Forget Facebook: What’s Warren Buffett See in GM and Viacom?

by Dan Burrows | May 18, 2012 12:22 pm

All eyes are on Facebook[1] (NASDAQ:FB[2]), probably the most hyped IPO in history, but long-term investors would do better to key on a couple of new investments made by Warren Buffett-led Berkshire Hathaway (NYSE:BRK-B[3]).

The Oracle of Omaha famously eschews whatever happens to be the latest hot tech stock. For one thing, they never offer the type of deep value propositions Buffett scrupulously seeks out. And, by definition, they don’t have much of a track record. Remember that Buffett studied Coca-Cola (NYSE:KO[4]) for decades before initiating what turned out to be a very profitable position.

So, it’s worth looking at two brand-new investments Berkshire just made. Two portfolio managers vying to replace the Oracle of Omaha are trying to bend it like Buffett with new stakes in General Motors (NYSE:GM[5]) and Viacom (NASDAQ:VIAB[6]).

Former hedge-fund managers Todd Combs and Ted Weschler initiated positions of 10 million shares in GM and about 1.6 million shares in Viacom during the first quarter, according to new Berkshire regulatory filings. But how do GM and Viacom fit into Buffett’s investment philosophy? Let’s take a look:


GM has a long and storied  history — unfortunately one that includes a federal bailout and bankruptcy before returning to the market in a 2010 IPO. It also has a business that’s easy to understand, something Buffett insists on.

But the real appeal for the long-term value investor lays in GM’s fundamentals and valuation.

For one thing, GM is a bet on the world’s largest economy: America. Buffett is bullish on the good, old U.S.A. Need proof? A couple years ago, Berkshire bought railroad operator Burlington Northern Santa Fe for $44 billion — a move Buffett called an “all-in wager” on the U.S. economy.

As the nation’s largest auto maker, GM is well-positioned to benefit from long-term economic growth and has shorter term tailwinds to boot. The grindingly slow pace of the recovery and continued high unemployment have Americans driving their cars longer than ever. Indeed, folks are holding on to their new cars and passenger trucks for record lengths of time, according to data from market researcher R.L. Polk & Co. The average age of passenger cars now on the road stands at more than 11 years. In 1995 that figure was just 8.4 years.

That means there’s tremendous pent-up demand for cars and trucks, and GM is set to meet it, the thinking goes.

Just as important for a deep-value investor like Buffett is the price of GM shares, which do look cheap by a number of measures. The stock currently trades at a 16% discount to its own five-year average on a forward earnings basis and a whopping 64% discount to the S&P 500, according to data from Thomson Reuters Stock Reports.

GM looks like a steal based on trailing earnings, too. Shares offer a 39% discount to their own five-year average and a 76% discount to the broader market.


Media giant Viacom, whose properties include MTV, Nickelodeon, BET Networks and Paramount Pictures, has a bunch of qualities Buffett requires.

Like GM, Viacom is a company of established, well-known and proven brands. As Buffett said in his most recent annual letter to shareholders: “‘Buy commodities, sell brands'” has long been a formula for business success. It has produced enormous and sustained profits for Coca-Cola since 1886 and Wrigley since 1891.”

Viacom is also among the dominant companies in its industry, notes James Gross, an analyst at Barrington Research. “Viacom’s solid complement of leading cable networks is its primary strength,” writes Gross.

MTV leads in its target demographic of young males, including three of the top 10 programs led by Jersey Shore. Meanwhile, The Daily Show with Jon Stewart is the top late night show in TV for its target demographic. Ratings at VH1 are growing sharply, the analyst notes, and Spike is making inroads as well.

It also doesn’t hurt that Viacom operates behind a wide moat. The company enjoys high competitive barriers given the difficulty of attaining so-called full carriage, or wide distribution, with the various cable and satellite TV companies.

And like GM, Viacom shares look to be selling at bargain prices. The stock offers a discount of 15% to its own five-year average by forward earnings and nearly a 40% discount to the S&P 500. By trailing earnings, the stock is about 15% below its own five-year average and more than 20% cheaper than the broader market.

Given its incomparable track record, it’s hard to quibble with Berkshire’s moves, even if they were made by Buffett’s lieutenants. The Oracle and No. 2 Charlie Munger run a tight ship. Berkshire sees long-term value in GM and Viacom, and that’s a big vote of confidence.

Sometimes stocks trade at prices so low, they’re silly, Buffett likes to say: “That’s how Charlie and I got rich.”

As of this writing, Dan Burrows doesn’t hold a position in any securities mentioned here.

  1. All eyes are on Facebook:
  2. FB:
  3. BRK-B:
  4. KO:
  5. GM:
  6. VIAB:

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