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Why Buffett Would Love a Crash—and Trump Wouldn’t (13639 hits)

-Berkshire Hathaway is sitting on a major cash pile. A major market crash would help Chair Warren -Buffett deploy some of Berkshire Hathaway’s cash.
-Buffett is known to be a value investor. However, over the last few quarters, Berkshire Hathaway’s buying activity has been subdued.

Warren Buffett
Berkshire Hathaway’s (BRK-B) (BRK.B) cash pile has gradually increased over the last few quarters. At the end of the second quarter, the company was holding $122 billion in cash and cash equivalents. This cash is mainly invested in short-term Treasuries in the absence of compelling investment opportunities. Chair Warren Buffett isn’t a fan of parking money in debt instruments. Investments in Treasury securities add little value for Berkshire Hathaway.

Berkshire Hathaway’s cash pile
Berkshire Hathaway’s cash pile has increased gradually. Buffett surprised the markets by not adding many publicly traded stocks in the fourth quarter of 2018 even as markets plunged. Apple (AAPL), Berkshire Hathaway’s biggest holding, fell more than 30% in the fourth quarter.

Berkshire Hathaway’s buying activity has been modest this year as well. While the company added Amazon (AMZN) this year, the addition hardly moved the needle for its massive cash pile. Incidentally, it wasn’t Buffett but a different investment manager at Berkshire that took the Amazon stake.

Why Warren Buffett would love a market crash
On March 28, in an interview with CNBC, an interviewer asked Buffett if he foresees a recession. For context, back then, the US yield curve had inverted, increasing recession fears. Buffett replied, “I just hope I see a lot of recessions.” A recession or a market crash would help Buffett deploy some of Berkshire Hathaway’s cash pile.

We should remember that during the last financial crisis, Buffett jumped into the fray and deployed a lot of money. General Electric (GE) was among the companies that Buffett invested in during the last financial crisis. Berkshire Hathaway has since fully exited General Electric. Last year, there were rumors that Berkshire Hathaway might again take a stake in GE.

Warren Buffett and elephants
In this year’s annual letter, Warren Buffett said that he’s looking for an “elephant-sized acquisition.” In a nutshell, these are companies that Berkshire Hathaway intends to fully acquire. Precision Castparts was Berkshire Hathaway’s last major acquisition. However, despite Buffett’s openly admitting that he’s looking for a major acquisition opportunity, Berkshire hasn’t been able to seal any such deal. Buffett was optimistic about this in his annual letter. He wrote, “Prices are sky-high for businesses possessing decent long-term prospects.” A recession might just help Buffett find attractive investment opportunities.

President Trump wouldn’t like to see a recession
Meanwhile, US President Donald Trump might fear a recession, as he attaches a great deal of importance to the economy and the markets.

The US economy is doing relatively well. While US economic growth rates have come down, they should be taken in the context of a global economic slowdown. With a little over a year remaining ahead of the 2020 presidential election, the last thing Trump would want is a recession or a market crash. On multiple occasions, Trump has highlighted that the US economy is booming under his administration. A recession or a crash would provide Democrats with much-needed ammunition.

Buffett seems to disagree with President Trump on certain points, including the US-China trade war. He also took a dig at Trump in his this year’s annual letter. Read Warren Buffett Disagrees with President Trump for more analysis.

Procter & Gamble (PG) shares are trading near a record high. The shares have risen 33.7% YTD (year-to-date) as of September 6. The company’s performance was consistent on the sales and earnings front.

Besides stock price appreciation, Procter & Gamble boosted investors’ return through dividends and share repurchases. The company raised its dividend 4% in April—its 63rd consecutive annual increase. Notably, the company returned $12.5 billion to its shareholders in fiscal 2020 in the form of dividends and share buybacks.

In comparison, stocks of other major personal care product manufacturers have also gained significantly this year. Improved underlying sales due to higher pricing and moderating input costs are driving these companies’ stocks.

Colgate-Palmolive (CL) and Kimberly-Clark (KMB) shares have risen 25.5% and 21.2% during the same period.

We expect these personal care product manufacturers to sustain the sales and earnings momentum in the coming quarters. However, unlike Procter & Gamble stock, the upside in Kimberly-Clark and Colgate-Palmolive shares might be capped.

Procter & Gamble’s growth drivers
On average, Procter & Gamble’s organic sales have increased by about 5% in the last four quarters. Meanwhile, the company’s performance in the previous quarter was even better with organic sales rising by 7%.

Stellar sales and productivity savings led Procter & Gamble to report improved margins, which remained pressured over the past several quarters. The company’s core gross and operating margin expanded by 120 basis points and 130 basis points, respectively.

Meanwhile, Procter & Gamble continued to beat analysts’ earnings estimates. To be precise, Procter & Gamble has outperformed analysts’ expectations for 17 consecutive quarters by an average of about 4%.

Will Procter & Gamble stock rise more?
Procter & Gamble stock could sustain the uptrend despite rising considerably this year. Continued strength in the company’s base business will likely support its stock in the coming quarters. We expect Procter & Gamble’s underlying sales to benefit from higher net price realizations backed by premium innovation. Meanwhile, the company’s volumes are also expected to grow.

Management remains upbeat and expects to maintain the growth pace in fiscal 2020. Procter & Gamble expects its organic sales to increase 3%–4% in fiscal 2020.

We expect improved sales and strong productivity savings to drive the company’s margins in the coming quarters. Moreover, input costs are expected to moderate and provide an additional cushion to the company’s margins.

Procter & Gamble’s core earnings could continue to beat analysts’ estimates in the coming quarters. The earnings could record healthy growth due to higher margins and share repurchases.

Valuation suggests otherwise
While we expect sustained momentum in the base business to support Procter & Gamble stock, its valuation suggests otherwise. The recent uptrend in the stock drove its valuation higher. Procter & Gamble stock trades at a forward PE ratio of 25.3x, which seems a bit high on the projected mid-single-digit growth in its fiscal 2020 EPS.

Analysts maintain a neutral view on Procter & Gamble stock. The consensus target price indicates minimal upside. Analysts have a target price of $123.73, which implies an upside of about 1% based on its closing price of $122.87 on September 6.

Posted By: Elynor Moss
Tuesday, September 10th 2019 at 7:01AM
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