Many market participants often flock to the latest 13F filing for the wealthy and well-known investors as they become available each quarter. Investors are often anxious to see what the likes of Warren Buffet and others are buying and selling.
While most of us will never know the kinds of wealth that these individuals have, we do want to find good stocks to buy.
With this in mind, this article will examine three holdings of the Bill & Melinda Gates Foundation and whether they are attractively priced today.
Our picks for today are:
- Canadian National Railway (NYSE:CNI)
- Crown Castle International Corporation (NYSE:CCI)
- FedEx Corporation (NYSE:FDX)
Canadian National Railway (CNI)
Canadian National Railway operates more than 20,000 route miles and transports more than 300 million tons of cargo each year. Canadian National Railway’s shipments include grain, energy products, intermodal, automobiles and forest products. The company has a market capitalization of $78 billion and generated $11.3 billion of revenue last year. Canadian National Railway is the third largest holding in the Gates Foundation’s portfolio.
Canadian National Railway possess a size and scale unmatched by competitors. The company also has route connections on the Atlantic and Pacific coasts, as well as the Gulf of Mexico. This gives customers numerous points to ship products to, which allows for a larger reach then what might be found by using another railroad.
There are also high barriers of entry in the railroad industry. An intensive capital investment would be needed to replicate Canadian National Railway’s infrastructure. We believe that this would be extremely cost prohibitive, making it likely that Canadian National Railway’s competitors will be those railroads already in operation.
We forecast that Canadian National Railway can leverage its prospects for growth and competitive advantages to grow earnings-per-share by 7% annually through 2025.
Canadian National Railway currently trades at $110 and is expected to earn $4.07 per share in 2020, which gives the stock a forward price-to-earnings ratio of 27. This is a steep premium to the stock’s 10-year average price-to-earnings ratio of 16.9. Reverting to this average by 2025 would reduce annual returns by 9.7% over this period of time.
Shares of the railroad yield 1.6% presently. The company has raised its dividend for a quarter-century in Canadian currency.
Total returns through 2025 for Canadian National Railway would consist of the following:
- 7% earnings growth
- 7% multiple reversion
- 6% dividend yield
Shares are projected to lose 1.1% annually over the next five years.
Canadian National Railway’s business model is sound and its position near the top of its industry is secure. However, shares are extremely expensive — so much so that we expect multiple reversion will more than offset any benefit from earnings growth and dividend yield. Due to this, Canadian National Railway receives a sell recommendation from Sure Dividend.
Crown Castle International Corporation (CCI)
Crown Castle International Corporation is a real estate investment trust (REIT) that specializes in owning and operating cell phone towers with small cells where larger towers are not feasible. The trust also provides fiber connections for data transmission. In total, Crown Castle operates and leases more than 40,000 cell towers and over 75,000 route miles of fiber across every major U.S. market. The trust has a market capitalization of nearly $67 billion and are expected to have generated revenue of $5.9 billion last year. Crown Castle is the sixth-largest holding in the Gates Foundation’s portfolio.
Crown Castle has several prospects for growth and competitive advantages that should aid business in the long run. First, the trust has been one of the beneficiaries of the stay-at-home directives that were in place for much of the year due to the coronavirus pandemic. The demand for broadband services during this time was quite high. Even a return to a more normal everyday life likely isn’t going to negatively impact this demand.
Crown Castle has also been very successful in building out its network in densely populated areas as well as rural portions of the U.S. Consumers in every market require broadband and wireless service, so the trust has done well to increase its presence in all market types.
Finally, Crown Castle should benefit from the rollout of 5G networks. Approximately three-quarters of revenues come from the major carriers, like AT&T (NYSE:T) and Verizon (NYSE:VZ). 5G is expected to be a major driver of growth for these carriers, which should only in turn benefit Crown Castle.
We expect that these factors will allow Crown Castle to grow cash flow per share by 6% over the next five years.
Shares trade for around $154 and the trust is expected to produce cash flow per share of $6.10 in 2020. This results in a price-to-cash flow ratio of 25.2. We have a 2025 price-to-cash flow ratio of 22, which is a slight premium to the stock’s long-term average of 21 times cash flow. Reverting to our target valuation would reduce annual results by 2.7% over through 2025.
Also factoring into total returns will be the trust’s dividend, which has been raised for seven consecutive years. Crown Castle offers a 3.5% yield at the moment.
Total returns will consist of the following:
- 6% cash flow per share growth
- 7% multiple reversion
- 5% dividend yield.
In total, we believe that Crown Castle will offer a total return of 6.8% over the next five years. We normally reserve our buy ratings for securities offering at least 10% total return potential. Therefore, Crown Castle receives a hold recommendation from Sure Dividend at this time.
FedEx Corporation (FDX)
FedEx is one of the largest transportation and shipping companies in the world. FedEx offers a wide range of services, including transportation, e-commerce, and business services. The company operates four core business units: FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services. FedEx is worth $72 billion, produced revenue in excess of $69 billion in fiscal 2020 and is the eight largest holding in the Gates Foundation’s portfolio.
FedEx is likely to see a continued rise in business due to e-commerce. Consumers are increasingly shopping online, which has boosted FedEx and its peers. Covid-19 pandemic has only accelerated the move to online shopping. Brick and mortar retailers have already been bleeding customers to e-commerce channels in recent years, but the social distancing requirements forced shoppers to order many items online.
While brick and mortar will never truly disappear, we believe that consumers will come to rely more on FedEx and other transportation companies to deliver goods and packages in the future. We expect FedEx will grow earnings-per-share at a rate of 6% per year for the next five years off expected earnings-per-share of $17.00 in fiscal 2021.
Shares of the company trade for $272, which gives the stock a price-to-earnings ratio of 16. We have a target price-to-earnings ratio of 18. Valuation could be a tailwind of 2.4% annually over the next five years.
Shares of FedEx currently pay a dividend yield of 1%.
Total returns for FedEx would consist of:
- 6% earnings growth
- 4% multiple expansion
- 1% dividend yield
Added up, we expect FedEx to deliver total returns of 9.4% annually over the next half-decade.
FedEx is in a prime position to take advantage of the ongoing transition to e-commerce as more consumers turn to online shopping to acquire the items that they need. On a slight pullback, we would be a buyer of FedEx.
On the date of publication, Bob Ciura did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.