Cheapness is a top characteristic Warren Buffett requires in companies he invests in, though they must also be high-quality companies. It makes sense then that his portfolio would contain quite a few low-P/E (price over earnings) companies. The lowest of the low are: General Motors Company (NYSE:GM), ConocoPhillips (NYSE:COP), Gannett Co. Inc. (NYSE:GCI) and General Dynamics Corp. (NYSE:GD).
A low P/E ratio indicates that while a company’s earnings have grown or remained flat, the price has not, for any number of reasons, and may later.
General Motors Company (NYSE:GM)
Warren Buffett initiated a position of 10 million General Motors shares at an average price of $25 in the first quarter of 2012. The company has a P/E of 5.3, after a steady year-and-a-half P/E plunge:
GM, the world’s top-selling automaker, just returned to public trading on the NYSE in 2010, after filing for and emerging from Chapter 11 bankruptcy, with the help of the U.S. government. Then, GM posted the largest annual profit in its history for 2011, with earnings of $7.6 billion. But with the government retaining almost 30% ownership, GM’s stock price showed only a mild reaction to the news.
In June, GM reported May sales were the highest monthly in 33 months. Consumers purchased 245,256 vehicles in the U.S., up 11 percent year over year, and the highest level since August 2009. Buick and GM sales both were up 19%, and Chevrolet was up 10%.
GM also reinstated its missing dividend on June 12. The payment will be $0.59375 per share quarterly on its Series B mandatory convertible junior preferred stock.
Buffett has 29,100,937 shares of COP as of the end of third quarter 2012, after whittling down the holding from its peak of over 83 million in 2008. Its P/E is 6, a three-year low. ConocoPhillips’ P/E was around the high teens in 2010, then dropped to the high single digits in 2011 and dropped further still to the current level in the second quarter of 2012.
The recently smaller P/E came as a result of a recent stock price drop. In late April, the price dropped from just over $70 to about $50 per share on news that the company would have to pay $266 million for a series of Chinese oil spills in early September.
Prior to that news, on April 4, the company announced it would split into two by spinning of its downstream businesses and remaining an upstream company. The distribution of one share of Phillips 66 for every two shares of ConocoPhillips stock took place on April 30, 2012.
On April 24, COP announced that its first-quarter earnings of $2.9 billion were slightly down from $3.0 the previous year, which coupled with the decline in stock price produced a low P/E.
Gannett Co. Inc. (NYSE:GCI)
Gannett, a Buffett holding that predates 2007, is just 0.035% of his portfolio. It has a 6.5 P/E, about the middle of its range for the last several years.
Though the newspaper stock has dropped more than 73% in the last five years, it is up more than 5% for the year. After losing $1.8 billion in 2008, Gannett’s earnings have remained relatively even. It produced $355 million in 2009, $567 million in 2010 and $459 million in 2011.
In the first quarter of 2012, Gannett’s earnings fell 22.7% from the prior-year quarter. The company’s results were impacted by spending on strategic investments and advertising softness. All of its segments were profitable, with growth in broadcasting and digital segments of 8% and 7%, respectively. Digital revenue growth in its publishing segment rose 13%, highlighting its efforts to push toward digital platforms.
General Dynamics Corp. (NYSE:GD)
Buffett owns 3,877,122 shares of General Dynamics at the end of the first quarter 2012, a new holding in the third quarter of 2011. GD has a P/E of 8.6, after generally declining for the last several years. Prior to the recession, GD sold for P/Es in the high teens.
Since 2008, General Dynamics’ earnings have risen from $2.48 billion from $2.55 billion in 2011. For the trailing 12 months, the period used to determine the P/E ratio, earnings are $2.498 billion, similar to 2008. While earnings have remained relatively flat, the company’s stock price has declined almost 19% in the last five years, bringing down the P/E ratio.
A factor weighing on the stock of GD, the world’s fourth-largest defense contractor, was the uncertainty of the government’s military budget. In the first quarter, Jay Johnson, chairman and CEO, said, "General Dynamics' first-quarter performance reflects continued growth in our Aerospace segment as well as the challenges presented by today's dynamic U.S. federal procurement environment. We are continuing to see slower-than-anticipated award activity, particularly relating to our IS&T programs with validated requirements and approved funding,"
U.S. budget cuts of 10% over the next decade, or $52 billion per year, go into effect Jan. 2, 2013, if Congress doesn’t agree to a deficit-cutting plan. This would include a $500 billion “sequester” of the defense budget over the next five years.
The next Buffett stock holdings with low P/E ratios are Sanofi SA (NYSE:SNY), Bank of New York Mellon (NYSE:BK), Torchmark Corporation (NYSE:TMK) and Intel Corporation (NASDAQ:INTC).
See all of Warren Buffett’s stock holdings at Berkshire Hathaway (BRK.A)(BRK.B) here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Warren Buffett.