This week, three stocks that Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial)'s Warren Buffett (Trades, Portfolio) selected for his portfolio have dropped to their 52-week low share prices.
Buffett became one of the world’s richest people by hitting many investing home runs applying a value stock selection strategy. The pillar of his philosophy is to find high-quality companies at a reasonable price and hold for the long term. He also appreciates companies he finds simple to understand and that have impeccable management.
Of the 48 stocks in his $191.2 billion portfolio, the three that have dropped to their lowest price in a year are: The Kraft Heinz Co. (KHC, Financial), Procter & Gamble Co. (PG, Financial) and Coca-Cola Co. (KO, Financial).
The Kraft Heinz Co. (KHC, Financial)
At $63.70 per share Monday afternoon, The Kraft Heinz Co.’s share price has plunged to its lowest since it began trading in July 2015.
Buffett owns 325,634,363 shares of the company, which gives him a 13.24% stake. The holding is valued at $25.32 billion. Buffett also held a seat on the company’s board and announced his retirement from it on Feb. 23.
It formed in July 2015 through the merger between Kraft and Heinz. With a $77.62 billion market cap, Kraft Heinz is the world’s fifth-largest food and beverage company, making products as recognizable as Heinz, Jell-O and Capri Sun.
The company’s has faced challenges of late, specifically in its U.S. sales, which declined 1.1% to $4.79 billion in the fourth quarter, missing Thomson Reuters’ estimates by analysts of $4.79 billion. It was the seventh straight quarter of sales declines for the segment.
Net income increased to $8.0 billion, or $6.52 per share, versus $944 million, or 77 cents per share, in the fourth quarter last year, largely reflecting benefits from U.S. tax code reform.
Though the company has struggled to lift sales, its operating margins have increased in the two years since its formation. In 2017, its operating margin reached 25.8%, an increase from 23.19% for 2016, suggesting it has maintained its moat for the time being.
Kraft Heinz’s balance sheet logs $1.63 billion in cash and $28.3 billion in long-term debt, most of which it acquired through the 2015 merger. For this reason, it has a financial strength rating of only five out of 10. Its interest expense totaled only $308 million, however, which is more than adequately covered by operating income of $1.64 billion.
At 7.31, the price-earnings ratio of Kraft Heinz has slipped to a three-year low. The price-book ratio of 1.21 is also near a three-year low, and the price-sales ratio is near a two-year low.
Procter & Gamble Co. (PG, Financial)
At $78.55 per share, Procter & Gamble’s share price has fallen to within 1% of its 52-week low.
Buffett owns 315,400 shares of the company, which is equal to 0.2% of its outstanding shares and makes it one of his smallest holdings. It was one of his largest prior to the first quarter of 2016, when he knocked 52.5 million shares from the position.
Procter & Gamble is a giant in the home and personal care industry, making brands like Bounty, Crest and Olay.
The company has suffered in some of its financial measurements, beginning with revenue per share, which had been in annual decline since 2012 until it rose in its fiscal year 2017 ended in June 2017. The company reported $23.74 per share, an increase from $22.96 in fiscal year 2016.
Operating margins also strengthened in the fiscal year, expanding to a decade high of 21.45%, from 20.48% the prior year. Net income posted a decade high as well, reaching $15.33 billion, versus $10.51 billion.
Procter & Gamble’s balance sheet features $7.43 billion in cash and $22.19 billion in debt, contributing to its financial strength rating of six out of 10.
The company’s share price nosedived in January when it beat analysts’ expectations on revenue and earnings but said on a conference call that the retailers it sold to were buying less product and giving more discounts. Despite a 10% earnings increase in beauty and 7% rise in health care, the company’s grooming segment declined 1%, as did its baby, feminine and family care segment.
"There continues to be significant retail competition which is forcing prices down to consumers. While that doesn't change the price that we necessarily sell products through to these retail channels, it starts driving price points in the marketplace,” the company said.
Coca-Cola shares are up 3% over the past year, but are still only 3.6% higher than their 52-week low.
Buffett owns 400 million shares of the company, which equals a 9.6% stake and makes it his fifth largest portfolio position.
The beverage maker has seen weakness on several fronts. In the past five years, it has had annualized declines of 4.2% for revenue, 26.2% for earnings per share and 0.4% for book value.
But its operating margin has expanded since 2015, reaching 21.18% in 2017, an increase from 20.61% in 2016. Coca-Cola’s operating margin is higher than 89% of the companies in the global beverages – soft drinks industry.
On its balance sheet, cash totals $6.01 billion, with debt at $31.18 billion. This contributed to its modest financial strength rating of five out of 10.
In the fourth quarter, the company’s net revenue dropped 20% as it encountered headwinds due to refranchising its bottling operations. Revenue beat expectations, however, totaling $7.51 billion versus $7.37 billion. Earnings per share also reached 39 cents, topping expectations of 38 cents per share.
See more of Warren Buffett (Trades, Portfolio)’s stocks at his portfolio here.
