3 Buys in Buffett’s Portfolio

These undervalued stocks are among the top holdings in Berkshire Hathaway today.

Susan Dziubinski 2 March, 2021 | 4:28AM
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A couple of weeks ago, Berkshire Hathaway (BRK.A)/(BRK.Breleased its third-quarter 13-F. Morningstar's resident Berkshire specialist, Gregg Warren, noted that the firm shaved its mammoth stake in Apple, though it still remains the portfolio’s top holding by a significant margin. The team also trimmed its positions in Wells Fargo, General Motors, and Suncor Energy, among others.

Buffett and crew used a portion of the proceeds to pick up shares of Verizon, Chevron, Marsh & McLennan, Merck, AbbVie, and RH.

Here are our analysts’ latest commentaries about three stocks in Berkshire Hathaway's portfolio that are among the most undervalued by our standards.

Coca Cola (KO)
Morningstar Rating (as of 2.25.21): 4 stars
Economic Moat Rating: Wide

"Coca-Cola’s ubiquity and brand resonance in the nonalcoholic beverage category has been going strong for over 130 years, and we see structural dynamics that will ensure this persists. Despite competing in a mature industry, the firm is adequately exposed, either directly or indirectly, to growth vectors such as premium water and energy drinks. Moreover, we believe Coke will be able to continue extracting incremental value growth from the carbonated soft drink (CSD) market.

The runway for growth is supported by ample room for share gains as well as geographic tailwinds. We estimate Coke derives more than 40% of sales from developing or emerging economies with burgeoning middle classes and low per-capita CSD consumption. We expect commercial drinks will become a larger portion of beverage consumption globally, and see the company executing against each of its market-specific strategies.

In developed markets, where Coke has firmly established the resonance of its brands, its strategies are geared toward profit growth driven by innovation. In developing markets, where its trademarks are visible but competition is rife, differentiation and eventual migration into higher-margin offerings is key. In emerging markets where the firm is less established, it is focused on driving volume growth even at the expense of modest margin dilution. We view these approaches as prudent and believe the decision to cull peripheral brands (going from 400 master brands to 200) will facilitate execution.

Coke’s future trajectory is not without risk, as it faces COVID-19 disruption, secular headwinds in terms of consumer sentiment, and well-capitalized rivals. Still, with a more aligned and technologically capable distribution system, digitization initiatives to drive engagement and operational efficiency, and vast financial resources, the firm is more than equipped to defend its turf. Ultimately, Coke’s overarching goal is to put drinks in more hands in more places more quickly than any competitor. We believe this pithy synopsis represents the crux of the firm’s competitive positioning, underpinned by its cost advantage and intangible assets."
Nicholas Johnson, analyst 

Kraft Heinz Company 
Morningstar Rating (as of 2.25.21): 4 stars
Economic Moat Rating: None

“No-moat Kraft Heinz closed the books on a volatile 2020 in epic fashion, posting 6% organic sales growth in the fourth quarter and 240 basis points of adjusted operating margin expansion to 22.4%. While we concede that pandemic-induced stock-ups of essential fare (like that in Kraft Heinz’s mix) have provided a timely boost, we also attribute a portion of this improvement to the new course laid out by CEO Miguel Patricio centered on pursuing sustainable efficiencies and leveraging its scale while also elevating its brand spending and enhancing its capabilities.

Along with the results, Kraft Heinz announced the sale of its nut business (including the Planters brand) to narrow-moat Hormel (HRL) for $3.35 billion. The deal equates to generous 3 times fiscal 2020 sales and 15 times adjusted EBITDA multiples. We view the transaction, slated to close in the first half of 2021, as strategic for both operators. For Kraft Heinz, the deal should enable it to hone its focus on core brands and businesses while reducing leverage, a side effect of past management’s hunger for deals. And for Hormel, long regarded as a disciplined acquirer, we think Planters stands to complement its presence in the peanut butter aisle and potentially afford better sourcing opportunities. However, we don’t expect the transaction alone to alter our $34.50 fair value estimate for Hormel.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of New York Mellon Corp53.77 USD0.69Rating
Coca-Cola Co53.05 USD-1.05Rating
The Kraft Heinz Co36.77 USD-0.19Rating

About Author

Susan Dziubinski

Susan Dziubinski  Susan Dziubinski is director of content for Morningstar.com.

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