Some More “Warren Buffett Retirement Plan” Picks

Ian Wyatt has been pitching the idea that you can “front run” Warren Buffett and Berkshire Hathaway by buying stocks that he calls the “Warren Buffett Retirement Plan” — he’s done this before, but I think the stocks he’s teasing have changed this time around.

There are three stock ideas hinted at in this teaser, I wrote about the first one yesterday and you can see that here, so now it’s time to get into the others.

The first one is teased as so cheap that it’s “hard to believe” — so I guess that means it’s even cheaper than yesterday’s stock, Teva … here’s how he puts it:

“Buffett frequently buys company with good cash flow (like his insurance businesses), or sometimes he’ll buy companies with great moats (like his railroad Burlington Santa Fe).

“But every now and then he snatches up a company because it’s so incredibly cheap that there’s essentially no downside.”

He shows a couple charts that show how cheap the stock is — here’s the verbiage:

“How do I know it’s cheap?

“Take a look at the two charts below. The first shows this company’s earnings per share. Over the past year, this company grew earnings per share by more than 500%…”

The charts, though I won’t copy them here, show that they had earnings of about two bucks in 2009, $15 in 2010, and projected earnings of roughly $6 in 2011.

Then the second chart comes in, providing some of our other key clues — we see that the stock had a very volatile 2010, but basically came out of the year at about the same price that it entered, though it has since climbed a bit. We learn from this chart that the stock closed at $72.33 on March 31 of this year, so that’s certainly a nice tidbit to verify our solution to the secret.

Then we get some Buffett connection:

“… this company is currently one of the cheapest on an earnings per share basis of any in the stock market.

“Normally that would be a red-flag. But according to a recent story from Reuters, this stock is currently high on Buffett’s potential shopping list.”

That “shopping list” was the result of analysts hearing Buffett say that his “elephant gun” was loaded for more acquisitions, and then sniffing out stocks that they thought might meet his criteria in the public markets … the same kind of speculating that everyone does about Berkshire buyout candidates from time to time, and we have essentially no chance of being right about these guesses (unless, of course, we work for Buffett — but speculating from an insider’s perch tends to get one in trouble… sorry, Mr. Sokol).

More about this teased stock?

“If Buffett buys this stock, you know what will happen.

“But if he doesn’t you’ll still be ahead of the game. A company’s earnings don’t jump 500% without eventually pushing stock price appreciation.

“I don’t anticipate that this company will remain cheap for very long. It’s selling for even cheaper than some of the hardest hit uranium stocks were after the Japan tsunami.

“And it’s exactly the kind of cheap, unloved, ignored company that can help you get rich at a measured pace and reliably–the Buffett way.

“If ‘reliability’ isn’t something that gets you excited as an investor, then I don’t know what to tell you.”

So who is Wyatt pitching as the next stock you can buy to “front run” Warren Buffett? Toss all those little data points into the mighty, mighty Thinkolator and we find that this is …

Bunge (BG), the agribusiness giant.

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Bunge is one of the larger global agribusinesses — and they do almost everything from processing sugar cane to making margarine, but they are largely a distrubutor and bulk processor, they don’t do much for the end market (making consumer food products, other than a few oils) and they don’t do much direct farming. They operate a lot of processing facilities and have a huge storage and distribution network for sugar, oilseeds, corn, wheat and other grains, largely in North and South America but touching most corners of the world.

And the shares did close at $72.33 on March 31, and their earnings match, so that’s good enough confirmation for me. The earnings that make the stock look insanely cheap are the trailing earnings, and it’s important to note that they’re not going to hit that $15 per share number for annual earnings again soon — most of that came as a result of their sale of a fertilizer nutrient business in Brazil to Vale last year, and that’s a textbook case of “one time earnings.” It’s too bad, really — I sold a house last year and therefore my family recorded a nice 2010 earnings number, but we cannot, unfortunately, sell that house again this year.

If you take away the sale of that fertilizer business and use Bunge’s adjusted earnings number, they reported $4.13 in earnings for 2010 — not bad, and more than twice the 2009 number, but that gives them a trailing PE on 2010 numbers of 17.6, which does not look so dirt cheap. The company is continuing to perform solidly as of the first quarter — they reported $1.49 in earnings per share, which was substantially higher than analysts had been projecting (Yahoo Finance says they were looking for $1.31). Forward estimates are that the company will earn $6.17 in 2011 and $6.52 in 2012, so the stock is going for roughly 12X forward earnings — which, to compare to some peer-ish companies, is a premium to Archer Daniels Midland (ADM) but a discount to the earnings of Viterra (VT in Toronto), and right about in line with the expectations of Cosan (CZZ).

