Tickers in this Article: KFT, AXP, USG, GIS, EFX, FAST
Each year, countless news articles appear about Warren Buffett, the legendary investor who has amassed billions through stock market investing. Inevitably, many make the argument that the best path to investment success is to invest in the "Oracle of Omaha" himself, by buying stock in Berkshire Hathaway (NYSE: BRK.A, BRK.B). After all, it's an excellent way to have your money managed by a legendary investor without paying too much of a management fee - despite the billions of dollars his company earns in annual income, Buffett continues to pay himself an annual base salary of only $100,000!

Alternative Solution
However, rather than attempt to merely match the returns produced by Buffett, why not study the businesses held within the Berkshire Hathaway investment portfolio and identify stocks that are similar yet superior to these holdings. Not an easy task by any means, but the results could make it a more than worthwhile one.

Berkshire Hathaway's Three Stars
Three of Berkshire's most sizable (and historically some of the most profitable) current holdings include:

• Kraft Foods (NYSE: KFT) - Berkshire owns approximately 132 million shares or 8.6% of the stock.
• American Express (NYSE: AXP) - Berkshire owns 152 million shares or 12.8% of the stock.
• USG Corp. (NYSE: USG) - Berkshire owns 17 million shares or 19% of the stock.

The Competitors
General Mills (NYSE:GIS)
The Minneapolis-based food company produces the iconic cereal Cheerios and other well-known brands like Häagen-Dazs, Yoplait, Green Giant and many others. While not as big as Kraft - its market cap is $19 billion in comparison to Kraft's $48 billion - it's certainly more profitable. With an EBITDA margin of 20.2%, a full 4% better than Kraft, and a return on equity almost 12 percentage points higher, it's not even a close competition. On a valuation basis, Kraft stock trades more expensively compared to both earnings and cash flow. Consider Kraft's 14.6-time's cash flow compared to 12-times for General Mills, trailing P/E of 20.5 compared to 18 for General Mills. Buffett likes to invest in exceptional companies at attractive prices, and on that basis, General Mills certainly fits the bill.

Equifax (NYSE:EFX)
Equifax provides businesses of all sizes with the data necessary to make credit decisions including approving new credit cards for consumers. It's one of three firms (Experian and TransUnion are the key competitors) providing credit reports worldwide. North America accounts for 80% of the company's current revenue, although international expansion is on the horizon. On a comparison basis, there is one area where it clearly underperforms American Express, and that's return on equity. American Express' ROE is 38.6%, almost double the 19.6% figure for Equifax. That's a definite argument for Buffett holding one over the other. But not so fast, in nearly every other metric it outshines American Express, including return on invested capital, total debt to equity, EBITDA margin and price to book. AMEX is the larger company, but Equifax arguably is the business with the bigger moat protecting future revenue and earnings growth. And while American Express is clearly exposed to the risks of the ongoing credit crunch, Equifax is largely isolated from them. (For related reading, see Keep Your Eyes On The ROE.)

Fastenal Company (Nasdaq:FAST)
Fastenal distributes products like drywall screws that are useful for hanging USG products and other building materials through a 2200-store network across the United States and other parts of the world. With annual sales in 2007 eclipsing the $2 billion mark for the first time in company history, it's poised for future growth. In the difficult economic climate of this past year, it still grew sales by 14% and net income by an impressive 16.9%. If anyone can withstand tough times, Fastenal can. While Fastenal increased sales and net income in 2007, USG's top and bottom lines were both less than the previous year. Incredibly, Fastenal's net earnings in 2007 were $232 million, this is $22 million more than USG on $3 billion less in revenue. Can you say "margin advantage"? Finally, USG's return on equity is 9.6% versus 22% for Fastenal. USG is the cheaper stock right now, but does this make it better? I don't think so.

The Bottom Line
There is no question Warren Buffett is a great investor. Having said that, it is possible that companies not held by Berkshire Hathaway and competing in the same industry can be better investments than those held by the legend himself. Mimicking the Oracle of Omaha's investment style, instead of simply buying into his company or copying his stock picks, could leave you with more bang for your buck.

For more on Buffett's methodology, see Think Like Warren Buffett and Warren Buffett: How He Does It.

comments powered by Disqus

Trading Center