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Weekly Wrap: Berkshire Buys, Activist Targets P&G

Warren Buffett's firm adds to airlines and Apple while Procter & Gamble faces a new activist investor. Plus, Pepsico well positioned for the future.

Jeremy Glaser: Berkshire's bets; P&G gets a new activist; and PepsiCo's solid results. This time on the Morningstar Weekly Wrap. 

Warren Buffett's Berkshire Hathaway boosted its stake in US Airlines and Apple in the fourth quarter. Greg Warren takes a closer look at these moves.

Greg Warren: Berkshire Hathaway made a few interesting moves during the fourth quarter, nontraditional moves for Buffett. They took big stakes in the airlines and a even larger stake in Apple than they had previously. On the airline side of the equation, we knew they were buying up stakes in the third quarter, assumed those were Ted and Todd moves. The airlines got hit pretty hard during the Brexit vote, but at this point now they have about $9 billion to $10 billion invested in Delta, American Airlines, Southwest, and United. 

Some of the argument or the rationale behind investing in them comes from Todd Weschler. He's been looking at the industry, believing consolidation is making them look much more attractive, similar to the arguments we heard from Buffett when they bought up railroads back in 2008, prior to them picking up BNSF in whole. Not really sure this is going to lead to a take out of an airline overall. It is interesting to look at from that perspective. Then Apple, they more than quadrupled the stake during the period. That was a bit of a surprise. Again we see Todd and Ted having a bit of an influence here. Technology has not necessarily been Buffett's strong suit over the years. I'd be interested to get some more comments here from them when the annual report comes out this year to see if Todd and Ted are actually taking on more of the portfolio.

Glaser: Proctor & Gamble has a new activist investor, Nelson Peltz, to contend with after his firm amassed a more than $3 billion stake. Analyst Erin Lash thinks that the timing of the move is interesting given that P&G is just completing a significant brand rationalization.

Erin Lash: News that activist investor Nelson Peltz had amassed a $3 billion stake in wide mode Proctor & Gamble sent shares significantly higher, converging on our $92 fair value estimate this week. However, we don't view this news by itself as indicative of driving sustainable improvement in the business. Rather we think Proctor & Gamble has already been on this course. Over the past two years, P&G has been significantly rationalizing its brand set as a means by which to focus its resources on the highest return opportunities to accelerate its top line. In addition, P&G is undergoing another $10 billion cost restructuring effort as a means by which to fuel further brand spending while also propping up its profitability. If recent strategic efforts falter, we think the firm could be called upon to take more transformational steps, such as selling off additional brands and/or splitting the business. However at this juncture we view this as unlikely.

Glaser: PepsiCo had a solid year with organic revenue growth at 3.7% and an increase in operating margins. Analyst Sonia Vora sees the firm's wide moat as being firmly in place and thinks that the company's broad portfolio of noncarbonated drinks and snacks should help offset any decline in carbonated drink sales. Their success in launching new products, 8% of revenue last year, were from products introduced in the last three years, is another sign that they're aligning themselves with changing consumer preferences. This is baked into the price, however, and we see shares as fully valued today. 

In case you missed it on, Russ Kinnel looked at what investors should do in the event of a surprise manager change. does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.