Which One of Berkshire's New Additions Should You Buy?

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

In the middle of February, with much fanfare, the newest additions to Berkshire's portfolio were announced. These stocks were immediately bid up after hours, and many investors and fund managers sought to emulate Berkshire's actions in order to make a quick profit.

Buying into any of these stocks then would have been silly. There was so much fuss around the stocks that they jumped quick, and were bound to be sold off soon after. In addition, when everyone buys into one stock because it is cheap, then it no longer remains so.

Now the dust has settled. Where would you invest if you wanted to invest like Berkshire Hathaway, but can only invest in one holding?

In the last 6 months, Berkshire has added these four new holdings to its portfolio.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Date Purchased</p> </td> <td> <p>Performance Since Reported Purchase</p> </td> </tr> <tr> <td> <p><strong>Deere </strong><strong><span class="ticker" data-id="203294">(NYSE: <a href="http://caps.fool.com/Ticker/DE.aspx">DE</a>)</span></strong></p> <p> </p> </td> <td> <p>30/09/2012</p> </td> <td> <p>+$6.5 (8%)</p> </td> </tr> <tr> <td> <p><strong>Precision Castparts <span><span class="ticker" data-id="204947">(NYSE: <a href="http://caps.fool.com/Ticker/PCP.aspx">PCP</a>)</span></span></strong></p> <p> </p> </td> <td> <p>30/09/2012</p> </td> <td> <p>+$22.6 (14%)</p> </td> </tr> <tr> <td> <p><strong>VeriSign </strong><strong><span class="ticker" data-id="206019">(NASDAQ: <a href="http://caps.fool.com/Ticker/VRSN.aspx">VRSN</a>)</span></strong></p> <p> </p> </td> <td> <p>31/12/2012</p> </td> <td> <p>+$6 (17%)</p> </td> </tr> <tr> <td> <p><strong>Archer Daniels Midland </strong><strong><span class="ticker" data-id="202727">(NYSE: <a href="http://caps.fool.com/Ticker/ADM.aspx">ADM</a>)</span></strong></p> <p> </p> </td> <td> <p>31/12/2012</p> </td> <td> <p>+$5 (18%)</p> </td> </tr> </tbody> </table>

Unfortunately, since their purchase all of these stocks have gone up, not really leaving much room for investors who were late to the party.

With prices up between 8%-18% since being purchased by Buffett, are there any opportunities left in these stocks or are they all now too expensive?

To find out, I am going to look at each stock for GARP (Growth At A Reasonable Price), and use the PEG ratio to discover if there is any potential left in these companies.

Rather than using the normal P/E ratios, I am going to use the forward P/E adjusted to remove cash from the balance sheet. In addition, rather than using the projected five year EPS growth rate, I am only going to use the predicted growth rate for next year, as I believe the further out that you try and predict growth, the more unreliable your numbers can become.


<table> <tbody> <tr> <td> </td> <td> <p><span>Share Price</span></p> </td> <td> <p><span>Cash Per Share</span></p> </td> <td> <p><span>EPS</span></p> </td> <td> <p><span>P/E Less Cash</span></p> </td> <td> <p><span>Forward P/E less cash</span></p> </td> <td> <p><span>Projected EPS growth rate </span></p> </td> <td> <p><span>PEG ratio</span></p> </td> </tr> <tr> <td> <p><span>DE</span></p> </td> <td> <p><span>$88.00</span></p> </td> <td> <p><span>$9.40</span></p> </td> <td> <p><span>8</span></p> </td> <td> <p><span>9.83</span></p> </td> <td> <p><span>8.54</span></p> </td> <td> <p><span>15</span></p> </td> <td> <p><span>0.6</span></p> </td> </tr> </tbody> </table>

As I write, Deere is trading at $88 a share. After deducting cash, this becomes $78.6 based on current EPS that gives it a P/E ratio less cash of 9.8. 

EPS is projected to grow 15% to $9.2 per share next year, and this gives a forward P/E ratio less cash of 8.5. Using this forward P/E ratio, divided by the projected EPS growth rate, we get a PEG ratio of 0.6, which is much less than the 1 required to signal that the stock is cheap for the growth it is expected to produce. 

Despite the rise in the share price since Buffett bought in, Deere is still an attractive value proposition. The stock is trading at a forward P/E multiple less cash of 8.5 times compared to the sector average of 11. Deere is also trading on a PEG ratio of 0.6, and appears to offer growth at a reasonable price.

