"The Oracle of Omaha". That is how Buffet has been called due to its impressive investing ability. He is also considered the most respected and successful investor in history. As of September 2007, he was the third richest person in the world. The legendary Benjamin Graham has been of great influence to Buffet regarding investment strategies. Currently, Buffett is Chairman of the miraculous Berkshire Hathaway, which he built from a textile company into a major corporation with a market cap in excess of $200 billion. From 1965 to 2006, Berkshire shares averaged 21.5% compounded annual gain in per share book value.
Warren Buffett follows an investment strategy that is based on Benjamin Graham´s philosophy. He focuses on patience, discipline and value. He seeks for companies that are trading at a discount to intrinsic value to hold them for a long time. Most importantly, he invests provided there is margin of safety. As he puts it: “We want businesses to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price.”
Warren Buffett also insists on the company´s earnings power to generate average returns on capital, on companies with little to no debt with solid management teams. Berkshire´s book value per share has increase 20% y/y on average.
International Business Machines Corp (IBM, Financial): International Business Machines Corp is a multinational technology and consulting corporation. Its main products and services are computer hardware and software and infrastructure, hosting and consulting services in areas ranging from mainframe computer to nanotechnology.
Two main actions help the firm to generate good profit: One is its aim at adjusting portfolio to the non-commodified portions of IT and its continuous observation of customer requirements which may mean important new products developments and its enormous range of services and products that provides. That is why IBM takes the lead in the IT market.
IBM is well-positioned to face the new arrival of the cloud computing by developing its own private clouds.
The firm’s initiatives regarding product and services are expected to deliver at least $50 billion in revenues by fiscal 2015. IBM is focused on high growth, and high value segments of the IT industry. The company expects to generate smarter planet and smarter commerce revenues of $10.0 billion and $20.0 billion, respectively, by 2015. Moreover, business analytics is expected to deliver $16.0 billion, while cloud computing is estimated to deliver $7.0 billion in revenues by 2015.
IBM is a leader in the middleware business with nearly 33.0% market share. IBM´s middleware products include Websphere, Lotus, Tivoli and Rational that are used to connect different types of software systems.
In terms of quarter results, EPS have grown at a compound annual growth rate of 17% from 2006 to 2010. IBM reported EPS of $11.67 in 2010 thus recording the eight consecutive year of double digit in EPS. IBM holds a strong portfolio of products and solutions and expects operating earnings to stand at $13 in 2011. By the end of 2015, earnings are expected to reach $20 per share. These EPS jointly with strong revenue growth and operating leverage make IBM an interesting pick with the opportunity to continue geographically expanding. As regards geographic expansion, IBM is experience strong revenue growth, particularly from growth markets. 50% of revenue is generated outside the US. In fiscal 2010, revenues from the emerging markets represented 21.0% of IBM´s revenues, which outpaced the growth from the traditionally developed economies. The company has reported important growth in Asia-Pacific and Africa. IBM is also focused on increasing its footprint in South-East Asia.
The international business machines has been building its portfolio through strategic acquisitions. In 2010, IBM completed 17 acquisitions and the software segment acquired 11 companies in 2011.
In terms of restructuring efforts, IBM has been able to improve bottom line. The company plans to improve efficiencies, strengthen client-facing operations and achieve opportunities in high-growth markets. In 2010, IBM s expense-to-revenue ratio dropped 50 basis points, which in turn drove gross margin growth of 40 basis points. Most of the reductions were related to the Global Services segment, primarily in Europe, as well as the vacation of leased facilities.
As regards shareholders, IBM has returned cash to them in the form of share repurchases and dividends. In the last ten years, IBM has returned $107 billion. Management expects to repurchase shares worth $50.0 billion in the following five years with EPS of $2.80 by 2015. IBM increased its quarterly dividend by $0.10 to $0.75 per share in April 2011. Currently, the company pays an annual dividend of $3.00 per share, yielding 1.6%. During the first three quarters of 2011, IBM has already returned $14.0 billion to shareholders, $2.5 billion in terms of dividends and $11.5 billion through share repurchase. At the end of the third quarter of 2011, IBM had $5.2 billion remaining in buyback authorization.
