Would I buy shares in Warren Buffet’s company – Berkshire Hathaway?

While this might be controversial, there are several issues I see with investing in Berkshire Hathaway (BRK-A, BRK-B), that would stop me from buying shares. While I’m a great admirer of Warren Buffett and Charlie Munger, as an investor, I want to know when and how I will receive a return on my investment. There’s not much point in investing in something, if you can’t envision the end game. At some point as an investor, you either want to be able to sell the investment and make a profit, or you want to receive a return along the way (usually in the form of dividends).

JB HiFi: Is NOW the time to buy?

JB HiFi Limited’s (ASX: JBH) share price has been pummelled over the last year and is down 40% since 29^th March 2011, and currently trading at $11.06.

As my Motley Fool colleague Bruce Jackson mentioned in this article, “You don’t make money looking backwards. Yet so many people do exactly that. They look at the recent past, and extrapolate that deep into the future.”

Vocus Communications – New Post on Motley Fool site

Vocus Communications Limited (ASX:VOC) recently updated the market with its expected half year results. I wrote an in-depth article for the Motley Fool, which you can view here.

Billabong International Limited (ASX:BBG) – Capital raising on the cards

Billabong released a trading update on Monday 19^th December, announcing a profit downgrade, an operational review and a strategic capital structure review. Billabong’s share price subsequently fell by 40%.

The company said that sales in Europe have been affected by “Sovereign debt issues and fears of a global recession, impacting consumer spending patterns significantly”. Europe is also being affected by bad weather due to limited snowfalls.

Sales in Australia have been significantly affected by unseasonably cold summer weather, despite the November rate cut by the RBA.

Spotless Group (ASX:SPT) – Arbitrage opportunity or trap?

Spotless Group Limited (ASX:SPT) received a takeover offer from Pacific Equity Partners Pty Ltd (PEP) for $2.50 per share on 9th May 2011. The Offer was revised to $2.68 on 30th November 2011. What is unusual is that SPT’s shares haven’t traded above $2.50. Buyer’s today could make 18 cents per share (8%) return by buying shares today and holding until the deal completes. The question is, what is the risk of the takeover not-proceeding?

Matrix Composites announces $61m in new orders

Matrix Composites & Engineering Ltd (ASX: MCE) announced on Thursday 17th November, that they had secured $61m in new contracts. They also announced that they had $105m in unfulfilled orders and have $560m in outstanding submissions.

This is the first announcement of new contracts since they reported 2011 full year results. Its been a while coming and Matrix had noted in August 2011 that orders had slowed for the whole industry.

In February 2011, Matrix announced that it had received $400m of new contracts in three months, since November 2010.  This announcement of $61m in contract wins should be put in that perspective. This should be the first of more announcements to come in the next two-three months, and while it’s a good sign, it should be considered as a baby step in the right direction, and not as a return to the levels of growth the company has sustained over the past year or two.

I’ll be watching with interest to see if Matrix announce more contract wins in the months ahead.

Does a low PE Ratio mean a stock is cheap?

The short answer is….’not necessarily’. There are many reasons why a stock might have a low PE ratio, including the following:-

• It has been overlooked by the market.
• Its share price has been marked down by the market because of real or imagined threats to its business in future.
• It has had abnormally high earnings in the last year.
• The market in general has fallen; so many stocks have low PE ratios.
• The sector as a whole may be suffering e.g. the retail sector in Australia at the moment e.g. David Jones Limited (ASX:DJS) is trading on a PE of 8.9x, Myer Holdings Limited (ASX:MYR) is trading on a PE of 8.2x.
• It’s a cyclical stock. Resources and Australian Bank stocks typically trade at lower PEs than the market as a whole e.g. BHP Billiton Limited (ASX: BHP) is currently trading on a PE of just over 9x and Westpac Banking Corporation (ASX: WBC) is trading on a PE of 8.7x.
• The company has gone through a de-merger or sold off some of its revenue producing assets, so the previous earnings bear no resemblance to its future earnings e.g. Tabcorp Limited (ASX: TAH) current PE is 3.37 based on earnings per share of 80.7 cents, however it recently split off its casinos business into Echo Entertainment Limited (ASX: EGP), so 2012 earnings won’t be as high as 80.7 cents.
• The company has issued a heap of new shares or had a rights issue. Generally this forces the price down, but earnings might still be based on the old number of shares.
• Property and Infrastructure trusts can have misleading earnings per share due to non-cash adjustments included in the income statement e.g. property revaluations.
• The stock may have gone ex-dividend, so price is pushed down, causing PE ratio to be artificially low.