None of those companies match up exactly with the products or specific country exposure in Bunge’s businesses, but with the exception of Cosan (Brazilian sugarcane, one of BG’s key segments), which is smaller and expected to grow far more quickly, they’re priced at roughly similar valuations when you take into account the analysts projections for their growth (using PEG, the PE ratio divided by the growth rate — BG, ADM and Viterra, all of which make most of their money processing, storing and distributing agricultural products, all trade with a PEG ratio of roughly 1.2-1.3). For full disclosure, I’ve profiled Viterra as an “Idea of the Month” for the Irregulars in the past, though I don’t currently own shares personally. There has been recent news from BG, they reported another quarter that “beat” estimates a couple weeks ago, and they were rebuffed in their attempt to buy a big Australian sugar company (Tully) earlier in the year, but they’re clearly trying to expand their sugar business, particularly in Asia where demand growth is strongest.

So there’s one idea for you — they’re just the right size for a Buffett acquisition at a touch over $11 billion in market cap, though I don’t know if he’d be interested in getting into the business. They don’t usually generate a lot of free cash flow, thanks in large part to their substantial investments in property and equipment, and they are in a business driven by commodity prices so, with those prices so volatile, they’re not even able to provide earnings guidance. On the positive side, in a very volatile business a big operator like Bunge, with access to capital markets and the ability to hedge globally and process produces rapidly and efficiently, should have an advantage over smaller or more localized companies. Don’t know that I’d be as quick as Wyatt to call them “reliable,” and we should completely ignore the idea that they have 500% earnings growth, since that came from a one-time asset sale, but it is certainly a competitively priced, global agribusiness.

Oh, and that “shopping list” that Wyatt mentioned? You can see that here if you like — it does include Bunge, along with several of its competitors and lots of other companies you’ll recognize. And, of course, Berkshire probably won’t buy any of ’em.

What, then, is behind door number two today? Wyatt calls it “The Most Boring Stock in the World” … about a year ago he used this same “most boring stock” teaser as part of his last “Buffett Retirement Plan” pitch, and that time I’m pretty sure he was teasing Teva (yes, the same stock he pitched this time around as “the stock Buffett can’t buy” and that we covered yesterday) — so maybe Teva isn’t “boring” anymore, but he’s pitching a different boring stock this time around.


“It’s another railroad firm. But it’s not in the United States. It’s in China.”

Hard to call anything Chinese “boring” right now, I’d say — but here’s what he tells us about this one, after bringing up the fact that Buffett also bought another “boring” railroad stock (that being Burlington Northern Santa Fe, Berkshire’s largest acquisition to date):

“… China is even more reliant on its railroads than the United States. China still doesn’t have a very robust highway system to truck goods across the country. But they do have rail. And no matter what happens to real estate there, or what the kooky Communists in power decide, they’ll rely heavily on rail to move people and goods.

“So today I’m adding this Chinese railroad stock to my Warren Buffett Retirement Plan report.

“If you’re yawning, consider that a sign that this company might be the best, safest and most consistent stock you’ll ever own.

“So, yeah. It’s boring. But that’s kind of the point. You never see Warren Buffett falling for some screaming bio-tech or a volatile penny stock. ”

But do we get any real clues? No, dangit. So we’re basically left with the fact that Wyatt is teasing a Chinese railroad stock of some kind. Which one?

Well, there are a bunch of publicly traded companies in the railroad business in China — though most of them are not, technically, railway owners, there are far more service, construction and equipment companies than there are actual railroad owners and operators, and I’m going to go out on a limb and say that we’re probably not looking at a construction company, a cement company, a contractor, or a car or locomotive manufacturer, not if you’re looking for something “boring” like BNSF (I don’t think Burlington Northern is particularly boring, personally — it spit a billion dollar dividend up to Berkshire this quarter because it had extra cash on hand that they thought Buffett might like to invest, and they’re hoping to keep sending cash to Omaha). The construction and equipment companies just don’t have the same consistent “toll road” business or irreplaceable assets that a railroad has.

Which cuts out many of the relatively easily purchased stocks — that means we’re not talking about the two big Chinese construction companies who’ve built most of their railroads and who have expanded into overseas markets. Those two are China Railway Construction, ticker 1186 in Hong Kong, and China Railway Engineering, 0390 in HK, both of which are large state-controlled firms, and both of which have been very disappointing for investors — the priority for China has been building the jewel of their national high-speed rail network, not necessarily in making their state-run construction companies profitable, and at least one of them has had trouble with losses on overseas projects as well.