Last but not least, IBM generates strong cash flow. In 2010, the company generated $19.5 billion of cash from operating activities that resulted in $16.3 billion in free cash flow. IBM´s operating activities generated cash flow of $4.68 billion, an increase of $128.0 million compared with the third quarter of 2010, primarily driven by higher net income. Free cash flow increased to $3.5 billion in the reported quarter. IBM expects to generate $100 billion in free cash flow by 2015 and return 70.0% thereof to shareholders.
General Dynamics (GD, Financial): General Dynamics Corporation (GD) provides business aviation, combat vehicles, weapons systems and munitions, military and commercial shipbuilding, and communications and information technology products and services worldwide. The company has four main business segments: Marine Systems, Combat Systems, Information Systems and Technology, and Aerospace.
General Dynamics was the fourth largest U.S. defense contractor in terms of revenue in fiscal 2010. Warren Buffett invested in the company because General Dynamics is a good investment target since its portfolio is broadly diversified. Its products and services include combat vehicles, weapons systems and munitions; shipbuilding design, repair and construction; and information systems and technologies. The firm is favored by congressional support for 2011 and 2012 programs regarding defense budgets.
General Dynamics working capital improvements continue to be impressive, as is evident from its inventory turnover of 11.2 times at the end of the first nine months of 2011, compared to only 3.5 times for the Zacks Industry Average a strong sign of operational efficiency. It also has one of the strongest balance sheets among its peers with a low long-term debt-to-capitalization of 16.9% at the end of the third quarter of 2011 (Zacks Industry Average was 42.9%).
Financially speaking, General Dynamics has one of the strongest balance sheets among its peers. Its debt-to-capitalization stood at 16.9% at the end of Q3 2011 and free cash flow from operations reached $2.6 billion. The company is shareholder friendly. It returns a substantial portion of its cash flow to shareholders through dividends and share buybacks. In 2010, the company repurchased 18.9 million shares. That same trend continued in 2011, when the company purchased 20 million shares. In 2011, the company also raised its quarterly dividend by 11.9% to $0.47 per share. Over the past decade this dividend growth stock has delivered an annualized total return of 4.40% to its shareholders. The company has managed to deliver a 12.70% annual increase in EPS since 2001. Analysts expect General Dynamics to earn $7.22 per share in 2011 and $7.59 per share in 2012. In comparison General Dynamics earned $6.82 /share in 2010. The company has been able to buyback 0.60% of its shares outstanding every year on average over the past decade. ROE has remained in a range between 17.50% and 22.50% over the past decade. The annual dividend payment has increased by 12.90% per year since 2001, which is in line with the growth in EPS. The dividend payout ratio has remained in arrange between 21% and 25%. Currently General Dynamics is attractively valued at 9.50 times earnings, has a sustainable dividend payout and yields 2.80%.
Last but not least, The Zacks forecast of GDP growth for the second half of 2011 is now at just around 2.7%. This culminates into a GDP growth rate of 2.9% for fiscal 2011.
CVS Caremark Corp (CVS, Financial): CVS is the second largest pharmacy (by sales) and the second largest pharmacy benefits manager (PBM) in the U.S. The company has presence in 44 states through 7,000 drugstores, in the District of Columbia and Puerto Rico.
By gaining some recent new contracts and provided the health care reform takes place, the firm will substantially increase its growth. CVS integrates clinical services, PBM functions, and retail pharmacy operations that will surely increase consumer engagement and create new sources for the saving of costs. CVS Caremark benefits from significant secular tailwinds, such as health-care spending growth, a wave of patent expirations on major brand-name drugs, and health-care cost-containment efforts. The company can further boost margins by promoting its private-label brands.
Now, the stock price is $42.01 and appears fully valued. The EPS ratio is near its historical average of 17 and the dividend yield is just 1.5%. EPS and cash flow per share have grown at an annual rate of 17% and 15% respectively. Dividends have risen on average 18.5% over the same period. The company has been increasing the payout ratio gradually and it is believed that the end target is going to be closer to 25%.
Wal-Mart Stores Inc (WMT, Financial): Wal-Mart provides a broad assortment of quality merchandise and service in the retail segment which has gained customer’s trust. Besides, WMT has a significant presence in the international market in almost 14 countries and Puerto Rico. This presence has fostered growth and this is believed to continue in the years to come.
