Analyzing the Bill and Melinda Gates Foundation's Top Holdings

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

The Bill and Melinda Gates foundation is well known for its philanthropic activities in the field of poverty reduction and healthcare. The foundation has over $36 billion dollars in endowments, out of which ~$15 billion is invested in equities. The following is a list of its top equity holdings:

<table> <tbody> <tr> <td> <p>Company Name</p> </td> <td> <p>Shares Held</p> </td> </tr> <tr> <td> <p><strong>Berkshire Hathaway Inc.</strong><br /> <span class="ticker" data-id="206602">(NYSE: <a href="">BRK-B</a>)</span></p> </td> <td> <p>81,204,077</p> </td> </tr> <tr> <td> <p><strong>The Coca-Cola Company</strong></p> </td> <td> <p>11,682,000</p> </td> </tr> <tr> <td> <p><strong>McDonald's Corporation</strong><br /> <span class="ticker" data-id="204400">(NYSE: <a href="">MCD</a>)</span></p> </td> <td> <p>9,872,500</p> </td> </tr> <tr> <td> <p><strong>Caterpillar Inc.</strong><br /> <span class="ticker" data-id="203043">(NYSE: <a href="">CAT</a>)</span></p> </td> <td> <p>10,090,400</p> </td> </tr> </tbody> </table>

I have already covered Coca-Cola in a previous article, so I won’t be discussing it again. Here’s my take on the other three companies in the list.

Berkshire Hathaway is the foundation’s largest equity position. Berkshire recently reported strong results, with each of its businesses gaining momentum in 3Q 2012. Going forward, Berkshire is expected to post strong earnings from railroads, manufacturing, services, and retail businesses. The performance of insurance and investment businesses will largely depend on stock market trends.

With over $40 billion in cash, the company is looking for some big acquisitions going forward, which are likely to drive growth. The company is currently trading at just 1.17x BV. This is only slightly above 1.1x BV, where management is likely to began aggressively buying back company shares, providing a strong support. I find a risk reward profile of this stock to attractive at current price.

McDonalds is trading at a forward P/E of 14.64. Its expected EPS for the current year is 5.31 and next year it's 5.79. The company is expected to post top line growth of 1.90% in the current year and 5.10% next year. Although McDonald is seeing some soft trends of late primarily due to macro concerns, increased competition, and difficult comps, I believe the company is an excellent long term buy given its prospects in emerging markets, high dividend yield, and defensive characteristics.

The company’s current P/E of ~14x is near the lower end of its historical range. Mcdonald's has rarely seen these kinds of valuation since 2005. Going forward, the company’s focus on Dollar menu advertising will offset competitive intensity to some extent. The company’s comparisons are also likely to get easier from April next year. I believe long term investors should start accumulating shares at these levels.

Caterpillar is trading at a forward P/E of 9.69. Its expected EPS for the current year is 9.09 and next year it's 8.77. The company is expected to post top line growth of 9.40% in the current year and decline 0.30% next year. Caterpillar is usually considered an early cyclical stock and it is best to buy it during early phases of recovery. So, it may not be the best bet for a short term investor during current times. However, investors with long term horizon may still consider taking a long position in the company.

Caterpillar is levered to the Chinese resource consumption story, which is likely to increase demand for its mining and construction equipment businesses. Even with the slowing macro environment, the company’s aftermarket business will continue to see strong replacement demand. The company doesn’t look expensive at less than 10 times forward earnings and 2.40% dividend yield. Hence, long term investors may start building the position in this stock.

All Engines Go

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GayatriSharma has no positions in the stocks mentioned above. The Motley Fool owns shares of Berkshire Hathaway, McDonald's, and Microsoft. Motley Fool newsletter services recommend Berkshire Hathaway, McDonald's, and Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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