A Quick Look at Berkshire Hathaway’s Big Buys in 1Q13

Aubrey is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Trade decisions of huge fund managers such as Berkshire Hathaway always make heads turn. I am turning mine today to the recent moves of this giant firm based on its first quarter 13F filing. The biggest buys include Liberty Capital (NASDAQ: LMCA), Wells Fargo (NYSE: WFC), Chicago Bridge & Iron (NYSE: CBI), and VeriSign (NASDAQ: VRSN). In spite of the significant lag between the filing date and the period concerned, such filings nevertheless offer ideas as this evaluation is based on current metrics. Here is a quick analysis from a fundamental perspective to see whether these are worth checking or not.

Liberty Media: stake in Sirius XM pays off

The communications, media, and entertainment company is one of Berkshire Hathaway’s big buys in the latest quarter. Liberty Media is a majority investor in the satellite radio company Sirius XM (NASDAQ: SIRI). The company, through its leader John Malone, announced buying a 27% stake in Charter Communications last March. Heads were turning recently as investors smell a looming merger with the reported talks of Liberty Media and another cable player, Time Warner, about the latter being acquired by Charter Communications. Also, Malone’s Liberty Global has reportedly offered a bid for Kabel Deutschland, the biggest cable operator in Germany. Wherever the talks or offers are headed, the geniuses at Berkshire Hathaway are likely to have seen these coming.

With or without the merger, there are several reasons to stick with this company. For one, it posted a huge positive EPS surprise in the latest quarter. This comes from its over 2,000% quarterly revenue growth. It is also important to assess Liberty Media by looking at the bulk of its portfolio. Sirius XM is itself achieving consistent growth. Since 2012, the radio company has been continuously raking double-digit quarterly revenue growth. Moreover, its profit margin of 13.77% for the quarter ending March is slightly higher than that for the same period last year. Based on Finviz data, Sirius’ EPS is expected to grow at an average rate of 29% each year for the next five years. This proves that Liberty Media's stake is worth the investment. Whether its portfolio further strengthens in the future is what investors must closely pay attention to.

Wells Fargo: strong earnings continue

The hedge fund also bought an additional $677 million worth of shares in Wells Fargo. Even with the strong and consistent growth that has been anticipated by analysts, the bank showed it could do more. Hence, it surpassed at least the four most recent EPS estimates. In terms of revenue, although it has failed to grow in the latest quarter vis-à-vis that for the same quarter last year, the prospects remain huge. In fact, it has gained three upward revisions, with no downward ones, for its June 2013 EPS.

If there is one thing that concerns me, it’s the fact that the bank may not be able to sustain its outstanding dividend performance in the long run because of its weak operating cash flow. However, in a broader view, the positive outlook earlier mentioned and its continuing efficiency can outweigh this. Wells Fargo is impressively growing its earnings through its expanding profit margins. In the quarter ending in March, its net profit margin was at 24.32%, way above that for the same period last year at 19.63%. Meanwhile, the bank’s P/E ratio of 11.60 is below that of its competitors Citigroup (17.23) and Bank of America (39.66) and the industry’s 22.17, but above JPMorgan’s 9.28. Given this relatively lower pricing, the room for appreciation in the future is very likely.

Chicago Bridge & Iron: a bright future ahead

Berkshire Hathaway bought over $400 million worth of shares in Chicago Bridge & Iron. What strikes me most about this company is the bright future that analysts have seen. This energy infrastructure company’s EPS is estimated to grow at an annual rate of 21.63% in the next five years. It has already put on a great show by surpassing EPS expectations in at least the last four quarters, including its strong revenue growth, at 87.42%, in the latest quarter. In fact, the company’s revenue has been growing at a double-digit rate since the second quarter of 2011.

What investors should perhaps keep an eye on is its profit margin, which recently went down to 1.49% in the first quarter from 4.95% in the same period last year. This is happening in light of a huge leap in the debt-equity ratio from 0.58 in the quarter ending December to roughly 0.99 in the latest quarter. Nevertheless, the strong growth performance and huge prospects are very encouraging. With the energy industry booming, the company with its long tradition of providing diverse infrastructural services is a good pick. In terms of pricing, its P/E ratio is roughly at the same level as that for the industry. But if one takes growth into account, its PEG ratio of 0.65 is way below the industry’s 1.30, which means it is relatively priced at a lower level.

VeriSign: Impressive revenue performance and profitability

The rule to evaluating a company with value is simple – growth and profitability. It is ideal to see a company raking in consistently growing revenues and have the machinery to turn it into profits. The quarterly revenue growth year-on-year of VeriSign, one of Berkshire Hathaway’s big buys, remains steadfast in the low-end double-digits since 2010, the most recent of which is 14.93% for the first quarter of 2013, while its competitors experienced a contraction in revenues. Moreover, the company’s profitability is undeniable. You won’t see many companies that have the ability to convert over a third of its revenues into profits. VeriSign has been excellent in managing its costs with a consistently high net profit margin of above 30% in the past couple of years. Its operating margin at 54% is way above the industry’s 12% based on Yahoo compilations. Consequently, VeriSign had surpassed at least the last four EPS estimates. And the EPS growth is not about to taper off yet, it is expected to grow in the next five years by 13.5% on average.

But why is VeriSign such an attractive investment? It is its business. This monopoly provides Internet infrastructure services. It is the business behind the domain names .com, .gov, and .edu, among others. It is almost impossible to think of the Internet without these. Moreover, VeriSign’s sphere is broad and therefore, it is not that vulnerable to domestic economic shocks. Currently, its valuation (P/E ratio is 21.92) is at a lower level compared to the application software industry’s (PE of 26). With a forward P/E that is even lower at 17.89, there is a notable room for appreciation that investors can take advantage of.

Conclusion

Famous hedge funds’ big buys are almost always likened to maps of hidden treasures – they point you where to look. But it pays to check the portfolio based on current metrics prior to any investment decision as the 13F filings do not reflect the latest information. I invite investors to check out these stocks. This set provides a balanced mix of great performing stocks that you can consider for long-term investments. 

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Aubrey Tabuga has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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