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We are now up to the second half of valuing the holdings of Berkshire Hathaway 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, M&T Bank, Sun Trusts Banks and Torchmark 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 (NRG)
• Nalco Holding (NLC)
• Nike (NKE)
• Norfolk Southern Corp (NSC)
• Procter & Gamble (PG)
• Sanofi Aventis (SNY)
• Sun Trusts Banks Inc. (STI)
• Torchmark Corp (TMK)

NRG Energy (NRG)

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 ont he low side.
• Mean ROA and CROIC of 2.7% and 5% respectively. Lower than competition
• FCF isn’t consistent.
• Huge increase in capex in 2008
• Large amount of taxes deferred.
• Still converts 12% of sales into FCF

Intrinsic Value Estimate

Current Price: $27.76

DCF Stock Value: $37.11

Graham Stock Value: $34

Competitor and Peer Comparison: $58

Nalco Holding (NLC)

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

Nike (NKE)

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)

NKE Intrinsic Value Graph

Norfolk Southern Corp (NSC)

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

NSC Intrinsic Value

Procter & Gamble (PG)

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

PG Intrinsic Value

Sanofi Aventis (SNY)

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 MRK or 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

SNY Intrinsic Value

Disclosure

No positions in any stock mentioned

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1. Warren Buffett Stock Picks: Part 4
2. Warren Buffett’s Stock Portfolio: Part 2
3. Warren Buffett’s Stock Portfolio
4. Warren Buffett Stock Picks: Eaton (ETN)
5. How to Think like Benjamin Graham and Invest Like Warren Buffett