Each quarter, investors and the media await the latest filing from Warren Buffett's Berkshire Hathaway (BRK.A, BRK.B) to see what changes the Oracle of Omaha made to his portfolio. This time, the report revealed a new investment in payment processor Fiserv (FISV) and a 73% increased stake in drugmaker Johnson & Johnson (JNJ).
As of June 30, Berkshire reported a 4.4 million-share stake in Fiserv, valued at $200.9 million. Based on Monday's closing price, the Fiserv stake was valued at about $220 million. Fiserv provides info-tech and electronic-commerce systems to financial and insurance companies. Services include electronically posting checks, opening accounts and tracking loans.
Why Buy Fiserv?
Despite its client base in the financial and insurance industries, Fiserv has managed its operation reasonably well during the financial crisis and recession, increasing its profits primarily through cost-cutting.
In its most recent quarterly report, Fiserv posted an adjusted profit of $1 per share, up from 90 cents per share in the previous year, and above analysts' estimates of 96 cents per share. Revenue rose to $1.02 billion from $1 billion in the year-ago quarter, topping analysts' estimates of $1.01 billion. Revenue from processing and services, which accounts for the bulk of the company's business, rose 3.4%, while product revenue fell 3.5%. Margins continued to improve in the quarter.
But while improved earnings, high margins and good management are definitely requirements for a Buffett investment, they're not enough. Fiserv also boasts a 37% market share in account processing, and according to Fool.com, nearly 70% of U.S. Internet banking transactions run through one of the company's technologies. And with its low capital needs, it's a cash-flow generator, Barron's adds. Taking it all into account, Fiserv sounds like a classic Buffett investment.
Rebuilding His Johnson & Johnson Stake
Berkshire also reported a 41.31 million share stake in Johnson & Johnson, up from 23.89 million shares three months earlier. Buffett had previously reduced his stake in J&J to help free capital for a $14.5 billion fixed-income investments in Goldman Sachs Group (GS) and General Electric (GE), and to help raise cash for Berkshire's $26.7 billion acquisition of the Burlington Northern Santa Fe railroad.
J&J has always been billed as a "stable, long-term growth company with outstanding management," as Bill Bergman, senior equity analyst at Morningstar told Reuters. "It's a company that had a few tarnishes on their reputation over the past several months, which makes it the ideal time for Buffett to increase his investment," Tom Russo, a Berkshire shareholder and a partner at Gardner Russo & Gardner told Dow Jones.
But J&J's problems aren't over. Last quarter, the company lowered its earnings guidance for the full year to reflect the impact of the children's medicine recalls and the suspension of manufacturing at the McNeil facility.
What at first seemed like a small issue in one subsidiary has started to affect the company's overall operation and worse, its reputation among consumers and investors alike. As the magnitude of the recall has became more widely realized, J&J's share price has suffered, and management has come under severe scrutiny by regulators, consumers and investors over the handling of the problems at McNeil.
Other Changes in Berkshire's Portfolio
Berkshire continued to sell its stake in ConocoPhillips (COP) after Buffett said he'd made a mistake buying it when oil prices were near their peak in 2008.
Other portfolio changes: Berkshire added to shares of medical device maker Becton Dickinson (BDX), pharmaceutical Sanofi-Aventis (SNY), water-treatment firm Nalco (NLC) and information manager Iron Mountain (IRM), and it sold some of its stock in M&T Bank (MTB), Procter & Gamble (PG) and Kraft Foods (KFT).
Berkshire's stakes in American Express (AXP), Coca-Cola (KO) and Wells Fargo (WFC) remained unchanged.
In all, Berkshire bought a net $1.21 billion of stocks in the quarter after selling a net $639 million in the first quarter. But the value of Berkshire's U.S. equities portfolio fell 8.8% to $46.44 billion as of June 30 from $50.93 billion as of March 31.
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