Bill Gates Still Loves Warren Buffett’s Berkshire

Bill GatesBill Gates’s Bill & Melinda Gates Foundation Trust is a $17+ billion portfolio that manages assets to fund the billionaire’s charitable works. The trust recently filed its 3Q 13F, revealing very little shakeup in the trust’s holdings – four in total. Outlined below are the trust’s key moves and what the trust’s investment thesis might be.

Berkshire Hathaway Inc. (NYSE:BRK.B) continues to be the trust’s largest holding, now worth 47.5% of its entire 13F portfolio. During 3Q, the trust increased its share count by 14%. A big part of the overwhelming presence of Berkshire is Warren Buffett’s donation of shares. Berkshire shares act much like a traded investment fund, and do not attract many hedge funds as a result. Even with a beta of 0.5, Berkshire has managed to outpace the market (S&P 500) year to date by three percentage points. Check out all of Warren Buffett’s Berkshire holdings.

The trust downsized its AutoNation, Inc. (NYSE:AN) position by 20% in 3Q, and is the 18th largest 3Q 13F holding. We see one potential better auto industry play as Group 1 Automotive. Group 1 pays a 1% dividend and has the same five year EPS expected growth rate of 21%, but actually trades much cheaper at 13x earnings, compared to AutoNation’s 18x. It appears that the Gates trust was taking some profits in AutoNation, not a bad choice as the stock has slumped 15% since its 3Q earnings release, after being up as much as 30% on the year. Following the earnings miss, Deutsche Bank slapped a $27 price target on the company, compared to its $40+ current stock price. AutoNation has also been a popular investment for Gates’ Cascade Investment. See all of Cascade’s insider purchases here.

The Proctor & Gamble Company (NYSE:PG) was the only new position for the trust in 3Q, with a modest position of 113,000 shares that comes in as the 27th largest 13F position. Proctor is looking to grow with product innovation and new market penetration, but expects relatively flat sales for the year. From a valuation standpoint we see no reason to rush into Proctor, as the household product conglomerate trades at 19x earnings, which is in line with other major competitors Clorox and Colgate-Palmolive. Proctor would also appear to have sub-par growth prospects given under 40% of sales are attributed to emerging markets.

Caterpillar Inc (NYSE:CAT) was the final change in the Gates trust, an increase of only 1% in shares from 2Q, now making up the 4th largest holding in its 13F portfolio. The world’s largest manufacturer of earth moving equipment trades at only 8x earnings and pays the highest dividend of the major players at a 2.5% yield. Revenues are expected to be up 12% in 2012 and then 3% in 2013, even amidst economic uncertainty, thanks in part to the replacement of aging equipment.

The trust’s other major change involved no increase or decrease in share count, but a shifting thanks to stock price appreciation. McDonald’s Corporation (NYSE:MCD) moved from the trust’s third largest 13F position in 2Q to 2nd in 3Q, jumping Coca-Cola. McDonald’s is one of the biggest fast food restaurant chains in the world, continuing to perform relatively well in a tough economic environment as consumers trade down. The fast food company is also looking to gain market share in other segments as it expands its menu and looks to infringe on other markets with smoothies and premium coffees. Compared to other major food chains, Yum Brands and Jack in the Box, McDonald’s is on the low end of  a P/E basis and pays the highest dividend by far, a 3.7% yield.

Worth noting is that Bill Gates is a big fan of trash, specifically the waste removal company Republic Services. Republic is the trust’s 22nd largest holding, and is also a big investment for Gates’s Cascade Investments. The Berkshire shares are an interesting investment, but concerns over Buffett’s health and the firm’s next big acquisition give us reason to stay on the sidelines for now. We agree with the trust that perhaps it would be useful to hold off on AutoNation, but disagree on pulling the trigger on Proctor Gamble. McDonald’s and CAT are both investments we would consider looking at given their geographical diversification, diverse customer base and solid dividend. Check out all of the Gates Foundation holdings.

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