Analyzing Berkshire Hathaway’s Top Consumer Stocks

By Sandeep Gupta - September 18, 2012 | Tickers: KO, PG, WMT | 0 Comments

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I like to examine hedge funds and what hedge fund managers do with their portfolios as analyzing and imitating successful hedge funds is a relatively easier way to make sizeable profits.  I find it essential to analyze Warren Buffett's top holdings and check some facts about each of his picks. This article provides an analysis of Warren Buffet’s top consumer stocks and their growth prospects.

I analyzed Berkshire Hathaway’s Q2 2012 13-F fillings to determine its top holdings. The following is a list of the top 3 holdings in the consumer sector.

Coke’s (NYSE: KO) stock is up ~8% year to date, but down ~5% in the last month after Goldman Sachs cut its rating on the stock from “Conviction Buy” to “Neutral”. Despite near-term currency headwinds and tough macroeconomic environment, I see Coke as the premier large-cap consumer investment and believe that the company is still on pace to meet or exceed its long-term goals of 3-4% volume growth, 5-6% revenue growth, and 6-8% operating income growth. The Company continues to grow volume and value share while focusing on productivity and cost savings. Moreover, the input costs are likely to be favorable for the next several quarters as several key commodity prices have fallen. In total, a low single-digit decline in COGS is expected for major beverage players. Key benefits are coming from orange juice (which would be down 20% over the next four quarters if current prices hold), aluminum (-17%), and natural gas (-25%), which is also used in plants.

Wal-Mart (NYSE: WMT) is trading near its all-time high as the stock has outperformed the broader markets with a 23% year to date run up. I think there is a further room for stock appreciation as the company has multiple growth drivers including the upcoming layaway program, “Pay with Cash” program, international expansion and the small box format. Following a good response to last year’s layaway program, the company is expanding the interest free pay-over-time program for Christmas. This will provide customers two additional pay cycles to pay for their Christmas purchases and thus, an even better customer response is anticipated. “Market Basket Challenge” commercials and print ads appear to be a big win for Wal-Mart in the United States, as they effectively highlight the price-to-value advantage yet are inexpensive to produce. Moreover, Wal-Mart appears to have good visibility on further productivity gains to facilitate SG&A reduction and incremental price reductions. Conventional food retailers appear to be most at risk, as item price reductions and advertising appear to be aimed most directly at them. Thus, in my opinion, Wal-Mart is still not overvalued and is a good investment for both near-term as well as long-term.

Like, Coke and Wal-Mart, Procter & Gamble (NYSE: PG) stock also offers a long-term stability as it is the industry forerunner and one of the highest-quality companies in the consumer industry with an extremely well- diversified product portfolio, leading share positions, and strong developing markets presence. P&G's group-leading sales and marketing capabilities should drive mid-tier sales growth in the medium term, and the company's commitment to cost-cutting should generate funding to execute its aggressive emerging market expansion while posting competitive profit growth. I think a downside risk on the stock is somewhat limited, offering reasonable risk/reward on the potential that P&G can actually deliver its near-term targets and drive improved confidence in long term opportunity.

The Bottom Line

Over the past few years, Coke has had superior execution in the U.S. versus its peer group and I expect continued long-term benefits from its advantaged brands and solid execution.

Wal-Mart’s U.S. business is well positioned with multiple drivers in place to drive consistent growth. Moreover, global growth opportunities and a more consistent profit growth support the outlook for Wal-Mart's International business.

After a prolonged period of flattish trends, Procter & Gamble shares can finally see some light. The company’s focus on its core business and the progress on the $10 billion cost saving plan limits any downside risk.

Thus, in my opinion, all the above three consumer stocks are low-risk and attractive stocks to buy. In addition, all these company’s provide above average dividend yield. Warren Buffet’s approval makes me even more optimistic about the growth potential of these companies and thus, I recommend buying these stocks.

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