Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%), the conglomerate headed by Warren Buffett, owns a massive stock portfolio worth well over $300 billion today. From consumer electronics and financial services to automobiles and telecommunications, Berkshire certainly owns a diverse range of businesses.
The Oracle of Omaha favors companies that are easy to understand, have a strong brand, and benefit from a competitive advantage. With this perspective in mind, a team of Motley Fool contributors have identified Chipotle Mexican Grill (CMG -1.34%), Costco Wholesale (COST -0.24%), and Salesforce (CRM -0.57%) as three outstanding businesses with features that Warren Buffett would love.
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Popularizing the fast-casual dining experience
Neil Patel (Chipotle Mexican Grill): Buffett is very familiar with the restaurant industry, having previously owned Restaurant Brands International. But the fast-casual pioneer, Chipotle, possesses some key characteristics that every investor should be looking for.
With 2,853 total locations and trailing-12-month revenue of $6.8 billion, Chipotle has developed a widely recognized consumer brand. Given that an estimated 30% of restaurants fail in their first year, reaching this level of scale is no easy accomplishment. Chipotle has become adept at marketing, leaning on social media channels, and introducing celebrity-inspired burrito bowls to convey the real ingredients and simple cooking methods used. It wasn't until July 2021 that the business aired its first-ever national TV commercial, which just goes to show that offering high-quality food at affordable prices speaks for itself.
Bolstering the brand even further is a focus on digital. In the most recent quarter, orders via the company's website, mobile app, and third-party delivery services accounted for nearly half of all sales. And there are now more than 23 million Chipotle rewards members who have the ability to order their favorite items ahead of time. Of the 56 new locations the business opened in the second quarter, 45 were equipped with a Chipotlane, which is the drive-through option. Serving customers in whatever ways are most convenient for them is table stakes in today's hyper-competitive restaurant and retail environment.
Something Warren Buffett would really appreciate is Chipotle's proven pricing power. Following an increase to employee wages, the company raised menu prices by up to 4% in June. But this had no adverse impact on demand. In fact, Chipotle was able to register an impressive 24.5% restaurant-level operating margin in the quarter, the highest since Q3 2015. "Consistent with the past, we saw very little resistance with the price increase in any of these channels," CEO Brian Niccol mentioned on the recent earnings call.
The stock has soared nearly 400% over the past five years, but based on a forward price-to-earnings ratio of 76, it is by no means cheap. Chipotle is a fantastic business, and it has the traits Buffett seeks out in his investments. However, the absence of a margin of safety would probably keep him away.
A bulk-sized moat
Jeremy Bowman (Costco): Warren Buffett's Berkshire Hathaway was a longtime owner of Costco Wholesale, the membership-based warehouse retailer, but the conglomerate sold the stock late last year. It wasn't clear why, though it may have been for valuation reasons. However, Costco shares have continued to gain since.
Though Buffett may have parted with Costco, there are a number of reasons why Costco still looks like a classic Buffett stock.
First, Costco is the clear leader in warehouse retail. The company only has two direct competitors, Walmart's Sam's Club and BJ's Wholesale Club, and Costco is significantly ahead of both of those rivals in key metrics like sales per square foot and overall revenue. In fact, Costco is the second-largest brick-and-mortar retailer in the U.S. behind Walmart, with $196 billion in revenue last year.
The membership model offers a number of competitive advantages, or economic moats as Buffett would put it. It locks in customers and encourages them to spend more money at Costco stores. Costco prices its products at near cost, encouraging customer loyalty and creating a business model where membership fees, which are $60 per year for most customers, make up the bulk of its profits. Costco has a 90% customer retention rate in North America and it ranks near the top in customer satisfaction surveys, a strong sign for the business's future growth.
The company continues to open new stores, unlike many large retailers, and invest in its e-commerce platform, which surged during the pandemic.
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As malls struggle and other brick-and-mortar retailers falter, Costco's business model remains a winner, and its rock-bottom prices will keep customers flocking to its stores. Costco even has a history of paying generous special dividends every few years.
In the retail industry, only a few stocks look as bulletproof as Costco.
A force to be reckoned with
Eric Volkman (Salesforce): It's been said before, but it's worth repeating and emphasizing -- if there's one thing Buffett loves in a company above nearly everything else, it's a moat.
I feel that Salesforce has a wide one. It's very much the dominant company in the ever-expanding world of customer relationship management (CRM; not coincidentally the company's ticker symbol too). In fact, its estimated market share of nearly 20% (as gauged by tech market researcher IDC) is higher than the four trailing competitors combined.
Another thing Buffett admires -- heck, all investors admire -- is a business that continues to scale. Salesforce delivers growth in spades. In its most recently reported quarter, a mix of organic improvement and well-considered recent acquisitions (corporate communications specialist Slack Technologies, for one) lifted total revenue by a meaty 23% year-over-year, to over $6.3 billion.
That wasn't a quirk or a one-off. Salesforce has posted very forceful top-line growth for years. From its fiscal 2017 to 2021 -- hardly a long stretch of time -- the company managed to more than double its total annual revenue, from just under $8.4 billion in the former year to over $21 billion in 2021.
Profitability has jumped around some, but in recent years the company has landed more consistently in the black, and convincingly at that. The trailing four quarters of non-GAAP net income were, respectively, $1.4 billion, $1.1 billion, $975 million, and $1.6 billion. Buffett would be well pleased with the double-digit net margins attached to those figures, which range from 17% to 30%.
Granted, some of this growth is due to the pandemic, which kept employees at home and necessitated the kind of remote-teamwork solutions Salesforce specializes in. However, it's likely we're shifting from a traditional office work regime to more of a hybrid model for a great many professions, so the company has a very long runway in front of it.
It realistically believes that vaunted double-digit growth will continue, to the tune of at least 23.5% for the entirety of 2021, and 20% for 2022. Those are consistent and strong improvements, particularly considering how long Salesforce has been on the scene.
They are also the kinds of hard-to-ignore figures Buffett loves to see in his companies. He should really consider buying a stake in this one.
