Warren Buffett is, in essence, a value investor.
Berkshire Hathaway‘s recent investment activities, including the purchase of more than $ 4 billion in HP shares, illustrate this.
Over the years, much has been done about Buffett’s transformation away from a deeply valuable investor in the form of his mentor Benjamin Graham to one who recognized the value of large franchises such as
Coca Cola (ticker: KO), and would pay for them. “It’s far better to buy a wonderful business at a fair price than a fair business at a wonderful price,” Buffett said.
But when it comes to actual investment, Buffett generally likes to buy things cheap.
HP (HPQ) is a fair business trade at a cheap price. Berkshire Hathaway (BRK. A, BRK. B) paid about nine times the expected earnings per year. share in 2022 for its 11% stake in the maker of personal computers, printers and print supplies.
News of Berkshire’s acquisition, revealed late Wednesday, increased HP’s share by 15% on Thursday to $ 40.08. HP shares fell 3.6% to $ 38.63 on Friday, while Berkshire’s Class A shares were 1.8% lower at $ 529,000.
What did Buffett see in HP?
Part of the appeal could be that the company generates ample free cash flow and returns it all to shareholders through an aggressive share buyback program as well as a dividend of almost 3%. HP has repurchased over 25% of its shares since October 2019, the end of its fiscal year 2019. Buffett likes companies that can comfortably finance large repurchases because the acquisitions increase Berkshire’s percentage ownership of them.
HP has a low valuation because investors see the PC business as cyclical and printers as secularly challenged. But the printing business, which generates half of HP’s profits, has held up in recent quarters.
It is noteworthy that Berkshire did not spend $ 4 billion on a stake in
Alphabet (GOOGL) or
Amazon.com (AMZN), higher quality technology franchises with higher ratings despite Buffett’s admiration for them. These stocks may have fallen into the “wonderful business at a reasonable price” category.
It is possible that the HP acquisition was orchestrated in whole or in part by Buffett’s lieutenants, Todd Combs and Ted Weschler, so the deal may not be a pure reflection of his investment ideas. The pair together run 10% of Berkshire’s $ 350 billion portfolio. Still, a $ 4 billion purchase would be very large in terms of what they manage, making Buffett the likely buyer.
Buffett could not be immediately reached for comment.
Occidental Petroleum (OXY), where Berkshire recently bought a $ 8 billion stake, is another example of a reasonably good deal that trades cheaply. It is a well-run, US-focused energy company, but its earnings depend on oil and gas prices. It is trading for less than 10 times the estimated 2022 earnings.
Buffett even managed to make a deal to buy an insurance company
Alleghany (Y) at an affordable price paying $ 11.6 billion, or about 1.25 times its book value and 12 times its expected earnings in 2022. Remove the estimated value of Alleghany’s valuable non-insurance business and the price is closer 1.1 times booked, a theft considering the price of other insurance deals and Alleghany’s strong franchise.
The low price may open the door for other bidders in a go-shop period that is now underway.
Other Berkshire stock purchases in recent years, in particular
Verizon Communications (VZ) and
Chevron (CVX), also show Buffet’s value bent. Even Berkshire’s largest share purchase in the last 10 years,
Apple (AAPL), was bought for a medium to high teenager multiplying its earnings from 2016 to 2018, hardly a rich price.
Other notable Berkshire stock purchases over the past decade, including
Bank of america (BAC), airlines (since sold), Japanese trading companies as
IBM (also sold), were also value situations.
Berkshire paid a richer price – about 20 times earnings – when it bought Precision Castparts for about $ 32 billion in 2016. That deal has been bad: Berkshire took a write-down of about $ 10 billion in the aircraft parts maker after the pandemic struck to. the aviation industry.
Write to Andrew Bary at email@example.com