And probably not the also-large CSR Corp, which makes a lot of the “rolling stock” — locomotives and carriages (also HK listed, at 1766 — and, though off the high-speed rail highs of January, still a far better performer over the last several years), or its supplier Zhuzhou CSR Times Electric (3898 in Hong Kong), which makes the electrical equipment and train control systems for Chinese railways, and has also done fairly well for investors over the last several years. Those are both being priced for pretty substantial growth, too, at about 30X trailing earnings — though, to be fair, the growth does seem to be there so far, with the government reportedly spending about $90 billion building out the high speed rail system last year, and with ambitious plans to link hundreds of cities to the network over the coming decade. There’s also the smaller China High Speed Transmission Equipment Group Co Ltd (658 HK), by the way, which is more diversified but also sells into the building high speed rail network.

And we’re probably also not talking about the relatively small ancillary companies, some of which even have US listings — that group includes Wowjoint Holdings (BWOW), which makes mostly specialized equipment for stuff like building railway overpasses and has very “lumpy” revenue, or smaller companies that pitch themselves as being a play on buildout of the high-speed network, like China Advanced Construction Materials Group (CADC in the US, this is one of those tiny, feared, and probably inadequately audited reverse-merger companies, they sell cement).

No, I’m betting that for this relatively mainstream newsletter, and for a boring pick, Wyatt would probably go with an actual railway, and probably with one that’s US listed — not least because of all the uncertainty surrounding contracts, particularly for the smaller firms, after the bribery allegations surrounding the rail minister in China back in February (good story about that here, though my favorite part was that one of the “bad guys” received a “suspended death sentence” … I’m sure he’s quite relieved).

Which means, after that long-winded exposition, that we’re probably talking about the only Chinese railway that’s listed overseas (as far as I can figure, at least): Guangshen Railway (GSH), which is a decent-sized company with a market cap of about $3 billion, and has had a US ADR for about 15 years. They pay a solid dividend in the neighborhood of 2.5%, and they operate a very busy rail line in the busy Pearl River Delta mostly between Guangzhou and Shenzhen, along with some longer-distance lines, branches and an interconnection to the Hong Kong railway run by MTR (which was teased by Jeff Opdyke last month). This was the first really fast rail line in China, though not nearly as fast as modern “high speed” projects — more like Acela speed, topping out around 140 mph.

The stock hasn’t been particularly boring, but it has done well at times — and it does pay that decent dividend. They are driven by both passenger traffic along this highly populated corridor (Guangzhou reports a population of about 14 million, Shenzhen of about 9 million as of 2009), and by freight traffic, since this is also the manufacturing heart of China. I don’t know a lot about the business or their capital needs, but they do seem to have a nice, captive population and reasonable pricing power in a regulated and partially state-controlled business, so their primary competitive threat is probably all the new highways and increasing auto ownership.

On the down side, Guangshen is pretty close to full capacity already for passengers, so they probably would have to add lines, which might be prohibitively costly, or acquire neighboring lines to new areas in order to expand their top line in any dramatic fashion … and their taxes are in the process of being raised a bit. It’s decently priced, at about 12X next year’s expected earnings and at a discount to their reported book value — Morningstar, for one, thinks it’s slightly above it’s “fair value,” and beyond that your guess is probably better than mine. I’ll wager that this is probably Wyatt’s pick, but it’s certainly not a certainty, and I haven’t looked at this stock much since it enjoyed the “China bubble” and got ridiculously priced back in 2007. I’m pretty sure that the Chinese wouldn’t let Buffett buy a controlling stake in this firm even if he wanted to, and it’s arguably too small of a stock for him to invest in at this point without buying full control, but it looks, on the surface, to be a decently priced and, if you like, “boring” little passenger and freight railway in one of the most bustling parts of the world.

So there you have it — I’d be surprised if you’re “front running” Buffett with either of these picks, but the Thinkolator sez these are the “Buffett Retirement Plan” ideas Wyatt is selling right now … if you’ve got a thought on either one, or on yesterday’s pick Teva, please let us know with a comment below.

And if you’ve ever subscribed to Wyatt’s Top Stock Insights, we’d be delighted to hear what you thought — just click here and you might be the first to review it for your fellow investors over at Stock Gumshoe Reviews. Thank you!



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