Warren Buffett’s Berkshire Hathaway (BRK.B) -) disclosed its second-quarter stock trades Monday, and its purchases of homebuilder stocks drew great attention.
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But Morningstar has produced a commentary citing the virtues of three of Berkshire’s longer-standing holdings. The trio is undervalued compared with Morningstar’s fair-value estimates.
Capital One Financial
(COF) -)
Morningstar moat (durable competitive advantage): narrow. Morningstar fair value estimate: $146. Tuesday stock quote: $107.20.
Berkshire owns 3% of this prominent bank stock.
“Capital One maintains a more limited branch network than its traditional banking peers, using its online and mobile channels to acquire customers and service its accounts,” wrote Morningstar analyst Michael Miller.
“The focus on online bank accounts has allowed the company to establish a national presence broader than what its narrow branch network would traditionally allow.
“This dynamic allows Capital One to enjoy the benefits of being a large bank without the expense of operating the branch system of a large bank.”
Capital One’s biggest segment is credit cards, which make up around 44% of its total loans. The rest consists mostly of commercial loans and auto loans.
Kraft Heinz
(KHC) -)
Morningstar moat: none. Morningstar fair value estimate: $53. Tuesday stock quote: $33.80.
Berkshire owns 27% of the food giant's stock.
The nearly five-year tenure of Kraft Chief Executive Miguel Patricio has been a productive one, writes Morningstar analyst Erin Lash.
“Kraft Heinz proactively enhanced its financial flexibility, with net debt-to-Ebitda hovering in the low-3 times range, down from north of 4 times in 2019.” she said.
“This affords the firm the ability to reinvest in its operations and selectively pursue acquisitions while bolstering shareholder returns.”
That’s reflected in Lash’s forecast for mid-single-digit percentage increases in the company’s dividend this year and the years ahead. This means a dividend payout ratio of 50% to 60%, she said. That ratio represents the portion of profit devoted to dividend payments.
Paramount Global
(PARA) -)
Morningstar moat: narrow. Morningstar fair value estimate: $25. Tuesday stock quote: $15.35.
Berkshire owns 14% of the media-and-entertainment stalwart's stock.
“Formed via the reunion of Viacom and CBS,” writes Morningstar analyst Neil Macker, “the rebranded Paramount derives a durable competitive advantage from:
· “the CBS broadcast network,
· a valuable portfolio of cable networks with worldwide carriage (including MTV, Nickelodeon and Comedy Central),
· production studios, and
· a now deeper content library.”
So, “given our overarching premise that the value of high-quality content will continue to increase, the production studios are among the most attractive assets of the reunited firm,” Macker said.
Paramount’s direct-to-consumer segment posted strong revenue growth in the second quarter, as management continues to forecast peak streaming losses in 2023, Macker said.
Total revenue fell 2%, due to the weak theatrical slate and the ongoing decline in TV ad revenue, he said.
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