8 months ago • 9:11 mins
All eyes were on Berkshire Hathaway over the weekend, as the home of investing guru Warren Buffett announced its latest quarterly results. But what really caught investors’ attention was Buffett’s reveal that just four companies make up 70% of the firm’s $311 billion stock market portfolio. So I thought I’d take a look at which ones they are, and what might be going through the Oracle of Omaha’s mind.
Credit card companies have a couple things going for them: credit card spending should pick up again now that the US government’s pandemic support for individuals is in the rearview, which should help push up non-loan fees too. These tailwinds should put credit card companies in a position to up their dividends and share buybacks.
For American Express, in particular, the return of business travel and entertainment spending could be a major bonus given its large corporate customer segment. The company reckons that overall travel and entertainment spending will get to 80% of 2019 levels by the end of this year, but corporate spending won’t recover until 2023. Any sooner, and that’d represent upside to current earnings estimates.
American Express is trading at 18.3x price-to-earnings (P/E) – well ahead of the US credit card peer group average of 8.3x. But while the latter is expected to show an earnings decline of over 20% next year, Amex’s earnings will likely remain flat, perhaps justifying its premium. Still, the wider US stock market is trading at 21.5x P/E and offering 8% earnings growth, so Amex’s stock doesn’t look particularly attractive, relatively speaking.
The investment case for Apple is a pretty exciting one: the company’s shifting from being hardware-focused to software-focused, primarily by ramping up a “services” business that currently represents 19% of revenue. That makes sense: its services segment – which includes the App Store, Apple Music, TV+, and more – generates a 70% gross profit margin compared to hardware’s 35%, so more services revenue means higher profits.
Trouble is, investors by now are wise to the opportunity. In fact, Apple’s stock is currently trading at 26.5x P/E – ahead of the average of US Big Tech firms and rival Samsung – and it’s only expected to grow its earnings 1% in the next year versus its peer group’s average 8%. So any long-term appeal is arguably offset by a high near-term valuation, as well as the fact that supply chain bottlenecks are slowing the delivery of new iPhones, denting hardware and software revenues and crimping Apple’s overall earnings growth.
Broadly speaking, banks are beneficiaries of the post-pandemic recovery: interest rates should rise in the next few years, helping banks earn more on their new loans. And given that the money that banks set aside last year in case of defaults is now being released, they should have excess cash to return to shareholders too.
Bank of America specifically should also benefit from “operating leverage” next year, where revenue rises faster than costs. That would boost profit and leave even more cash for dividends and buybacks.
Bank of America’s stock is currently trading at 14.7x P/E, making it the most expensive of the large US banks. Analysts are also expecting it to shrink its earnings by 9% next year, which is slightly more than the peer group average. So with a higher valuation and lower growth than other US banks, Bank of America’s stock doesn’t appear particularly convincing right now.
Coca-Cola’s products have been in high demand ever since entertainment hotspots opened up again, but the company’s not resting on its laurels: it doubled its marketing budget from 2020 and launched a massive soda ad campaign for the first time in five years last quarter. And the blitz seems to have worked: the company’s organic revenue – without the effects of currency swings and acquisitions – grew by a better-than-expected 14% last quarter compared to the same time last year.
There’s another reason to be keen on Coke right now: it’s a consumer staples company, meaning it sells goods that customers need no matter what. That bodes well in these high-inflation times, since it allows Coke to pass higher costs onto customers without losing them to competitors. And that’s exactly what it’s been doing: the company upped the average price of its products by 6% last quarter, and it still sold 6% more than the same time last year. Throw in Coke’s recent purchase of Bodyarmor, and there’s an argument for even higher earnings growth to come.
Coca-Cola’s currently trading at 23.6x P/E compared to its major US drink-making rivals at 27.2x, and it’s expected to grow its earnings by over 6% next year versus its rivals’ 7%. With Coke’s shares seemingly at a discount and potential upside to come from its recent purchase of Bodyarmor, Buffett might be right: now could be a good time to buy.
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