Berkshire Hathaway Found Value in Pharma - 13-F 3Q 2020
Updated: a day ago
Berkshire Hathaway’s (BRK/A, BRK/B) 3Q 2020 13-F was filed on November 16. This filing gives us a quarterly opportunity to observe what two of the greatest investors and their team are doing within Berkshire’s publicly traded equity portfolio. Berkshire has a large stable of wholly owned entities, so this is just a slice of their investments. Please see our recent analysis of Berkshire’s 3Q earnings report for more about these operating companies.
This analysis looks at the Berkshire portfolio across a host of measures including 12-month forward estimated: price-to-earnings (P/E), price-to-sales (P/S), return-on-equity (ROE), enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA), price-to-book (P/B), dividend yield, debt-to-EBITDA and long-term earnings-per-share growth consensus estimates (Chart 1).
Berkshire’s $229 billion investment portfolio consists of 49 companies and is very concentrated with the top 5 holdings accounting for almost 78% of the total portfolio. The top five holdings are: Apple (AAPL), Bank of America (BAC), Coca-Cola (KO), American Express (AXP) and Kraft Heinz (KHC). Due to the large holdings in AAPL, BAC and AXP, the portfolio is significantly overweight technology and financials relative to the S&P 500. This portfolio includes no industrials or utilities, but Berkshire’s wholly owned entities include a large railroad, Burlington Northern Santa Fe, and multiple regulated utilities and pipelines.
Overall, our analysis of the portfolio reflects a similar to slightly cheaper valuation than the S&P 500 while having better profitability (higher ROE) and quality (lower debt/EBITDA). Long-term (next 3 to 5 years) consensus earnings-per-share growth rate is expected to be slightly lower than the S&P 500.
Only Costco Wholesale (COST) was eliminated from the portfolio in 3Q despite being a long-term holding. It was a small holding at less than 1% of the portfolio prior to being sold.
Berkshire reduced their holdings of Apple (AAPL), Davita (DVA), Wells Fargo (WFC), Axalta Coatings (AXTA), Liberty Global (LBTYA), Barrick Gold (GOLD), M&T Bank (MTB), PNC Financial (PNC) and JPMorgan Chase (JPM). Apple’s stock price has appreciated by almost 58% through the first three quarters of 2020 and the holding remains their largest at almost 48% of the investment portfolio even after the sales in the third quarter.
Berkshire added to their holdings of Bank of America (BAC), General Motors (GM), Kroger (KR) and Liberty Latin America (LILAK).
New purchases in the quarter were dominated by pharmaceutical companies along with T-Mobile (TMUS) and Snowflake (SNOW). The SNOW purchase had previously been disclosed. Our additional analysis will focus on the new purchase of four U.S. pharmaceutical companies: Abbvie (ABBV), Bristol-Myers Squibb (BMY), Merck (MRK) and Pfizer (PFE).
The valuation characteristics of the portfolio of four drug firms as well as each of the individual holdings compared to the Dow Jones U.S. Select Pharmaceutical index are shown in Chart 2. Our “Berkshire New Pharma Holdings” weighted the holdings approximately according to the Berkshire purchases which had a small purchase of Pfizer (PFE) relative to the other pharmaceutical new buys. The only pharmaceutical or biotech companies that were in their portfolio prior to these purchases were small holdings in Biogen (BIIB), Johnson & Johnson (JNJ) and Teva Pharmaceutical (TEVA).
The Berkshire pharma purchases have a lower valuation than both the pharmaceutical index and the S&P 500 on both P/E and EV/EBITDA basis. In addition, their purchases have significantly better profitability and debt coverage. Long-term consensus expected earnings growth is expected to be faster than both the pharma index and the S&P 500. The dividend yield is higher as well. BMY’s long-term earnings growth is inflated by expected poor earnings in 2020, so the rebound back to “normalized” levels flatters the comparisons.
Because the 13-F does not include international stocks, Berkshire Hathaway announced acquisition of about 5% of five Japanese trading companies at the end of August is not part of this analysis: Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co. Ltd. and Sumitomo Corp. Buffett indicated that these were intended to be long-term holdings and Berkshire may increase its stake to up to 9.9%. Our analysis of these purchases is available here.
A PDF version of this report can be found here.
Full disclosure: I am a long-time shareholder of Berkshire Hathaway and worked for Salomon Brothers when Warren Buffett became Chairman and CEO. In addition, I and/or clients of Stone Investment Partners own shares in several companies mentioned in this report.
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