Finding the Fortress Companies the Buffett Way

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

Finding fortress-like firms for a portfolio is the objective but it's not always easy. Several U.S. firms fit the Buffett bill with low corporate governance risk, yield, and iconic products.

In the garage, under the sink, and in the toolbox

The first may be a new name to you as it doesn't get much attention on CNBC or Forbes. It's not a flashy tech or momentum battleground stock. It's merely been lubricating, degreasing, and maintaining all kinds of things in 160 countries since 1953. The company is WD-40 Company (NASDAQ: WDFC), a specialty chemical company that makes 3-In-One oil, WD-40 lubricant spray, Lava hand cleaning soap, and other household, industrial, and automotive products

If you have a can of WD-40 in your house or workshop, you can use it for winterproofing boots, stain removal, and Reader's Digest listed 50 handy uses .One can also use WD-40 to remove a python from underneath a bus or extract nude burglars from air conditioning vents among two of the more unusual uses documented in the company's archive of testimonials. WD-40 is also the official "multi-purpose problem solver" of Nascar, used to remove stuck spark plugs fast.

The company website uses the fortress terminology saying,"WD-40 will leverage and build the brand fortress of WD-40 by developing and acquiring brands that deliver a unique high value to end users." Since 1995, the company has acquired and developed ten additional brands aside from the original WD-40 formula. The formula is almost as closely guarded a secret as the formulation of Buffett's favorite beverage Coca-Cola (NYSE: KO).

This company has a Buffett like moat with corporate governance risk score of the enviable 1 (best). It offers a yield of 2.30% and global annual sales of over $300 million. With only 347 employees, revenue per employee almost approaches Google levels!

This is still a small cap with market cap of $879 million but it fits most of the Buffett criteria for a fortress.

The fortress of refreshment

Coca-Cola is Buffett's largest holding in his portfolio and he won't be upset if you come along for the ride. He probably doesn't drink the company's other refreshment solutions: Odwalla, Pico coconut water, Dasani water, Minute Maid, Powerade, or Innocent Drinks, but he must approve of these acquisitions to keep ahead of healthy drinking trends and keep up with rivals, PepsiCo, Dr. Pepper Snapple, and Monster.

Coca-Cola offers a 2.80% yield and a trailing P/E of 20.81. After Jeep, Coca-Cola and Hershey tie for Most Patriotic brands in a survey published by USA Today. Despite its century old history, the company keeps up with the times, and is about to debut a Coke sweetened with stevia in Latin America.

Undoubtedly, Buffett bought his 400 million shares much lower and the price/book has been getting stretched, now at 5.53. Analysts are bullish with a median price target of $47 for over 15% upside and have 14 Buys or better and eight holds.They don't expect a super quick growth with a five year EPS growth rate of 10.18%.

Coca-Cola is a big cap name with a $180 billion market cap, larger than both Dr. Pepper Snapple and PepsiCo.

A fortress in tech

VeriSign (NASDAQ: VRSN) is one of Buffett's newest additions. It is a mid-cap with $6.8 billion market cap and dominates the domain of well...internet domain registration, .coms,.net, etc.. It also provides internet security authentication. Although Buffett has famously said, "Beware of geeks bearing formulas" he likes this company's formula for tech success enough to have added to his position by 121%, owning over 8 million shares.

Operating margin is an impressive 54% with a profit margin of 37.22%. Gross margin has hovered between 70%-80% over the last ten years but Trefis believes margin will contract due to its ICANN (Internet Corporation for Assigned Names and Numbers) agreement, fixing .com domain prices at $7.85 until 2018 and only allowing a 10% annual hike for the less popular .net domains. They advise VeriSign is fairly priced at $41. It closed on July 3 at $45. This explains the 11% short interest.

ICANN does give VeriSign a virtual monopoly on internet domain name registration in the U.S. This has helped it increase net income from $70 million in 2010 to $312 million in 2012. The P/E has come down from 95 in 2010 to its current 21 trailing P/E.

But VeriSign will be hamstrung by this agreement for the foreseeable future unless it can do an end-run into the burgeoning generic top level domain (gTLD like .book,.app, .web) business with ICANN, setting up for the largest expansion of domain names ever in the next few years.

At what price did Buffett buy VeriSign? He could have bought it as low as $34 last November when this agreement with ICANN and the Commerce Department was being hammered out. Its main competition is tiny Tucows and privately held Network Solutions and Global Domains International.

The company has a 0.95 debt/cash ratio. Analysts are neutral on VeriSign with 10 Holds, one Underperform, two Buys, and one Strong Buy with a median price target of $47. That doesn't leave much upside and without a yield like the other two fortress stocks more susceptible to bear raids. They believe the company can grow EPS at a five year rate of 13.50%, and the PEG is at 1.44.

VeriSign is a veritable cash flow machine generating cash per share of $5.75. The company is shareholder friendly with a $300 million buyback last year and a special dividend for investors usually around the holidays. It also has the best corporate governance risk rating of 1.

Storming the fortresses

I have to like WD-40 the best as it has a great product with a moat, a yield, and great management.

What's not to like about Coca-Cola? It's a dependable performer as a consumer defensive and excepting growth investor, could be a core position in any portfolio. It is in Buffett's portfolio as his second-largest position. Ride on Buffett's coattails and pick up a slug of Coke stock on any market downturn.

VeriSign, at these levels, has too many ifs and untils and unlesses for my liking and would hold back from buying until it is below the Trefis level of $41.

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AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola. 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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