Berkshire Hathaway (BRK-B) shareholders attending this year’s annual meeting will be an extra-happy bunch, as the conglomerate’s stock price gain has more than doubled the S&P 500’s over the past 12 months. But if you’re the type who likes to parse the Berkshire Hathaway investment portfolio for potential piggyback investments, there’s slim pickings for the value conscious.
Coca-Cola (KO), American Express (AXP), Procter & Gamble (PG), and Johnson & Johnson (JNJ) all have trailing 12 month PE ratios above 17, compared to 14 for the S&P 500. Besides, those positions haven’t been added to in years.
The absolute best value among the top 10 holdings is Wells Fargo (WFC), with a PE ratio below 11. And it’s a Berkshire holding that chairman Warren Buffett has been adding to consistently since 2010. Wells Fargo has definitely made a case that it is the best in breed, as its focus on retail and commercial banking has helped it shine compared to the prop-desk-vulnerable JPMorgan Chase (JPM) But even with its understandable business model, an investment in Wells Fargo means bellying up to the bar to partake in the healthier-but-far-from-healed financial sector. Same goes for US Bancorp (USB), another top-10 financial in the Berkshire Hathaway portfolio.
That bring us to the other cheap stock among Berkshire’s biggest holdings: Directv (DTV) has a trailing 12.4 PE ratio and a forward PE of 11.7. We don’t yet have Berkshire Hathaway’s first-quarter portfolio disclosures but at the end of 2012, the stock was the eighth largest Berkshire Hathaway holding; the 37.04 million shares on record at the close of the year have a current market value of $1.9 billion. Berkshire Hathaway owns nearly 6% of Directv’s outstanding shares.
If the conglomerate didn’t add to its Directv stake in the first quarter of this year, that would be a small bit of news. Ever since the position was opened in the third quarter of 2011, more shares were added in every subsequent quarter.
The best non-financial value stock among Berkshire Hathaway’s biggest positions isn’t the handiwork of Warren Buffett. The Directv stake has the fingerprints of former hedge fund manager Ted Weschler, who joined the good ship Berkshire Hathaway two years ago along with Todd Combs. Weschler’s concentrated hedge fund had a big position in Directv.
Some other sharp value minds have also been adding to their Directv stakes lately. Bill Nygren, co-manager of both the Oakmark and Oakmark Select fund increased each fund’s position in the first quarter of this year. Directv accounts for nearly 5% of the $3.6 billion Oakmark Select fund and 2.4% of the $8.8 billion Oakmark fund, where it is the fund’s third largest holding.
Wally Weitz, lead manager of the $1 billion Weitz Value fund also increased that fund’s Directv position in the first quarter; at 5.7% of fund assets it is the fourth largest position in the 27-stock portfolio.
So what’s a value investor to love? In two words: stock buybacks. Aggressive doesn’t seem to overstate management’s pursuit of share reduction.
(For a sense of how much Buffett loves buybacks, take a spin through his 2011 riff on how much he was rooting for IBM to keep up its repurchase pace.)
Directv doesn’t pay a dividend, choosing to solely return capital via buybacks. Still, it’s net payout yield (dividends plus the value of buybacks) is an impressive 16%, that’s more than double the non-too-shabby 7.3% for IBM. A mid March decision to forego bidding on Vivendi’s Brazil telecom enterprise was cheered by Directv shareholders, who worried the acquisition could potentially put the brakes on the repurchase program.
Nygren recently posited on CNBC that one reason Directv continues to sell at a below-market valuation is because of its dividend policy: yield hungry investors today are bidding up the dividend payers, and giving shorter shrift to the holdouts, like Directv.
The subscription model gives Directv a nice bit of free cash flow that helps makes share repurchases possible. But the company has also borrowed aggressively ever since the Fed began driving rates down during the crisis. And as the chart below shows, the borrowing far exceeds what has been needed to fund capital expenditures; leaving DTV with plenty of cheap borrowed money to buy back shares.
For all its borrowing, Directv’s $17.5 billion in long-term debt is less than 2.3x the company’s $7.72 billion EBITDA for the trailing 12 months. According to Morningstar the average for the industry is 3x.
In a time when most companies are scrounging around for low single-digit revenue growth, Directv has compounded revenue growth at an 11% pace over the past 5 year. That’s expected to slow to 7%-8% or so, as the company has stated its goal is to boost profits from its existing base, rather than go whole-hog on bringing new subscribers online. Still, high-single-digit growth isn’t anything to sneeze at. Another sign of Directv’s value proposition is its forward price-to-sales ratio -- available to Platinum subscribers -- which remains near its historic lows.
The company announced an additional $4 billion share repurchase program in February. If revenue and profit growth can keep apace that’s a nice three-pronged formula going forward. Unless of course, Apple’s (AAPL) long awaited and long-rumored AppleTV enters the arena as a category killer. Stay tuned.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at email@example.com.
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