by George Frost, CFA, GuruFocus
Filed Under: WFC, USG, KFT,
Filed Under: WFC, USG, KFT, , Thanks to Buffett, it's simple, very simple, for us to identify great companies with great managements selling at undervalued (i.e., inefficient) prices.
Just check-out Warren Buffett's holdings/buys on www.gurufocus.com, memorize Buffett's 2007 letter to shareholders (paying particular attention to cost basis info. on page 15), and then look-up Buffett's companies in Value Line ("Buffett's bible"). Here's just a sample of the treats you'll find:
Kraft Foods (KFT--$30.73)
In recent SEC filings, Buffett revealed that, over the past nine months, he has accumulated 124,393,800 shares of Kraft Foods for $4.2 billion ($33.38/share). That, of course, is a very significant purchase for Buffett: Kraft has become Berkshire 's sixth largest public equity holding (after Coke, Wells Fargo, American Express, Procter & Gamble, and Burlington Northern).
As any true Buffett groupie should, I've done some "reverse engineering" of Buffett's Kraft purchase. Here are just a few of the significant things I've found:
1. One of the world's top brands
2. Rock-solid balance sheet (rated A+ by Value Line)
3. Stable/predictable business
4. Fully 33% of sales outside the US (Buffett remains negative on US dollar)
5. Above-market 3.5% dividend yield (equal to 10-year Treasury yield!), well-covered by earnings
6. Vast distribution network/customer relationships give Kraft major, and durable, competitive advantages
Kraft is currently selling for about 8% less than Buffett's cost. Why? Primarily because the market fears that Kraft will be unable to rapidly pass along commodity/food inflation to its customers, crimping margins. But, for the long-term investor, so what? Kraft will be able to raise prices eventually, normalizing margins. Moreover, when (not if) food commodity prices decline, as they inevitably will, Kraft's margins will fatten considerably.
Is Buffett continuing to buy Kraft at its reduced price? I would imagine so.
USG Corp. (USG--$37.67)
Now that EVERYONE/EVERYWHERE realizes that there's a problem in the US housing market, it's useful to remind ourselves that markets discount. That's why USG is no longer trading at $120, as it was in 2006. Yes, the housing news is very, very bad...and may get much worse. But, the markets are well aware, and have been busily discounting: Indeed, housing stocks, as a group, recently traded at twenty year lows!
Buffett owns 17,072,192 shares (17%) of USG, at an average cost of $31.34/share. And, now, some reverse engineering:
1. By far the largest, and lowest cost, US supplier of wallboard
2. Best balance sheet in the business
3. Best and most seasoned management team in the business
4. Germany 's Knauf recently raised its stake in USG holdings to 15% (the poison pill limit), using Euros
5. Trades at about 3 1/2 X next cycle peak estimated earnings
I see three realistic possibilities for USG: First, it joins the Berkshire fold (as Shaw, Acme Brick, and Johns Manville have done); second, it gets acquired by Knauf; and, third, it soars on its own in the next US housing up cycle.
Wells Fargo (WFC--$27.97)
Why does Buffett own 303,407,068 shares (9%) of Wells Fargo? And why does he just keep buying it?
Is it Wells' AAA-rated balance sheet (the only large bank in the US to receive AAA ratings from both Moody's and Standard & Poor's)?
The well-covered (by earnings) 10-year Treasury-beating 4% dividend?
The fact that Wells' astute management team largely side-stepped the sub-prime slime/derivatives mess?
Probably all of the above, and, from page 15 of Berkshire 's 2007 Annual Report: "...Wells Fargo had a small decline in earnings because of the popping of the real estate bubble. Nevertheless, I (Buffett) believe its intrinsic value increased, if only by a minor amount."
The US banking system is injured, but not dead. And it, like housing, will recover.
Investing is simple. But, it's not easy. Even with Buffett's help.
Having the guts to buy great companies when they are temporarily out of favor requires discipline, patience, and focus. So, lash yourself to the mast. Ignore the screams and lamentations of CNBC pundits, efficient market theorists, and business school deans (none, to my knowledge, are worth $62 billion).
Five years from now, and perhaps much sooner, Kraft's commodity input inflation problem, USG's housing collapse problem, and Wells' credit crisis problem will likely all be distant memories.
So, I own all three, and Berkshire, too.
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George Frost, CFA, is a retired portfolio manager and securities analyst living on the coast of Maine.
Warren Buffett's 3 Favorite Books: A guide to The Intelligent Investor, Security Analysis, and The Wealth of Nations
Monday, April 14, 2008
by George Frost, CFA, GuruFocus