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Billionaire Warren Buffett’s Big Changes: Johnson & Johnson (JNJ), General Motors Company (GM), Archer Daniels Midland Company (ADM)

Billionaire investor and Berkshire Hathaway founder Warren Buffett is a pupil of legendary investor Benjamin Graham. Berkshire is a major conglomerate investing in a number of companies across a number of industries, focused on acquiring great companies at a discount to intrinsic value. Since Buffett is one of the world’s top investors, I found it useful to take a look at what Buffett and Berkshire were buying and selling during the fourth quarter (see all of Buffett’s new picks).

hedge funds vs. mutual fundsBuffett sold off…

Berkshire dumped 34% of its stake in Johnson & Johnson (NYSE:JNJ) during the fourth quarter. Johnson & Johnson pays a decent dividend yield at 3.2%, but its 60% dividend payout ratio is not quite as appealing. I generally look for a dividend payout of less than 50% to ensure a company can remain flexible during economic downturns. Valuewise, Johnson & Johnson (NYSE:JNJ) has a PEG of 3.0; anything above 2.0 is considered expensive.

For fiscal 2013, Johnson & Johnson (NYSE:JNJ) forecasts earnings to come in between $5.35 and $5.45 per share, but analysts’ consensus calls for $5.50. This lowered guidance includes a $0.25 hit from U.S. health-care reform. The company, which makes drugs, health-care products, and medical devices, should still see supply issues due to its product recalls and suspension of manufacturing at its Fort Washington plant. The company doesn’t expect that site to be ready for the FDA certification review process until late 2013 (see more about why J&J is heavily shorted).

Boosting Stakes In…

Berkshire added to its General Motors Company (NYSE:GM) stake, upping its shares by 66% and elevating the car company to thirteenth in Berkshire’s portfolio. GM is also one of billionaire David Einhorn’s top bets (read more about Einhorn’s picks). General Motors Company (NYSE:GM) plans to increase its North American capital expenditures to $1.5 billion in 2013, spending more on plant expansions. It hopes to lift profit margins in the region to 10% in the next three or four years, from 8% currently. The company is also hoping for break-even results in Europe by 2015.

General Motors Company (NYSE:GM) has a solid growth outlook, with Wall Street expecting it to grow EPS at 15%. Couple this with the car maker’s forward P/Eof 8, and it appears the company is a solid growth-at-a-reasonable-price opportunity, with a PEG of 0.5. The company is also turning around its profitability from an operating margin standpoint — with a five-year average operating margin of a negative 1.5% — but the company has a trailing-12-month operating margin of 0.4%.

Buffett boosted its stake in DIRECTV (NASDAQ:DTV) to 34 million shares, an increase of 15% from its Q3 stake, now being Berkshire’s eighth-largest holding. Latin America is expected to be a major growth story for the company in the coming years, and it is also looking to focus on a more premium brand, targeting high-end customers that are willing to pay for its costly interactive services and premium programs.

From a valuation standpoint, DirecTV trades cheaply when compared to major competitor DISH Network Corp. (NASDAQ:DISH).


Price to Earnings

DirecTV 8.5

Dish Network 14


Price to Cash Flow

DirecTV 6

Dish Network 10

DirecTV is another “growth at a reasonable price” opportunity that Buffett is invested in; the satellite company trades at a 0.7 PEG.

Buffett’s new additions…
Buffett bought 3.68 million shares of Verisign, Inc. (NASDAQ:VRSN) during the fourth quarter, making it Berkshire’s 32nd largest position. The company provides Internet infrastructure services to companies, and recently got its agreement with Internet Corporation for Assigned Names and Numbers approved. This will allow Verisign to serve as the authoritative registry operator for the .com registry through 2018.

One big advantage for this tech company is its healthy cash position. At the end of 2012, the company had $1.5 billion in cash, versus debt of only $700 million. VeriSign has also managed to boost its operating margins of late. Its five year average operating margin is 38%, whereas its trailing-12-month operating margin is 52%.

Another addition to the Berkshire portfolio was Archer Daniels Midland Company (NYSE:ADM), with the firm buying 5.95 million shares and putting the company as its 31st largest holding.

Archer Daniels Midland Company (NYSE:ADM) has a relatively diverse revenue portfolio, generating 50% from agricultural services related to grain elevator and transportation networks, then 35% from oil seeds processing that’s engaged in the processing of soybeans and others. Its other segment, corn processing, makes up just over 10% of revenues and produces products for the food and beverage industries.

Archer Daniels Midland Company (NYSE:ADM) also has a solid dividend yield, at 2.3%. The company has paid a dividend for 325 successive quarters, and increased its dividend every year since 2002. Another notable billionaire, Stephen Mandel of Lone Pine Capital, was also betting on Archer during the fourth quarter, owning over four times as many shares as Buffett (see all the hedge funds owning Archer).

Given Warren Buffett’s superior track record, it’s worthwhile taking a look at what he was loading up on during the fourth quarter. His new additions, VeriSign and Archer Daniels, appear to be solid investments for 2013 with robust growth prospects. Johnson & Johnson still has a number of headwinds related to recalls and production suspensions, but Buffett’s other additions, GM and DirecTV, are both opportunities for growth at a reasonable price.

The article Billionaire Warren Buffett’s Big Changes originally appeared on Fool.com and is written by Marshall Hargrave.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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