Last week, Berkshire Hathaway (BRK.A) (BRK.B) released its third-quarter 13-F. Morningstar's resident Berkshire specialist Gregg Warren noted that Berkshire was a net seller of equities during the quarter. It entirely offloaded its positions in Merck (MRK) and spin-off Organon (OGN), as well as Liberty Global (LBTYK). It also scaled back its positions in Abbvie (ABBV), Bristol-Myers Squibb (BMY), Marsh & McLennan (MMC), and Charter Communications (CHTR), among others.
Berkshire initiated new positions in Royalty Pharma (RPRX) and Floor & Decor (FND) and added to its stake in Chevron (CVX).
We think most of Berkshire's holdings are fairly valued to overvalued as of this writing. But there are three names that weren't trimmed during the quarter that we think are quite undervalued. Here are our analysts' latest stock analyst notes about each.
Amazon.com (AMZN)
Current Morningstar Rating (as of Nov. 16): 4 stars
Economic Moat Rating: Wide
"We are lowering our fair value estimate for wide-moat Amazon to $4,100 per share from $4,200, based mainly on margin pressures arising from hiring and shipping challenges, which we think may pressure profitability in the near term and, to a lesser extent, the long term. That said, we see the shares as attractive. Amazon reported third-quarter results that came in above the midpoints of its guidance range for both revenue and operating income but were still shy of investor expectations. Guidance for the fourth quarter was modestly below our expectations but has little bearing on our long-term view. Meanwhile, the company continues to rapidly add capacity in order to meet customer demand and one-day delivery, even as it roughly doubled its footprint during the past two years. We don’t see issues with 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, but we do see a modest reset in terms of growth and profitability through the next several quarters.
"Third-quarter revenue grew 15% (15% in constant currency) year over year to $110.8 billion, compared with FactSet consensus of $111.6 billion and guidance of $106 billion-$112 billion. Surging growth last year in online stores and third-party seller services slowed to 3% and 19% year-over-year gains in the third quarter, respectively, while physical stores accelerated to 13% growth. This shift succinctly captures the dynamics of the end of pandemic-driven lockdowns. On a year-over-year basis, subscription services slowed to 24% growth, AWS accelerated to 39% growth, and other decelerated to 50% growth. Performance of AWS was staggering with acceleration from a $12 billion base a year ago. We continue to view advertising (in 'other') and AWS as key long-term growth drivers for the firm."
Dan Romanoff, analyst
Kraft Heinz (KHC)
Current Morningstar Rating (as of Nov. 16): 4 stars
Economic Moat Rating: None
"Rampant cost pressures, supply-chain disruptions, and stepped-up competition did not derail no-moat Kraft Heinz’s performance in the third quarter; we attribute its results to the foresight to set out on a revised strategic course even before the pandemic took hold. Organic sales edged up 1.3% versus a year ago and impressively jumped 7.6% relative to the pre-pandemic period in 2019. Further, while adjusted operating margins contracted 250 basis points over last year to 19.8%, we’re encouraged that management has opted to continue funneling resources to support its brands and capabilities despite facing unrelenting inflationary headwinds. In this context, advertising was up 9% through the first nine months of the year, and research and development spend has increased to the tune of 17%. In addition, Kraft Heinz has directed 3.4% of sales toward capital expenditures for the year to date, versus just 2.1% over the same horizon in 2020. Although the market doesn’t seem enamored (with shares down a touch), we think results showcase the extent to which the company has prudently prioritized investments for the long-term health of the business (as opposed to its previous mandate to boost margins at all costs) since CEO Miguel Patricio took the helm in mid-2019.
"With just three weeks left in its fiscal year, management articulated its expectations for organic sales to hold flat relative to 2020 and adjusted EBITDA to amount to more than $6.2 billion (up from $6.1 billion prior). We will likely tweak our near-term outlook to reflect marks through the first nine months but see little to warrant altering our long-term forecast (2%-3% annual top-line growth and operating margins holding in the low-20s) or our $49 fair value estimate (beyond a modest bump for time value). However, with shares trading at a 25% discount to our intrinsic value (and shares boasting a more than 4% dividend yield), we think investors should add this leading packaged food operator to their shopping lists."
Erin Lash, director
Teva Pharmaceutical (TEVA)
Current Morningstar Rating (as of Nov. 16): 4 stars
Economic Moat Rating: None
"Teva Pharmaceutical Industries' third-quarter results were generally in line with our forecasts. Revenue fell shy of our projections as the rise in delta variant cases suppressed broader pharmaceutical usage, so we expect sales to rebound somewhat next quarter. We maintain our $20 fair value estimate and no-moat rating.
"Sales this quarter declined 3% year over year in local-currency terms because of poor performance of generic products and Copaxone in North America, as well as the absence of significant product launches. Revenue in North America decreased 7% as the surge of COVID-19 cases in the region resulted in lower overall physician and hospital visits. Sales in Europe were less affected by the delta variant, and revenue there rose 9%, driven by generics and over-the-counter products. Volume trends in Europe point to an encouraging fourth quarter. International sales remained stable. Operating margin for the quarter was 26.8%, up from 25.7% in the year-ago quarter and in line with our expectations. Management reiterated its target of a 28% operating margin by the end of 2023. Non-GAAP earnings per share remained fairly stable at $0.59 compared with $0.58 in the third quarter of 2020.
"Debt was further reduced this quarter, though management estimates 2022 interest expense will remain unchanged despite the continued debt reduction. Regarding the ongoing opioid trials, Teva reached a settlement with Louisiana in September that reflects the proposed nationwide settlement the company is seeking. The settlement is expected to be more lenient given Teva's large amount of debt, though the terms may hamper further debt repayments."
Damien Conover, director
