2 Low P/E Stocks You Should Buy From Buffett's Portfolio
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Warren Buffet, one of the most successful investors is known for his impressive returns. Recently he bought around 9200 shares of his own firm Berkshire Hathaway worth ~$1.2 billion. This move shows his immense confidence in Berkshire's stock. His great investing ideas are treated as valuable advice by many in the industry. I was going through his portfolio and found out a few low P/E stocks which is an important selection factor for his portfolio. These stocks are cheap and two of them offer good investing opportunity to the investors. Let’s look at each of these in detail.
After hitting a low of ~$18 in July '12, the stock price of GM has again gained momentum and has climbed ~48% since then. This was mainly due to the recovering conditions in the US auto industry. To further gain from this market, GM will invest ~$1.5 billion in 2013 in its North American facilities to boost its production. The company expects to sell around 15 million new vehicles in 2013 that will be supported by this investment. It will also improve GM's existing manufacturing facilities that are a part of its ongoing upgradation program. I expect the modest growth in the US market in 2013 shall offset the sluggish market in Europe with ~3% decline in production volume.
The company is also planning an aggressive roll out of more than 30 new vehicles expected to be launched or redesigned. It includes launches across all its brands such as Chevrolet, Cadillac, GMC and Buick US scheduled for the next three years. Its largest brand Chevrolet will have around 13 new or remodeled launches in 2013. GM will also unveil some high-end vehicles and an all new line of full-size pick-up trucks in 1H13. With these launches in place, I feel the company will be able to enhance its top-line and its market share in the coming years.
Overall, 2013 is going to be a transition year and I expect a flat EBIT margin in North America for 2013 due to the higher cost absorption by the new launches. The benefits will start flowing from mid 2013 where margins should improve by ~10% resulting from sales of the new launched models.
Another pick from Buffett's portfolio is ConocoPhillips, which provides an attractive combination of a low P/E as well as a good dividend yield. The company is known for its capital appreciation with a solid dividend yield of ~4.4%. The company's 75% cash flow is used for upgrading its exhausted assets, while the remaining is utilized for the investors via share buybacks and dividend hikes. I expect ~$3 billion to be available to the company for share buybacks in 2013 as a result of its asset disposition program.
The company is on track with its asset disposition program that started in 2010 with a target of ~$29 billion till 2013. It completed asset sales of around $12 billion in 2012 will help the company in achieving its capital expenditure target of ~$15 billion for the three years starting from 2013. To fulfill these cash flow objectives, the company is selling its unproductive and non-core assets. Recently, ConocoPhillips announced the sale of its Algerian and Nigerian assets for ~$1.75 billion and ~$1.79 billion respectively. I view this as a good strategic decision by the company as both these assets had limited exposure and few plans for future growth and were a burden on the portfolio. This sell-off will reduce the capital requirement of the company by ~$6 million for the next few years. The proceeds will further help the company to focus more on its core and high performing assets such as Bakken and Eagle Ford, which will bring momentum to its earnings.
I feel 2013 will be good entry point in this stock for an investment and not for growth. The long-term investors can enter the stock for dividend returns, with capital growth to follow from 2013 onwards. I expect the company to generate ~5% growth in volumes and margins in the long run.
General Dynamics recently reported its 4Q12 and FY12 results which were below analysts’ estimates and the stock moved lower after the news. Its revenue decreased by ~12% to ~$8.08 billion for the fourth quarter and full-year revenue fell by ~3.6% to ~$31.5 billion. The company posted EPS of ~$1.39 for 4Q12 much below analyst's estimate of ~$1.90. This was because of the company's efforts to diversify its operations to offset the sluggish demand because of the low defense budget. The company has been focusing a lot on its information technology segment that is the biggest contributor in its sales. However, this segment was also a let-down in the quarter with its revenue down by ~12% to ~$2.58 billion reflecting the slow defense spending. The only segment that didn't posted negative returns was its Aerospace segment with ~0.2% increase in revenue. Further improvement is expected in this segment looking at the scheduled deliveries in 2013. It includes 113 large cabin aircraft and 26 mid cabin aircraft along with the backlog of Gulfstream airplanes.
However, the gloomy outlook of the defense sector will continue to affect the company in the future as well. The US defense industry is under the clouds of uncertainty with the Pentagon cutting down the budgets. Around $487 billion of cuts were already announced which would impact the sales of the defense contractors in the future years. Apart from this, another bill that was supposed to be passed in early Jan '13 has been delayed till March. This could further result in ~$500 billion cuts in the defense budget for the next ten years including ~$55 billion in FY13.
To sum up, I feel General Motors and ConcoPhillips offer a perfect opportunity to make a long-term investment. GM would be benefited with its product line expansion strategy and ConocoPhillips would be able to lure investors with its attractive pay-back strategy. On the other hand, I remain skeptical about General Dynamics's overall performance and would recommend a hold on this stock for now.
madhudube has no position in any stocks mentioned. The Motley Fool recommends General Motors. The Motley Fool owns shares of General Dynamics. 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!