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Warren Buffett Stocks (III): NRG Energy, Nalco Holding, Nike, Norfolk Southern Corp, Procter & Gamble, Sanofi Aventis

We are now up to the second half of valuing the holdings of Berkshire Hathaway via the DCF valuation method, Ben Graham formula as outlined in the Intelligent Investor, and a simple multiples valuation based on PE, cash flow, sales and other metrics compared to the competition and industry.

Of the 10 companies I go through in this post, I’ll be passing on Moody’s, M&T Bank, Sun Trusts Banks and Torchmark as I do not know how to value financial stocks.

Warren Buffett Stock Holdings : 21-30


M&T Bank Corporation (MTB) (outside of circle of competence)

Moody’s (MCO) (outside of circle of competence)

NRG Energy (NRG)

Nalco Holding (NLC)

Nike (NKE)

Norfolk Southern Corp (NSC)

Procter & Gamble (PG)

Sanofi Aventis (SNY)

Sun Trusts Banks Inc. (STI) (outside of circle of competence)

Torchmark Corp (TMK) (outside of circle of competence)


NRG Energy (NRG)

Wholesale power generation company. Owns more than 189 active operating generation units at 48 power generation plants.


Had a big year in 2008

Big margins increase in 2008 and since 2005

Increase in short term and long term debt

Company is able to make money but its returns are ont he low side.

Mean ROA and CROIC of 2.7% and 5% respectively. Lower than competition

FCF isn’t consistent.

Huge increase in capex in 2008

Large amount of taxes deferred.

Still converts 12% of sales into FCF


Intrinsic Value Estimate


Current Price: $27.76

DCF Stock Value: $37.11

Graham Stock Value: $34

Competitor and Peer Comparison: $58


Nalco Holding (NLC)

Provider of integrated water treatment applications to prevent corrosion, contamination and the buildup of harmful deposits.


Needs to improve efficiency. 40+% margins but negative net income or low single digits at best isn’t good

Decrease in intangibles suggests bad acquisitions and mistakes by management

Long term debt is steady

Been buying back stock

FCF isn’t reliable. Lots of cash come from “other” income

Low returns, cash and earnings growth

Doesn’t look like something Buffett would buy


Intrinsic Value Estimate


Numbers aren’t reliable enough for a proper valuation.

Current Price: $17.52

DCF Stock Value: N/A

Graham Stock Value: N/A

Competitor and Peer Comparison: $22


Nike (NKE)

Sells athletic footwear, apparel and sports products.


Great company, leader, innovator, huge moat

Drop in margins in 2008 but increased inventory turnover

Low debt with plenty of cash

Can pay off debt with FCF easily

Don’t have to go in detail with numbers. They are just too good.


Intrinsic Value Estimate


Stability and predictability makes it easy to value.

Current Price: $56.18

DCF Stock Value: $65

Graham Stock Value: $77

Competitor and Peer Comparison: fairly valued at $56 (trades at a premium to competition)


nke-intrinsic-value.gif


NKE Intrinsic Value Graph

Norfolk Southern Corp (NSC)

Rail company. Another rail company in the portfolio along with Burlington Northern Santa Fe (BNI).


Looks to be a better company than BNI

Good top line growth

Decrease in gross profit but managed to increase net margins

Lots of FCF and excellent FCF growth

Low end for CROIC at 4%

Debt can be handled with FCF rather than taking on additional debt


Intrinsic Value Estimate

FCF growth is at 22.8% but if you look at how the value of the company has tracked the share price over the past 5-7 years, the company has been growing at the rate of its CROIC. i.e. the cash returns of its invested capital.


Current Price: $46.91

DCF Stock Value: $61

Graham Stock Value: $120 - high value due to excellent earnings growth

Competitor and Peer Comparison: $54


nsc-intrinsic-value.gif


NSC Intrinsic Value

Procter & Gamble (PG)

Sells consumer good that you use everyday.


Wrote about PG briefly in the Best Stocks to retire list

FCF growth above 18%

CROIC at 60%! Mindblowing.

Only negative is big drops in tangible shareholders equity

Stable margins. Net margins even increased in 2008

Good stable dividend


Intrinsic Value Estimate

Included a 10 year version of the intrinsic value graph to show how price and value end up meeting.


Current Price: $53.19

DCF Stock Value: $76 - increased from my previous DCF valuation

Graham Stock Value: $97 - slightly down from previous Graham calculation

Competitor and Peer Comparison: $67


pg-intrinsic-value.gif


PG Intrinsic Value

Sanofi Aventis (SNY)

Pharmaceutical company.


Stats look good but some metrics are quite erratic

FCF growth is up and down

Top line isn’t so consistent

FCF and earnings growth is relatively low

Has outstanding returns and converts it to plenty of FCF

Debt is not an issue

Maybe MRK or PFE would be better?


Intrinsic Value Estimate

Not quite sure about what future products the company has but from the current snapshot of the company, I get the following figures.


Current Price: $34.53

DCF Stock Value: $47

Graham Stock Value: $18

Competitor and Peer Comparison: $36


sny-intrinsic-value.gif


SNY Intrinsic Value

Disclosure

No positions in any stock mentioned

Jae Jun

http://www.oldschoolvalue.com/

About the author:

Jae Jun
Mark's equity focus is identifying secular growth trends, and the companies most likely to benefit from these macro trends. Stocks are identified through fundamental analysis, although basic technical analysis is used in determining entry and exit points. With a degree in Economics from the University of Michigan, a broader understanding of the economy as a whole, along with interpreting investor psychology is also a major interest for Mark. His career background has focused on financial analysis in corporate America. Visit Mark's website at http://www.fundmymutualfund.com/

Visit Jae Jun's Website


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