Precision Castparts  

<table> <tbody> <tr> <td> </td> <td> <p><span>Share Price</span></p> </td> <td> <p><span>Cash Per Share</span></p> </td> <td> <p><span>EPS</span></p> </td> <td> <p><span>P/E Less Cash</span></p> </td> <td> <p><span>Forward P/E less cash</span></p> </td> <td> <p><span>Projected EPS growth rate </span></p> </td> <td> <p><span>PEG ratio</span></p> </td> </tr> <tr> <td> </td> <td> <p><span>$187.00</span></p> </td> <td> <p><span>$3.30</span></p> </td> <td> <p><span>9.25</span></p> </td> <td> <p><span>19.86</span></p> </td> <td> <p><span>16.48</span></p> </td> <td> <p><span>20.5</span></p> </td> <td> <p><span>0.97</span></p> </td> </tr> </tbody> </table>

Next on the list is Precision. Unlike Deere, the company does not have much cash to make a difference to calculations. The company is currently trading on a forward P/E ratio of 16.5 less cash, and EPS is expected to grow 20.5% this year.

With only $3.30 per share in cash, Precision's P/E ratio after the deduction of cash is not that much different from its ratio without the deduction of cash. In addition, Precision's high double-digit growth rate is not enough to make the company look like a GARP investment. 

With a PEG of nearly one, Precision is the second most expensive company in the group, thanks to its small cash balance and P/E ratio. Precision is not a good investment to make after its strong share price gains.


<table> <tbody> <tr> <td> </td> <td> <p><span>Share Price</span></p> </td> <td> <p><span>Cash Per Share</span></p> </td> <td> <p><span>EPS</span></p> </td> <td> <p><span>P/E Less Cash</span></p> </td> <td> <p><span>Forward P/E less cash</span></p> </td> <td> <p><span>Projected EPS growth rate </span></p> </td> <td> <p><span>PEG ratio</span></p> </td> </tr> <tr> <td> <p><span>VeriSign</span></p> </td> <td> <p><span>$46.40</span></p> </td> <td> <p><span>$10.20</span></p> </td> <td> <p><span>1.9</span></p> </td> <td> <p><span>19.05</span></p> </td> <td> <p><span>17.2</span></p> </td> <td> <p><span>10.5</span></p> </td> <td> <p><span>1.8</span></p> </td> </tr> </tbody> </table>

Next on the list is VeriSign. VeriSign has the highest cash per share value on the list. Deducting cash from the company's balance sheet gives a P/E ratio of 19, which is significantly below VeriSign's sector average of 56!

However, with a projected EPS growth rate of 10.5% for 2013, the company does not do well when it comes down to the PEG ratio. VeriSign is trading on a PEG ratio almost double that of Precision!

So, overall, despite its high cash balance, VeriSign is not a decent GARP investment anymore. Indeed, I believe the stock is now overpriced for the earnings growth it is expected to produce.

Archer Daniels Midland 

<table> <tbody> <tr> <td> </td> <td> <p><span>Share Price</span></p> </td> <td> <p><span>Cash Per Share</span></p> </td> <td> <p><span>EPS</span></p> </td> <td> <p><span>P/E Less Cash</span></p> </td> <td> <p><span>Forward P/E less cash</span></p> </td> <td> <p><span>Projected EPS growth rate </span></p> </td> <td> <p><span>PEG ratio</span></p> </td> </tr> <tr> <td> <p><span>Archer</span></p> </td> <td> <p><span>$32.00</span></p> </td> <td> <p><span>$3.50</span></p> </td> <td> <p><span>2.1</span></p> </td> <td> <p><span>13.57</span></p> </td> <td> <p><span>11.6</span></p> </td> <td> <p>17</p> </td> <td> <p>0.8</p> </td> </tr> </tbody> </table>

The last company on the list is Archer Daniels. Now, I know Berkshire would have bought this stock due to its associations with food; food is long term and Berkshire likes long-term investments. Analyzing Archer as a growth stock seems wrong, as the company is not about growth - it is about long-term sustainable investing. 

I am going to analyze it anyway. Archer's EPS fell last year due to higher commodity input costs, but earnings are expected to grow a solid 17% this year, which will put the company on a forward P/E of 11.6 minus cash.

I believe that this rate of growth is highly conservative, as last year's EPS fell due to higher crop prices. Crop prices are now falling back to levels seen in 2011, which could mean that Archer's earnings rise back to levels seen in 2011 - a potential EPS growth of 50%-100%.

Anyway, even on the conservative EPS growth figure of 17%, Archer's PEG ratio is 0.8, the second lowest in the group. Even after gains of 18% since Berkshire's original investment, Archer Daniels still appears to offer growth at a reasonable price.


All in all, you may not be able to buy any of these shares at the price that Berkshire paid for them, but this analysis shows that there are still two good value stocks in this group. 

Both Deere and Archer Daniels are currently trading at prices that offer future growth at a reasonable price. Precision Castparts is on the edge, however, due to its lack of cash and high P/E multiple, the shares currently look over priced. 

If you want to invest like Berkshire Hathaway and Warren Buffett but didn't get in early enough, the stock to buy now is Deere for future growth at a reasonable price.

RupertHargreav has no position in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus