holdings (WBC) – Not enough data
• Wal-Mart (WMT)
• Washington Post (WPO)
• Wells Fargo (WFC)
• Wellpoint (WLP)
• Wesco Financial Corp (WSC)

USG Corporation (USG)

Makes and sells building materials.

• Rose with the housing market. Dropped with the housing market.
• The capex numbers show in hindsight how USG had high capex at the peak of the housing bubble.
• Been losing a lot of cold hard cash in the process – FCF
• Tiny gross profits from good revenue
• Turnover back down to 10.9 compared to 12.2 from the previous year
• Even if I ignore 2008 numbers and imagine looking at the company in 2006 or 2007, numbers still aren’t great.

Intrinsic Value Estimate

Current Price: $14.70 No reliable data or numbers to calculate intrinsic value. Only thing I can say with certainty is that the tangible book value is at $14.14. Throw it on the pass pile.

Union Pacific Corp (UNP)

Another rail company. Buffett sure likes his train sets.

• Good tangible book value growth. Shows that growth is organic.
• Top line growth is impressive. Median of 33% in the past 5 years.
• CROIC is just below 2%. Only makes 2c off every $1 of cash invested.
• FCF growth isn’t  much to consider unless you compare it to capex.
• Seems like earnings and FCF is realized 3 years after the capex outlay.
• Consistent reduction in debt.
• Rising margins since 2004 to highest levels.
• NSC still looks to be the better company.

Intrinsic Value Estimate

Numbers aren’t reliable enough for a proper valuation. Current Price: $62.25 DCF Stock Value: $54.81 @ 14% growth, 15% discount rate. Graham Stock Value: $95.40 Competitor and Peer Comparison: Looks fairly valued

United Parcel Service (UPS)

Courier company. Delivers packages.

• Huge moat.
• Stock price affected by high oil price.
• Reducing capex past 2 years. How will it affect future results?
• Past 5 years hasn’t been great for UPS. Went no where.
• Good stable CROIC at 11%
• Earnings YOY isn’t good. Shows a decline.
• Margins are good but there are huge overhead costs as expected. 75+% gross margin but only 6-9% net margin.
• Big rise in debt
• Still better than FDX

Intrinsic Value Estimate

Stability and predictability makes it easy to value. Current Price: $55.43 DCF Stock Value: $52.72 @ 15% growth and 9% discount rate Graham Stock Value: $85 – $90 @ 13% growth Competitor and Peer Comparison: overpriced. Should be around $35-$40

United Health (UNH)

Healthcare company. A previous holding of mine until August.

• Healthcare is a great industry for cash flows.
• Highly profitable business but has a lot of economic factors involved
• Universal healthcare is just uncertainty which provides a better deal for investors
• Outstanding FCF, CROIC and profitability return numbers
• Huge drop in tangible shareholders equity
• Try looking at the smaller healthcare companies.

Intrinsic Value Estimate

Current Price: $28.40 DCF Stock Value: $61 @ 15% FCF growth and 9% discount rate Graham Stock Value: $64 @ 9% growth Competitor and Peer Comparison: $40

Wal-Mart (WMT)

King of retail.

• FCF doubled compared to past year. Highest its ever been.
• No change in margins. WMT doesn’t need to lower margins.
• Highest inventory turnover rate ever in 10 years at 8.9 (although COST has better turnover)
• Tangible book value consistently up.
• Good top line and bottom line growth.
• Rock solid.

Intrinsic Value Estimate

Current Price: $51.11 DCF Stock Value: $57 @ 13% growth and 9% discount rate Graham Stock Value: $70 @ 9% EPS growth Competitor and Peer Comparison: $60

Washington Post (WPO)

Newspaper, media company.

• Media has been one of the worst industries in the past year. Especially with everyone believing that newspapers will become extinct.
• Fiscal 2008 saw a big decline in everything. Sales, profit, cash, book value, ROE, ROA
• Management still used its cash effectively with a CROIC of 12.2%
• FCF positive with stable capex.
• Capital expenditures have been steady for 4-5 years now.
• Tells me that most of the current $280mil in capex is due to maintenance rather than growth.

Intrinsic Value Estimate

Not very certain about the growth of the print business so I’ll keep things conservative. Current Price: $435.45 DCF Stock Value: Normalized FCF back to a reasonable $200 million as this is what the company has been able to achieve for the past 10 years.

• $293 @ 0% growth and 9% discount rate
• $358 @ 5% growth and 9% discount rate

Graham Stock Value:

• $240 @ 0% growth
• $492 @ 5% growth

Competitor and Peer Comparison: N/A Industry and competitors have all fared horribly to be able to provide any reliable valuation. Seems like GCI is the better pick in terms of value.

Wellpoint (WLP)

Healthcare company.

• Again, Buffett likes to buy in pairs.
• Much like UNH. Great cash flow, great numbers.
• By the numbers, I prefer UNH.
• Dependent on macro factors.

Intrinsic Value Estimate

Current Price: $52.84 DCF Stock Value: $86.91 @ 13% growth and 9% discount rate Graham Stock Value: $118 @ 10% EPS growth Competitor and Peer Comparison: $64-$70

Warren Buffett’s Stock Portfolio Analysis

You view my comments and intrinsic value estimates of all 41 stocks in the pdf below. Warren Buffett Stock Portfolio Analysis and Valuation

Disclosure

No positions in any stock mentioned