Wells Fargo (WFC -2.30%), Coca-Cola (KO -1.09%), American Express (AXP -3.42%), and IBM (IBM -1.49%) are Berkshire Hathaway's (BRK.B -0.57%) big four positions as they make for nearly 65% of Berkshire's listed portfolio. What happens to these companies has important implications for Berkshire Hathaway investors, but they also make for interesting investment alternatives on their own merits.
These companies have been selected by Buffett himself as long-term high-conviction picks because of their superior quality and competitive strengths. So, let's take a look at how Buffett's big four are doing this earnings season in the search for investment opportunities.
One big winner
American Express reported some really strong figures this week: Both revenue and earnings per share were above analysts' expectations, growing at 6% and 15% versus the prior year, respectively. This performance is particularly encouraging considering the challenging consumer environment over the last months, and the company is proving once again that its affluent customer base represents a remarkable differentiating factor in the industry.
The stock jumped by more than 4% in reaction to the positive news and is now trading near historical highs in the area of $80 per share. Investors may want to wait for a pullback before taking a position, but still, the company isn't excessively expensive from a valuation point of view. American Express trades at a P/E ratio of 19.5 versus an industry average of 18.2 according to data from Morningstar.
The company's financial strength provides the resources for an aggressive share buyback policy; American Express reduced its share count by 5% over the last 12 months. As long as the business continues going strong, investors will likely continue receiving generous capital distributions from the company over years to come.
One big loser
IBM is having a really tough year. The company has reported negative sales growth over last six consecutive quarters, and the stock is down by more than 14% in a year in which the Dow Jones has risen by almost 20%. Revenue for the last quarter was down by 4%, the hardware segment was particularly weak with sales falling by 17%, and China is another reason for concern because of steeply falling sales in the country.
On the other hand, earnings were actually better than expected in the quarter with diluted earnings per share of $3.99 on a non-GAAP basis, a 10% increase year over year. Still, even if the company manages to grow earnings by increasing profit margins and reducing share count, a stock trading near 52-week lows is a clear indication on the fact that investors are feeling materially concerned about falling revenue at IBM.
The good news is that IBM is trading at bargain valuation levels with a P/E ratio of 12.5 versus an average of 15.6 for the industry. The company has proven its ability to transform itself and adapt to changing industry dynamics over time, and it has the brand power, market position, and resources to reignite growth in the medium term.
Besides, IBM rewards investors with active stock buybacks and growing dividends, and the company has consecutively increased dividend distributions in each of the last 18 years, including a 12% rise for 2013. The payout ratio is comfortably low at less than 23% of earnings, so IBM will most likely continue rewarding investors for their patience with increasing dividend payments over time.
Two steady performers
Both Wells Fargo and Coca-Cola reported solid figures for the quarter, nothing especially exciting, but the kind of steady performance investors should expect from these mature, high-quality companies.
Wells Fargo reported earnings per share of $0.99 -- a 13% increase versus the prior year and above analysts' expectations of $0.97 per share. Net interest margin has been under pressure lately, and mortgage originations fell by a whopping 42% versus the prior year because of rising interest rates. But return on equity was at a new high near 14.1%, proving that Wells Fargo is one of the best-run banks in the industry with superior capital allocation policies.
Coca-Cola met estimates with an increase of 6% in earnings per share for the last quarter. Revenue fell when measured in U.S. dollars, but sales excluding the impact of foreign exchange translations increased by 4% in the quarter. As expected, volume growth in North America was uninspiring, with a 2% increase, but emerging markets did much better, with counties like Vietnam and China delivering 21% and 9% growth in volume, respectively.
With dividend yields of 2.8% and 3% for Wells Fargo and Coca-Cola, respectively, they are both trading at reasonable levels. These are the kind of high-quality companies an investor can buy and "hold forever," to quote Buffett, and now is a good time as ever to add these consistent performers to your portfolio.
The bottom line
Among Buffett's big four, American Express was the clearest winner in the last quarter, with materially better-than-expected performance in a challenging environment. IBM continues to be disappointing, and even if the stock is dirt cheap, falling revenues are a worrisome trend to watch. Wells Fargo and Coca-Cola remain as strong as ever.
As for Berkshire Hathaway itself, nailing three out four doesn't sound too bad. Besides, Buffett is planning to hold these positions for years to come, which should give IBM enough time to turn things around in order for Berkshire to profit from the company's currently dirt-cheap valuation.
