Buffett's New Power Plays: Which is the Better Buy?
Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Any time Warren Buffett makes a move in the market, his activities are dissected as thoroughly as a body from a crime scene. What did he buy and how much, what did he sell and how much, with theories and reasoning from everyone and their grandmother. So as the end-of-quarter portfolio holdings were released recently, the buzz about Buffett’s new moves hit the blog-o-sphere, and the conjectures began. I personally am not interested in what he sold – he may have done so for many reasons, and I don’t believe in guessing at those reasons. However, he buys for one reason: he believes it is the best place to invest his money. I am taking a look at his two new energy purchases, Phillips 66 (NYSE: PSX), which was recently spun-off from ConocoPhillips (NYSE: COP), and National Oilwell Varco (NYSE: NOV). Which is the better buy?
In my analysis, I tend to rely heavily on analyst opinion and estimates. I figure they have been studying the stock for a while and probably have a better handle on the numbers than I do. I do look at current news, as well, but I like to lean more on the numbers to provide an objective recommendation.
Phillips 66 is currently trading at about $42, just off its 52-week high of $43.45 reached in early August. It has a PE of 6.89 and pays 1.90% dividend. The current analyst rating is a 2.3 (1.0 = Strong Buy, 5.0 = Sell) with a mean target price of $46.27, for a potential gain of 10%. There are 2 Strong Buy recommendations, 6 Buys, and 7 Holds.
The consensus estimate for year-end 2012 is $6.00. The estimate for year-end 2013 is $5.32, 11% lower than 2012.
The stock is up 24% since its spin-off from ConocoPhillips in April. The current estimated annual growth rate for the next 5 years is 6.00%, compared to an industry average of 14.81% and a sector average of 13.65%.
National Oilwell Varco is trading at approximately $77 per share, down 11% from its 52-week high reached in February. It has a PE of 13.11 and pays a 0.6% dividend. Currently analysts rate it a 1.8 (8 Strong Buys, 17 Buys, and 2 Holds) with a mean target price of $94.62, for a 23% potential gain.
NOV’s year-end 2012 consensus earnings estimate is $5.96, 25% higher than actual 2011 earnings. Its estimate for year-end 2013 is $6.80, 14% higher than 2012.
The stock is up 14% since the beginning of 2012, and up 17% from a year ago. Current 5-year annual growth is estimated at 16.25% vs the S&P at 9.96%.
Both Phillips 66 and National Oilwell Varco look well-positioned going into the next few years of energy production. Buffett’s big bet is on Phillips 66; with over a billion dollars invested, it’s one of his top positions. On the other hand, Buffett holds so few stocks in his portfolio (only 37 as of the end of June) that any purchase should be deemed significant, and thus NOV should be considered note-worthy.
Clearly Warren Buffett plays a deeper game than the average investor, and his reasoning for the investment in Phillips 66 is unknown. (Of course, he did initially obtain the stock via the spin-off from ConocoPhillips, which continues to be a large part of the Berkshire portfolio.)
But in considering either of the stocks as a new purchase, I have to go back to the numbers. With Phillips 66’s current PE and year-end 2013 earnings estimate, I see a stock price of $37, or a significant decrease from where it stands today. National Oilwell Varco’s PE and earnings estimate leads to a stock price of $89, for 16% upside.
And with analysts predicting an 11% growth decrease in 2013 for Phillips 66, versus a 14% growth increase for National Oilwell Varco, I have to go with the latter rather than the former.
My money is on National Oilwell Varco.
Blogger Karin Hernandez does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of National Oilwell Varco. Motley Fool newsletter services recommend National Oilwell Varco. 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.