Warren Buffett’s Stock Portfolio Holding: Part 3

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

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

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