Berkshire Hathaway (BRK.B) (BRK.A) has recently released the latest list of its portfolio holdings. Morningstar's resident Berkshire specialist Gregg Warren noted that it was a net seller of equities during the quarter. We think most of Berkshire's holdings are fairly to overvalued today - including the names the firm added to last quarter. But there are four names that weren't trimmed during the quarter that we still think are undervalued today. Here are our analysts' latest stock analyst notes about each.
Amazon (4 Stars, Wide Moat)
"Wide-moat Amazon reported second-quarter results that were within its guidance range but were slightly short of investor expectations for both revenue and operating profit. Guidance for the third quarter is also light compared with FactSet consensus. In short, consumers' online shopping levels are returning to more normal levels as they shift some spending to other entertainment sources and offline shopping. Meanwhile, the company continues to add capacity at a breakneck pace in order to meet customer demand and one-day delivery, even as it roughly doubled its footprint during the past 18 months. We see no cracks in the long-term story as Amazon remains well-positioned to prosper from the secular shift toward e-commerce and the public cloud over the next decade. We note revenue weakness was limited to Amazon's own online store segment, with other segments performing well and overall profitability impressive despite lower revenue. Our model changes are fairly modest, thus we are maintaining our US$4,200 per share fair value estimate and see shares as undervalued.
Third-party seller services grew 38% year over year despite a marked slowdown, as the solution remains attractive to merchants. Subscription services, AWS, and other remained strong, with year-over-year growth of 32%, 37%, and 88%, respectively. We continue to view advertising (in 'other') and AWS as key long-term growth drivers for the firm. In particular we see AWS as the clear leader in public cloud, and we think Amazon's advertising business offers a unique value proposition for marketers.
-Dan Romanoff, analyst
Kraft Heinz (4 Stars, No Moat)
"While Kraft Heinz's organic sales slumped 2.1% in the second quarter and adjusted operating margins were off 90 basis points (to 22.4%) relative to the outsize gains realized in the hefty stock-up period a year ago (when organic sales popped 7.4% and adjusted operating margins jumped 230 basis points to 23.3%), we don't think this modest pullback precipitated the 4% downdraft in shares. Rather, we think the market is souring on the no-moat name given its thirst for transparency isn't being quenched, with management reluctant to provide annual guidance beyond its long-term targets for 1%-2% organic sales growth and 4%-6% adjusted EPS growth (which match our outlook).
"But from our vantage point, the results illustrate the revised strategic playbook Kraft Heinz has been operating under since CEO Miguel Patricio took the helm two years ago is yielding marked performance improvements. In this context, organic sales were up 5% in the second quarter on a two-year stack for both the consolidated organization and its core U.S. hub (about 70% of total sales). But more impressive, this growth hasn't been met with an erosion in profitability or investment in the business, as adjusted operating margins are up 140 basis points relative to the same period in 2019 even as marketing spend is up more than 10%. Also, the firm is continuing to realize increased relevance with consumers, with management citing that household penetration (up nearly 3%, equating to nearly 2 million more households), repeat purchases (up more than 8%), spending per buyer (up around 10%), and spending per trip (up 3%) are each edging higher since its revamped road map was put in place.
"Against this backdrop, we think shares offer an attractive entry point, trading at a 25% discount to our fair value estimate."
-Erin Lash, director
Teva Pharmaceutical (4 Stars, No Moat)
"Teva posted moderate results this quarter, with revenue essentially flat and margins within our expected range. Despite middling sales, the company continued to reduce debt and may receive terms that dampen the severity of its eventual settlement in the opioid litigation. We maintain our fair value estimate of US$20 per share and our no-moat rating.
"Revenue grew by 1% year over year but declined by 2% absent a positive currency impact. Europe sales stood out solely due to a uniquely poor comparison last year. On a sequential basis, revenue decreased by 2%, spread evenly across all main regions. This decrease was led by poor generics sales in North America, due to continued price competition in the industry. Austedo (for Huntington's disease and tardive dyskinesia) was 9% of North America revenue this quarter, making it the company's best-selling product in the region. Austedo had a profitable launch in China this quarter, but it will remain small for at least the next few years as it gains traction."
Damien Conover, director
Wells Fargo
Current Morningstar Rating: 4 stars
Economic Moat Rating: Wide
"Wide-moat Wells Fargo reported OK second-quarter earnings. Overall, results largely fit within our projections, and after making some minor adjustments, we are increasing our fair value estimate to US$55 per share. This is primarily related to slight adjustments to credit costs and fees, and to the time value of money. We've also moved up rate hikes to late 2023 from 2025. Wells remains our top pick among the traditional U.S. banks, and we think it has unique, idiosyncratic upside compared with peers as more expense savings play out over 2021 and beyond, and we think the asset cap will be lifted sometime in the fourth quarter of 2021 or the first quarter of 2022. Meanwhile, we view most of the rest of our banking coverage as fully valued."
Eric Compton, senior analyst
