Billionaire investor Warren Buffett’s Berkshire Hathaway made headlines with its latest acquisition: the purchase of battery manufacturer Duracell from Proctor & Gamble (NYSE:PG) in exchange for the $4.7 billion worth of Procter & Gamble shares Berkshire held.
But lost in the news were Berkshire’s latest 13F filings — which are usually some of the most anticipated filings in the markets because of the legendary investor’s successful 50 plus year track record of picking stocks.
A 13F requires funds to disclose their long positions within 45 days of a quarter’s end, and so Friday’s filing represents Buffett’s holdings as of June 30.
This quarter, the company boosted stakes in a number of stocks including meaningful purchases of Charter Communications (CHTR), DirecTV (DTV), General Motors (GM), Visa (V), and Mastercard (MA).
The company also held 8 million shares of Liberty Media Class C (LMCK), which was paid out during the period as a stock dividend on Berkshire’s holdings in Liberty Media Class A (LMCA) shares.
But what most investors missed was Berkshire’s only new money purchase during the period was 450,000 shares of Express Scripts (ESRX) for an estimated cost of around $32 million.
Express Scripts Holding Company is a Fortune 100 company as of 2013, the 20th-largest in the United States and is the largest pharmacy benefit management (PBM) organization in the United States, with 2013 revenues of $104.62 billion.
The company reported revenues of $25.78 billion for the third quarter, down from $25.92 billion a year ago. The company also reported earnings per share of $0.78, up from $0.54 for the third quarter of last year. The company has narrowed its EPS guidance for 2014, to between $4.86 and $4.90 from $4.84 and $4.92 stated earlier. However, the new guidance still expects a growth in the range of 24% to 27% on the year.
ESRX stock has appreciated by almost 11% since the beginning of the year.
But is the stock a buy?
Based on earnings per share of $2.51, a growth rate of 19%, and a discount rate of 12%, we estimate ESRX’s fair value at $68.22 per share. That means the current price of $77.87 represents a premium of 14%.
But here’s where Warren Buffett’s wisdom comes into play:
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
ESRX is in a business where it has the power to dictate terms. Barriers to entry are high because of the importance of scale. If you don’t have a very large base of patients, you’re not going to have bargaining power over drug manufacturers or retailers. So, it’s going to be very hard to start this business from scratch or for competitors to steal market share.
That makes this company a strong buy, by Warren Buffett standards. And of course, if it’s good enough for Berkshire Hathaway, it’s probably great for other investors as well.
Yours in profits,