Warren Buffett invested in Wal-Mart because it has a size that no peer can match, as well as strong purchasing and pricing power. Furthermore, the company holds many online retail sales growth opportunities. Its international presence and expansion are very important. The international segment is expected to be a major margin and ROIC contributor. Last but not least, in the last decade WMT has increased profit, has bought back millions of shares and has increased its dividend by 400%. The company registers double digit dividend growth.
Of course these pros are also followed by certain headwinds. As regards competitors, Target (TGT) poses the biggest threat and Amazon (AMZN) is also dangerous in terms of online sales. In addition, WMT largely depends on Chinese exports. This significant dependence may affect bottom line with the rise in the Chinese Yuan.
Intel Corp (INTC, Financial): Intel’s main area of business is the manufacturing of microprocessors and platform solutions for the computer market. Intel pioneered the production of x86 architecture for microprocessors. It is also the largest chipmaker in the world and remains number one in market share and product performance.
Some of Intel's initiatives and actions help the company boost its revenues and shares. For example, INTC has managed to become the leader in the microprocessor market and has switched from selling separate components to full platforms optimized for specific markets. Besides, Intel has announced the launch of the Sandy Bridge CPU microarchitecture on January 3, 2011. This technology enables much superior performance, speeding up the entire computers. Furthermore, Intel has started to promote its ultrabook which is expected to enable notebook makers to regain a market share after they lost to Apple´s iPad. The characteristics of this new ultrabook involve a lighter device with greater functionality.
Intel has also entered into an agreement with Google to launch Intel-powered Android devices. The purpose of this deal is to support x-86 architecture and take some share from Apple. In addition, Intel has acquired MacAfee. This is a big move in security. The research firm expects that the enterprise segment going mobile will be the biggest driver of growth for the mobile security market, although consumer demand for security on mobile devices is also on the rise. Intel´s agreement with NVIDIA is also positive.
Financially speaking, Intel has always generated healthy profit margins and strong operating cash flow. Intel’s revenues have grown at a CAGR of 2.4%, while its gross profit increased at a CAGR of 4.6% and operating profit increased at a CAGR of 5.5%. The gross margin expanded 1,358 bps and the operating margin 1,497 bps during the same period.
Warren Buffett follows an investment strategy that is based on Benjamin Graham´s philosophy. He focuses on patience, discipline and value. He seeks for companies that are trading at a discount to intrinsic value to hold them for a long time. Most importantly, he invests provided there is margin of safety. As he puts it: “We want businesses to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price.”
Warren Buffett also insists on the company´s earnings power to generate average returns on capital, on companies with little to no debt with solid management teams. Berkshire´s book value per share has increase 20% y/y on average.
International Business Machines Corp (IBM, Financial): International Business Machines Corp is a multinational technology and consulting corporation. Its main products and services are computer hardware and software and infrastructure, hosting and consulting services in areas ranging from mainframe computer to nanotechnology.
Two main actions help the firm to generate good profit: One is its aim at adjusting portfolio to the non-commodified portions of IT and its continuous observation of customer requirements which may mean important new products developments and its enormous range of services and products that provides. That is why IBM takes the lead in the IT market.
IBM is well-positioned to face the new arrival of the cloud computing by developing its own private clouds.
The firm’s initiatives regarding product and services are expected to deliver at least $50 billion in revenues by fiscal 2015. IBM is focused on high growth, and high value segments of the IT industry. The company expects to generate smarter planet and smarter commerce revenues of $10.0 billion and $20.0 billion, respectively, by 2015. Moreover, business analytics is expected to deliver $16.0 billion, while cloud computing is estimated to deliver $7.0 billion in revenues by 2015.
IBM is a leader in the middleware business with nearly 33.0% market share. IBM´s middleware products include Websphere, Lotus, Tivoli and Rational that are used to connect different types of software systems.
