Warren Buffett.
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Warren Buffett is at heart a value investor. Berkshire Hathaway ’s recent investment activity, including the purchase of more than $4 billion in HP stock, illustrates that.
Much has been made over the years about Buffett’s transformation away from a deep-value investor in the mold of his mentor Benjamin Graham to one who recognized the value of great franchises like Coca-Cola (ticker: KO), and would pay up for them. “It’s far better to buy a wonderful business at a fair price than a fair business at a wonderful price,” Buffett has said.
But when it comes to actual investing, Buffett generally likes to buy things inexpensively.
HP (HPQ) is a fair business trading at a cheap price. Berkshire Hathaway (BRK. A, BRK. B) paid about nine times earnings projected 2022 earnings per share for its 11% stake in the maker of personal computers, printers, and printing supplies.
News of Berkshire’s purchase, revealed late Wednesday, boosted HP’s stock by 15% Thursday to $40.08. HP shares fell 3.6% to $38.63 on Friday, while Berkshire’s Class A stock was 1.8% lower at $529,000.
What did Buffett see in HP?
Part of the appeal could be that the company generates ample free cash flow and returns all of it to shareholders through an aggressive stock buyback program, as well as a nearly 3% dividend. HP has bought back over 25% of its stock since October 2019, the end of its fiscal 2019. Buffett likes companies that can comfortably fund big buybacks because the purchases increase Berkshire’s percentage ownership of them.
HP has a low valuation because investors view the PC business as cyclical and printers as secularly challenged. But the printer business, which generates half of HP’s profits, has held its own in recent quarters.
It is notable that Berkshire didn’t spend $4 billion on a stake in Alphabet (GOOGL) or Amazon.com (AMZN), higher-quality tech franchises with loftier valuations, despite Buffett’s admiration for them. Those stocks might have fallen in the “wonderful business at a fair price” category.
It’s possible that the HP purchase was orchestrated entirely or in part by Buffett’s lieutenants, Todd Combs and Ted Weschler, so the deal may not be a pure reflection of his investing ideas. The pair run a combined 10% of Berkshire’s $350 billion portfolio. Still, a $4 billion purchase would be very large relative to what they manage, making Buffett the likely buyer.
Buffett couldn’t immediately be reached for comment.
Occidental Petroleum (OXY), in which Berkshire recently bought an $8 billion stake, is another example of a reasonably good business trading inexpensively. It is a well-run, U.S.-focused energy company but its earnings hinge on oil and gas prices. It trades for under 10 times estimated 2022 earnings.
Buffett even managed to reach a deal to buy insurer Alleghany (Y) at a bargain price, paying $11.6 billion, or about 1.25 times its book value and 12 times projected 2022 earnings. Strip out the estimated worth of Alleghany’s valuable noninsurance operations and the price is closer to 1.1 times book, a steal considering the price of other insurance deals and Alleghany’s strong franchise.
The low price could open the door to other bidders in a go-shop period now under way.
Other Berkshire stock purchases in recent years, notably Verizon Communications (VZ) and Chevron (CVX), show Buffett’s value bent as well. Even Berkshire’s largest equity purchase in the past 10 years, Apple (AAPL), was bought at a mid to high teens multiple of its earnings from 2016 to 2018, hardly a rich price.
Other notable Berkshire equity purchases in the past decade, including Bank of America (BAC), airline stocks (since sold), Japanese trading companies like Itoch
u, and IBM (also sold), were value situations, too.
Berkshire paid a richer price —about 20 times earnings—when it bought Precision Castparts for about $32 billion in 2016. That deal has been a poor one: Berkshire took a roughly $10 billion write-down in the maker of aircraft parts after the pandemic slammed the aerospace industry.
Write to Andrew Bary at [email protected]
