Bill Gates (Trades, Portfolio) is the co-founder of Microsoft (MSFT, Financial) and one of the richest people on the planet. He set up the Bill & Melinda Gates Foundation to invest into what he defines as "ethically sound" companies which potentially have a double benefit both in terms of profitability and helping to make the world a better place. While Gates himself has set the overall principles of the trust, the funds are managed, as they have been for almost three decades, by Cascade Management Company.
The trust has reported a staggering $35.73 billion in U.S. common stock holdings in its latest 13F portfolio for the fourth quarter of 2022, which is split across just 23 stocks. Of course, the trust also has non-13F investments, but this article focuses on the 13F. In the fourth quarter of 2022, the trust's portfolio managers added two new stocks and increased the holdings in three more. In this article, I want to highlight the new buys as they are both fairly defensive; let’s dive in.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
1. Danaher Corp
Danaher Corp. (DHR, Financial) is a diversified conglomerate that operates across a variety of industries, from life sciences to the environment. Its business model focuses on acquiring “high quality” companies with growth potential. Interestingly enough, Danaher operates a similar business model to Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) in that it manages its businesses in a decentralized manner. This means Danaher hires management and then takes a step back. This strategy helps cut down on overly-complex bureaucracy and allows good managers to do what they do best. Therefore I would say this is an extremely successful but rare strategy.
Danaher's criteria for investing into companies include those with solid brand recognition, market leadership and solid financial profiles. The company then leverages its DBS segment (Danaher Business Systems) to help optimize the acquired company's operations.
Growing financials
The company reported strong financial results for the fourth quarter of 2022. Its revenue was $8.37 billion, which beat analyst expectations by $430 million and rose by 2.71% year over year. For the full year of 2022, the company reported $31.47 billion in revenue, which increased by ~6.85% year over year.
This was driven by solid life sciences revenue, which grew by 8% year over year. This was spearheaded by Leica Microsystems and Beckman Life Sciences growth.
Danaher also has exposure to the genomics consumables sector and reported double digit revenue growth in the quarter for this segment. This was driven by the popularity of its gene editing and sequencing solutions, bolstered by the acquisition of Archer DX DGS.
According to GrandView Research, the genomics industry was valued at $24.16 billion in 2021 and is forecast to grow at a rapid 16.4% compounded annual growth rate up until 2030. Danaher is poised to benefit from this trend.
Danaher also reported strong core revenue in its diagnostics segment, which increased by 7.5% year over year. This was driven by growth of radiometer, which increased by double digits on the back of increased blood gas testing in China.
Moving on to profitability, the company reported earnings per share of $2.99, which beat analyst expectations by $0.85. Its core operating margin also expanded by 60 basis points and it generated $7.4 billion in free cash flow.
The company has a strong balance sheet with $5.955 billion in cash and short term investments. The company does have high total debt of $19.6 billion, but the vast majority of this (over $19 billion) is long term debt and thus manageable.
Valuation and guru investors
Danaher trades at a price-earnings ratio of 26.6, which is ~32% cheaper than its five-year average. The company also trades at a price-sales ratio of 5.92, which is close to 5% cheaper than its average.
The GF Value chart indicates a fair value of ~$308 per share, making the stock “modestly undervalued” at the time of writing.
Gates' foundation trust loaded up on 373,000 shares in the fourth quarter of 2022, during which the stock traded at an average price of $261 per share. Other gurus buying during the quarter included Chuck Akre (Trades, Portfolio), Ron Baron (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Mairs and Power (Trades, Portfolio).
2. Hormel Foods Corp
Hormel Foods Corp. (HRL, Financial) is a food production and marketing company which operates in a variety of branded food markets. Food is an essential part of our lives and thus this is one of the most defensive businesses out there which should be solid no matter what the economic environment.
Popular Hormel food brands include Applegate, Columbus craft meats, Dinty Moore stew, Herdez salsa and many more. Customers tend to form habits when grocery shopping and will often continue to choose known brands even if prices change. Therefore Hormel is poised to benefit from strong brand loyalty and owning a “share of mind” of the consumer.
Stable financials
Hormel reported mixed financial results for the fourth quarter of 2022. Its revenue was $3.28 billion, which was solid but still missed analyst expectations by $50.5 million and declined by ~5% year over year.
Despite the challenges in the fourth quarter, Hormel reported its third consecutive year of record breaking sales, with $12.486 billion reported for the full fiscal year of 2022.
This was driven by a 7% increase in its retail channel sales, led by well known brands such as Spam, Dinty Moore and Mary Kitchen. In addition, the company has continued to grow its snacking and entertaining business with solid growth in its Columbus and Hormel Gatherings brand, according to its earnings call.
Its food service channel also expanded by 20% year over year, as operators utilized Hormel's pre-prepared foods in order to avoid having to hire people to cook. Popular brands in this channel included Bacon 1, Hormel Fire Braised and Café H.
Interestingly enough, Hormel has also been investing internationally and opened an innovation center in the Asia Pacific region to support growth into China. Given China has a population of over 1.4 billion and a growing middle class, this is a lucrative opportunity for Hormel. The Chinese consumer’s diet has gradually become more “globalized” with the increase in purchases of things like steaks, burgers, bacon, etc. from overseas.
In terms of profitability, Hormel reported earnings per share of $0.51 for the quarter, which beat analyst expectations by $0.02.
The year of 2022 was the second most profitable year in the company's 131-year history. This was driven by strong improvements in operational efficiency, which has been a key strategic driver by management.
Valuation and guru investors
Hormel trades at a price-earnings ratio of 24, which is 4% cheaper than its five-year average.
Its price-sales ratio is 1.93, which is over 16% cheaper than its five-year average.
The GF Value chart indicates a fair value of $58.75 per share, making the stock “modestly undervalued” at the time of writing.
In the fourth quarter of 2022, the Gates foundation trust purchased a staggering 2.195 million shares in the company. During the quarter, shares traded for an average price of $46.56 apiece. Other gurus buying the stock recently include Jim Simons (Trades, Portfolio)' Renaissance Technologies, Caxton Associates (Trades, Portfolio), Jefferies Group (Trades, Portfolio) and Steven Cohen (Trades, Portfolio).
Final thoughts
Both Dahaner and Hormel are solid defensive stocks which cover areas from life sciences to genomics and of course food. Personally I believe Dahaner is the more diversified of the two and the strongest from a financial standpoint at this time. However, I believe Hormel also offers an opportunity for those who want to gain exposure to their favorite food brands. Given the macroeconomic environment, both stocks could act as a hedge to a certain extent.