Washington H Soul Pattinson (ASX:SOL) – overlooked?

You may or may not have heard about Australia’s second oldest listed company, Washington H. Soul Pattinson (ASX:SOL). The company has been listed on the Australian Stock Exchange for more than 107 years. The company has a current market cap of over $2.9Bn, putting it into the Top 50 companies in Australia by market cap. Would you believe its not in any of the standard ASX indices? Not even the ASX300. The reason is that the company has a cross holding agreement with Brickworks (ASX:BKW), where Soul Pattinson owns 44% of Brickworks shares and Brickworks owns 43% of Soul Pattinson shares. This was setup to protect both companies from being individually acquired.

The company has returned 17.5% per annum to shareholders over the last 15 years, and at the current price of $12.18, looks to be trading at a discount to intrinsic value and definitely worthy of further research. The company’s next report to shareholders is due in the next couple of weeks (has to report to ASX by end of September), and I await it with great interest.

Things to like

• Big enough market cap of 2.875Bn to be in Top 50, but its not even in ASX300.
• Only covered by one stockbroker (which is great)
• Very diversified investments not limited to construction materials, property, energy, coal mining, port operations, pharmacies, pharmaceuticals and health care, telecoms, funds management, rural supplies such as fertiliser, seed and grain, irrigation and insurance and financial services. It also has its own investment portfolio worth around $450m with investments in companies such as BHP Billiton, Commonwealth Bank, Westpac, National Australia Bank, Telstra and Perpetual.
• Shareholder friendly, pays out approximately 50% of earnings as dividends, so retains fund to invest and has paid out eight special dividends in the last 10 years.
• Soul Pattinson haven’t raised equity from shareholders in 10 years.
• Debt/Equity ratio is -45%, with net cash of $1,700m
• Management have large shareholdings in SOL as well as its associated companies and subsidiaries.

Valuation

Market value

If we add up all the value the market ascribes to Soul Pattinson’s holdings and exclude $350m in costs such as liabilities and operating costs, Total value comes to just over $4Bn. On a per share basis, thats $16.83. Based on today’s share price of $12.18, you are getting $16.83 of value, a discount of 38%.

Book Value

Soul Pattinson’s last stated book value per share (March 2011) was $16.39, so its trading at a discount to book value of 34%.

Net Asset Value

Based on the last stated net assets provided by Soul Pattinson and each of its holdings, and again excluding $350m in costs, I’ve calculated net asset value per share to be $13.65, so company is trading at a 12% discount to net tangible assets.

Discount to intrinsic value

Based on several of my valuation methods, I get an average valuation of $16.72, so Soul Pattinson looks to be trading at a discount to its intrinsic value. With a history of special dividends, 17.5% annual returns, a 107 year history and the many features mentioned above, Soul Pattinson is definitely a company I’ll be keeping my eye on.

Transfield Services – An analysis

Transfield Services (ASX:TSE) is an Australian listed company providing services such as operations, maintenance, and asset and project management services to the  Resources and Industrial, Infrastructure Services and Property and Facilities Management sectors. It was listed in May 2001.

In this report, I’m going to have an in-depth look at Transfield’s financials and its current valuation. I’ve also attached an Excel model for the company, so you can see the financials for yourself.

Cheap stocks

Now that most companies with a June year-end have finalised their 2011 fiscal year results, I’ve updated the valuations for many companies and share my views on a few of them here, including some that I think are cheap.