Warren's Wonderful World

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

Warren Buffett has uttered so many truisms over the years he's like the Mark Twain of business. Few humorists have come up with so many pithy and succinct witticisms.  A recurring theme is that he loves the concept of a "wonderful company."

  • "Time is the friend of the wonderful company, the enemy of the mediocre."
  • "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Looking over his holdings you can see a pattern emerge of what makes a wonderful company to Warren. His top holding as everyone knows is his beloved Coca-Cola. But lately he's added to a few positions and some names that aren't familiar to the average investor.

What Warren Wants

For instance, Liberty Media Corporation (NASDAQ: STRZA), is a position he's increased by 83% to $5.5 million shares. This is not to be confused by the other stock ticker, Liberty Interactive Corporation (NASDAQ: LINTA) which is in the catalog and mail order business. Both are headed by the same CEO Gregory B. Maffei and based in Englewood, Colorado. Liberty Media Corporation is a sort of  media and entertainment holding company. It owns and operates premium cable content like Starz, Encore and MoviePlex. It also distributes and creates content. To top it off, it owns the Atlanta Braves team and also invests in other media, including a large stake in Sirius XM Satellite radio. Liberty Media is best described as the Goldman Sachs of media.

This is a very curious name for Mr. Buffett as it has no yield but I think Warren must know something. Liberty Media has a P/E of 7.34 and a forward P/E of 31. For a media company the debt load is not bad at only half of its total cash. Berkshire Hathaway is its largest institutional holder and company Chairman John C. Malone owns 1,749,369 shares. Since the company share price fell off a cliff from its 2008 high in the $120's to a sub $10 share in 2008-9 it has slowly but steadily climbed back over $100.00.

Presumably Buffett may have started a position then but he's been adding even at higher prices. The company has a market cap at $12.75 billion and it's not a household name. The profit margin is 69.22% and most people only know it for its Sirius stake. Buffett sees the list of all their quality assets and must see dollar signs as to the total asset value. Its return on equity at 30.20% justifies its 1.96 price to book.

What's So Wonderful

Another name that Buffett has been adding to is DaVita Health Care Partners Inc (NYSE: DVA) which just closed its acquisition of Health Care Partners. He increased his stake by 55% in this mid-cap US dialysis provider with Berkshire Hathaway now holding a 11.6% stake. Buffett does know how to pick them as it's up over 50% in 52 weeks. This company's P/E is higher than most Buffett faves at 20.40 and a forward P/E at 15.72.

DaVita has a $10.73 billion market cap but unlike Liberty Media it has a much larger debt to cash ratio, basically $5.76 billion in debt to $388.03 million in cash. Deutsche Bank loves this name and just anointed it a top pick among Health Providers on November 6 also raising their price target. Feltl & Co. also raised their price target to $121 and maintains its Buy rating.

What's so wonderful about DaVita that compelled Warren to buy over a million shares since late September?  It is the best of breed dialysis name. Sadly, all too many kidney and renal disease sufferers are intimately familiar with its 1,912 dialysis centers in the US and 24 abroad.

The return on equity is 22.07% although its price to book is 4.20. All its corporate governance concerns are low except compensation at medium and has a low beta of .67. 

With its acquisition of Health Care Partners it now has a managed care network under its umbrella and on the Q3 earnings call CEO Kent J. Thiry was very upbeat saying of the merger, " On a combined enterprise, we'll have a very distinctive potential for free cash generation as HCP is highly likely to contribute significant free cash flows in 2013, even after the initial debt cost to finance the deal." CFO Matthew Mazdyasni estimated the amount adding $25-30 million per month to operating income.

Ole' Big Blue

The last position that Warren has been adding to is surprising given his disdain for investing in tech, having famously said,"Beware of geeks bearing formulas". International Business Machines (NYSE: IBM)  is one of his top holdings. This is a household name fondly referred to as "Big Blue" but many may not be aware of how they have transitioned away from hardware to business services. The century-old company is now almost exclusively providing IT software and service for businesses globally.

IBM has a P/E of 13.63 with a forward P/E 0f 11.40 and a 1.80% yield. The stock has pulled back from its 52 week high of $211.79 but its chart over the last three years from below $80 to over $200 just weeks ago is stunning. And yet its P/E is still below that of competitors Accenture and Microsoft. Warren probably appreciates IBM's return on equity at 73.84.

Since the stock has run Warren isn't adding as aggressively in this name (only 3% more) but it is exactly the steady Eddie kind of name he likes even if it is tech. It is the go-to name in business IT systems and even Warren understands that.

Too Much Of A Good Thing?

So, if you are a fan of all things Warren you may want to take a look at the three names in which he's been increasing his stake. Obviously, he started positions in these names at lower prices but even here these "wonderful companies" have enticed him to add more. And to close, here's my favorite Warren Buffett quote. (I think Warren may have fancied Mae West).

"Why not invest your assets in the companies you like? As Mae West said, "Too much of a good thing can be wonderful."


leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services recommend International Business Machines. 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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