In terms of quarter results, EPS have grown at a compound annual growth rate of 17% from 2006 to 2010. IBM reported EPS of $11.67 in 2010 thus recording the eight consecutive year of double digit in EPS. IBM holds a strong portfolio of products and solutions and expects operating earnings to stand at $13 in 2011. By the end of 2015, earnings are expected to reach $20 per share. These EPS jointly with strong revenue growth and operating leverage make IBM an interesting pick with the opportunity to continue geographically expanding. As regards geographic expansion, IBM is experience strong revenue growth, particularly from growth markets. 50% of revenue is generated outside the US. In fiscal 2010, revenues from the emerging markets represented 21.0% of IBM´s revenues, which outpaced the growth from the traditionally developed economies. The company has reported important growth in Asia-Pacific and Africa. IBM is also focused on increasing its footprint in South-East Asia.
The international business machines has been building its portfolio through strategic acquisitions. In 2010, IBM completed 17 acquisitions and the software segment acquired 11 companies in 2011.
In terms of restructuring efforts, IBM has been able to improve bottom line. The company plans to improve efficiencies, strengthen client-facing operations and achieve opportunities in high-growth markets. In 2010, IBM s expense-to-revenue ratio dropped 50 basis points, which in turn drove gross margin growth of 40 basis points. Most of the reductions were related to the Global Services segment, primarily in Europe, as well as the vacation of leased facilities.
As regards shareholders, IBM has returned cash to them in the form of share repurchases and dividends. In the last ten years, IBM has returned $107 billion. Management expects to repurchase shares worth $50.0 billion in the following five years with EPS of $2.80 by 2015. IBM increased its quarterly dividend by $0.10 to $0.75 per share in April 2011. Currently, the company pays an annual dividend of $3.00 per share, yielding 1.6%. During the first three quarters of 2011, IBM has already returned $14.0 billion to shareholders, $2.5 billion in terms of dividends and $11.5 billion through share repurchase. At the end of the third quarter of 2011, IBM had $5.2 billion remaining in buyback authorization.
Last but not least, IBM generates strong cash flow. In 2010, the company generated $19.5 billion of cash from operating activities that resulted in $16.3 billion in free cash flow. IBM´s operating activities generated cash flow of $4.68 billion, an increase of $128.0 million compared with the third quarter of 2010, primarily driven by higher net income. Free cash flow increased to $3.5 billion in the reported quarter. IBM expects to generate $100 billion in free cash flow by 2015 and return 70.0% thereof to shareholders.
General Dynamics (GD, Financial): General Dynamics Corporation (GD) provides business aviation, combat vehicles, weapons systems and munitions, military and commercial shipbuilding, and communications and information technology products and services worldwide. The company has four main business segments: Marine Systems, Combat Systems, Information Systems and Technology, and Aerospace.
General Dynamics was the fourth largest U.S. defense contractor in terms of revenue in fiscal 2010. Warren Buffett invested in the company because General Dynamics is a good investment target since its portfolio is broadly diversified. Its products and services include combat vehicles, weapons systems and munitions; shipbuilding design, repair and construction; and information systems and technologies. The firm is favored by congressional support for 2011 and 2012 programs regarding defense budgets.
General Dynamics working capital improvements continue to be impressive, as is evident from its inventory turnover of 11.2 times at the end of the first nine months of 2011, compared to only 3.5 times for the Zacks Industry Average a strong sign of operational efficiency. It also has one of the strongest balance sheets among its peers with a low long-term debt-to-capitalization of 16.9% at the end of the third quarter of 2011 (Zacks Industry Average was 42.9%).
Financially speaking, General Dynamics has one of the strongest balance sheets among its peers. Its debt-to-capitalization stood at 16.9% at the end of Q3 2011 and free cash flow from operations reached $2.6 billion. The company is shareholder friendly. It returns a substantial portion of its cash flow to shareholders through dividends and share buybacks. In 2010, the company repurchased 18.9 million shares. That same trend continued in 2011, when the company purchased 20 million shares. In 2011, the company also raised its quarterly dividend by 11.9% to $0.47 per share. Over the past decade this dividend growth stock has delivered an annualized total return of 4.40% to its shareholders. The company has managed to deliver a 12.70% annual increase in EPS since 2001. Analysts expect General Dynamics to earn $7.22 per share in 2011 and $7.59 per share in 2012. In comparison General Dynamics earned $6.82 /share in 2010. The company has been able to buyback 0.60% of its shares outstanding every year on average over the past decade. ROE has remained in a range between 17.50% and 22.50% over the past decade. The annual dividend payment has increased by 12.90% per year since 2001, which is in line with the growth in EPS. The dividend payout ratio has remained in arrange between 21% and 25%. Currently General Dynamics is attractively valued at 9.50 times earnings, has a sustainable dividend payout and yields 2.80%.
