Warren Buffett is first and foremost a value investor.
recent investment activity, including the purchase of over $4 billion worth of HP stock, illustrates this.
Over the years, much has been made of Buffett’s transformation from a high-value investor in the mold of his mentor Benjamin Graham to one who recognized the value of great franchises like
(ticker: KO), and would pay them. “It’s much better to buy a great business at a fair price than a fair business at a great price,” Buffett said.
But when it comes to actually investing, Buffett generally likes to buy things cheap.
HP (HPQ) is a fair trade company with a cheap price. Berkshire Hathaway (BRK.A, BRK.B) paid about nine times its expected 2022 earnings per share for its 11% stake in the maker of personal computers, printers and printing supplies.
News of the Berkshire purchase, which emerged Wednesday night, sent HP shares up 15% on Thursday to $40.08. HP shares fell 3.6% to $38.63 on Friday, while Berkshire Class A shares were down 1.8% to $529,000.
What did Buffett see in HP?
Part of the appeal could be that the company generates abundant free cash flow and returns it entirely to shareholders via an aggressive share buyback program, along with a dividend of almost 3%. HP has repurchased more than 25% of its stock since October 2019, the end of its 2019 fiscal year. Buffett likes companies that can comfortably fund large buyouts, as purchases increase Berkshire’s ownership percentage.
HP has a low valuation as investors view the PC sector as cyclical and printers as age-old challenges. But the printer business, which generates half of HP’s profits, has held firm in recent quarters.
It should be noted that Berkshire did not spend $4 billion on a stake in
(AMZN), higher quality tech franchises with higher valuations, despite Buffett’s admiration for them. These actions could have fallen into the “wonderful company at a fair price” category.
It’s possible the HP purchase was orchestrated in whole or in part by Buffett’s lieutenants Todd Combs and Ted Weschler, so the deal may not be a pure reflection of his investment ideas. . The pair manage a total of 10% of Berkshire’s $350 billion portfolio. Still, a $4 billion buy would be very large compared to what they’re managing, making Buffett the likely buyer.
Buffett could not immediately be reached for comment.
(OXY), in which Berkshire recently bought an $8 billion stake, is another example of a reasonably good company trading cheaply. It is a well-run, US-focused energy company, but its profits are dependent on oil and gas prices. It is trading at less than 10 times estimated 2022 earnings.
Buffett even managed to strike a deal to buy an insurer
(Y) at a bargain price, paying $11.6 billion, or about 1.25 times book value and 12 times projected 2022 earnings. Remove the estimated value of Alleghany’s valuable non-insurance operations and the price is closer to 1.1 times the book, a steal given the price of other insurance contracts and Alleghany’s strong deductible.
The low price could open the door to other bidders in an ongoing go-shop period.
Other Berkshire stock purchases in recent years, including
(CVX), also show the value of Buffett. Even Berkshire’s biggest stock buy in the last 10 years,
(AAPL), was bought at a mid-to-high multiple of its 2016-2018 earnings, barely a rich price.
Other notable Berkshire stock purchases over the past decade include
Bank of America
(BAC), airline stocks (since sold), Japanese trading companies like
(also sold), were also valuable situations.
Berkshire paid a higher price – around 20 times earnings – when it bought Precision Castparts for around $32 billion in 2016. That deal was poor: Berkshire took a writedown of around $10 billion in the aircraft parts manufacturer after the pandemic. the aerospace industry.
Write to Andrew Bary at [email protected]