Three of Warren Buffett's New Buys
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
All investors would like to achieve a great investment record like Warren Buffett. That is why we love to follow his speeches, his teachings, and his ideas. It would be quite useful for us to closely follow the movement of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) in the stock market. Recently, Berkshire Hathaway revealed its three newest investments: Deere & Company (NYSE: DE), Wabco Holdings (NYSE: WBC), and Precision Castparts (NYSE: PCP). Currently, Berkshire Hathaway holds nearly 4 million shares in Deere, 1.6 million shares in Wabco, and 1.25 million shares in Precision Castparts. Should investors join Berkshire Hathaway into those three new buys? Let’s look at their fundamentals to find out.
1. Deere & Company
Deere is involved in three main business categories: agriculture and turf to provide farm and turf equipment; construction and forestry to provide machines for construction, material handing and earth moving; and financial services for leasing its equipment. The first business segment delivered the majority of sales, with $24 billion out of $32 billion in total sales, whereas construction and forestry segment only brought in a combined $5.3 billion in fiscal 2011. In the last several years, the agriculture and turf segment has surfed quite well on the rising demand for agricultural commodities. The demand was expected to be strong, mainly for high horsepower equipment of the company.
Over the last 9 years, Deere has managed to continuously deliver double-digit returns on equity to shareholders. Trailing twelve months, the ROE was nearly 41%. The high return on equity was due to a decent net margin of 8.7% and a high leverage level of 7.19x. As of July 2012, Deere had $7.4 billion in stockholders’ equity, more than $21 billion in long-term debt, $10 billion in short-term debt, and nearly $5 billion in cash. The low equity portion was mainly due to the increasingly high share buybacks, with nearly $8.5 billion value in its balance sheet. Even with the high debt level, Deere could comfortably pay for the interest expense, as its interest coverage is 6.2x. Deere is trading at $84.74 per share; the total market capitalization is $33.19 billion. The market is valuing Deere at 11.4%, with a 2.1% dividend yield.
2. Wabco Holdings
Wabco Holdings, established in 1869, is in the business of providing electronic and mechanical products, especially anti-lock braking systems (ABS) and electronic braking systems (EBS) for bus, truck, and passenger car producers. Its customers are divided into four main groups: OEMs for trucks and bus, OEMs for trailers, commercial vehicle aftermarket distributors, and car manufacturers. Daimler and Volvo are its largest customers, with around 12% and 11% of total sales, respectively, in fiscal 2011. The top 10 customers took 52% of its total sales. It is interesting to see that around 62% of revenue came from Europe; Asia ranked the second with 19% of sales. So the bet on Wabco by Berkshire Hathaway is a bet on European trucks and bus OEMs.
Wabco has delivered solid returns over the past 10 years, with consistent double-digit return on invested capital in the majority of the years. Over the past twelve months, its ROIC was 47.9%, the net margin was 12.3% and financial leverage was ample at 2.3x. As of September 2012, Wabco had $710 million in stockholders’ equity and $225 million in cash. The business employed $123 million in short-term debt, but it does not have long term debt. Like Deere, Wabco has been buying back shares, with the current value of $606 million treasury stocks in the book. Currently, Wabco is trading at $57.64 per share; the total market capitalization is $3.64 billion. The market is valuing Wabco at 12.2x P/E and 5.1x P/B.
3. Precision Castparts
This is a manufacturer of metal components in three segments: Investment Cast, as well as Forged and Fastener products, which are provided to diverse industries ranging from aerospace, medical, oil/gas, to pollution control. The majority of sales were from the aerospace market, which accounted for 62% of total sales in fiscal 2012. The second position belonged to the power market, with 21% of sales. The biggest customer was General Electric, accounting for 15.4% of sales in 2012. In addition, the firm considered United Technologies, Boeing, Airbus, and Rolls-Royce as key customers, although they didn’t account for more than 10% of total sales.
The business performance has been quite consistent, with double-digit return on invested capital and net margin for the last 5 years, while employing ample financial leverage of only 1.3x. Over the past 12 months, its ROIC was 15%, the net margin was 17.2%. As of September 2012, it had $9 billion in stockholders’ equity, $193 million in cash and only $670 million in debt. Currently, the stock is trading at $173.30 per share; the total market capitalization is $25.22 billion. The market is valuing the business at 19.1x P/E, 2.8x P/B, with the dividend yield of only 0.1%.
My Foolish Take
All three businesses mentioned above have delivered good business performances in the past, with high return on capital and reasonable debt level. They all have kept enhancing shareholders’ value by repurchasing its own stocks in the market. Personally, I think they are worth investors’ consideration to buy and hold for the long run.
hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Berkshire Hathaway and Precision Castparts. Motley Fool newsletter services recommend Berkshire Hathaway and Precision Castparts. 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.