Last but not least, The Zacks forecast of GDP growth for the second half of 2011 is now at just around 2.7%. This culminates into a GDP growth rate of 2.9% for fiscal 2011.
CVS Caremark Corp (CVS, Financial): CVS is the second largest pharmacy (by sales) and the second largest pharmacy benefits manager (PBM) in the U.S. The company has presence in 44 states through 7,000 drugstores, in the District of Columbia and Puerto Rico.
By gaining some recent new contracts and provided the health care reform takes place, the firm will substantially increase its growth. CVS integrates clinical services, PBM functions, and retail pharmacy operations that will surely increase consumer engagement and create new sources for the saving of costs. CVS Caremark benefits from significant secular tailwinds, such as health-care spending growth, a wave of patent expirations on major brand-name drugs, and health-care cost-containment efforts. The company can further boost margins by promoting its private-label brands.
Now, the stock price is $42.01 and appears fully valued. The EPS ratio is near its historical average of 17 and the dividend yield is just 1.5%. EPS and cash flow per share have grown at an annual rate of 17% and 15% respectively. Dividends have risen on average 18.5% over the same period. The company has been increasing the payout ratio gradually and it is believed that the end target is going to be closer to 25%.
Wal-Mart Stores Inc (WMT, Financial): Wal-Mart provides a broad assortment of quality merchandise and service in the retail segment which has gained customer’s trust. Besides, WMT has a significant presence in the international market in almost 14 countries and Puerto Rico. This presence has fostered growth and this is believed to continue in the years to come.
Warren Buffett invested in Wal-Mart because it has a size that no peer can match, as well as strong purchasing and pricing power. Furthermore, the company holds many online retail sales growth opportunities. Its international presence and expansion are very important. The international segment is expected to be a major margin and ROIC contributor. Last but not least, in the last decade WMT has increased profit, has bought back millions of shares and has increased its dividend by 400%. The company registers double digit dividend growth.
Of course these pros are also followed by certain headwinds. As regards competitors, Target (TGT) poses the biggest threat and Amazon (AMZN) is also dangerous in terms of online sales. In addition, WMT largely depends on Chinese exports. This significant dependence may affect bottom line with the rise in the Chinese Yuan.
Intel Corp (INTC, Financial): Intel’s main area of business is the manufacturing of microprocessors and platform solutions for the computer market. Intel pioneered the production of x86 architecture for microprocessors. It is also the largest chipmaker in the world and remains number one in market share and product performance.
Some of Intel's initiatives and actions help the company boost its revenues and shares. For example, INTC has managed to become the leader in the microprocessor market and has switched from selling separate components to full platforms optimized for specific markets. Besides, Intel has announced the launch of the Sandy Bridge CPU microarchitecture on January 3, 2011. This technology enables much superior performance, speeding up the entire computers. Furthermore, Intel has started to promote its ultrabook which is expected to enable notebook makers to regain a market share after they lost to Apple´s iPad. The characteristics of this new ultrabook involve a lighter device with greater functionality.
Intel has also entered into an agreement with Google to launch Intel-powered Android devices. The purpose of this deal is to support x-86 architecture and take some share from Apple. In addition, Intel has acquired MacAfee. This is a big move in security. The research firm expects that the enterprise segment going mobile will be the biggest driver of growth for the mobile security market, although consumer demand for security on mobile devices is also on the rise. Intel´s agreement with NVIDIA is also positive.
Financially speaking, Intel has always generated healthy profit margins and strong operating cash flow. Intel’s revenues have grown at a CAGR of 2.4%, while its gross profit increased at a CAGR of 4.6% and operating profit increased at a CAGR of 5.5%. The gross margin expanded 1,358 bps and the operating margin 1,497 bps during the same period.
