In what has seemed like an incredibly busy year for Berkshire Hathaway (BRK-B), the investment conglomerate continued to remain very active during the third quarter, re-positioning some of the holdings in its equity portfolio.  Berkshire, today, released its Form-13F, which details its equity holdings as of September 30, 2009.  And while typically Berkshire only makes one or two moves during a particular quarter, during this period there were a number of changes to note.

New Positions and Additions

Berkshire almost doubled its position in low-cost retailer Wal-Mart (WMT) during the third quarter, adding almost 18 million shares to its position.  As becoming more frugal has recently come into vogue (wasn't it always cool?), Wal-Mart's low prices have attracted more and more customers. Yet, despite its business improving, Wal-Mart's stock has almost entirely missed out on the rally since the market made its lows in March 2009.  As such, for a larger buyer like Berkshire, Wal-Mart is big enough to soak up a bunch of capital, in addition to the possibility that the stock's price/value proposition has also likely improved.  Hence, its not too surprising-in hindsight, of course-that Berkshire made this move.

Berkshire also established a new position in European consumer products company Nestle (NSRGY).  Nestle is--in many ways--a classic Berkshire investment, given that it is a large conglomerate with a stable of world-class brands that it would be almost impossible for a competitor to replicate.  It is also notable because Nestle competes with Kraft (KFT), another Berkshire holding.  Kraft is currently in a hostile takeover bid for Cadbury PLC (CBY), and while strategically this deal could benefit Kraft, it is much more difficult to justify the price that Kraft may have to potentially pay for Cadbury to consummate the deal.  As such, by initiating a position in Nestle, Berkshire may be hedging its bet to some extent.

Exxon Mobil (XOM) is another new position for Berkshire.  In my opinion, this seems to fit with a lot of Berkshire's moves over the last few years.  Through its utility businesses, its investment in ConocoPhillips (COP)-which, I might add Berkshire has been selling to create tax losses-as well as Berkshire's recent purchase of railroad Burlington Northern  (BNI), there seems to be an implicit bet on higher energy prices through many of Berkshire investments.  Perhaps Exxon Mobil is another investment made with this in mind, or perhaps it has simply done to avoid wash sales-thereby eliminating the tax benefit-of re-buying Conoco shares at current prices.

There were a number of other purchases that Berkshire made during the third quarter.  Berkshire continued to increase its holdings of Wells Fargo (WFC), which isn't too surprising given that Wells has issued new shares over the last year.  Berkshire also initiated a small stake in Republic Services (RSG), a waste disposal company.  Finally Berkshire also initiated a very small stake in Travelers (TRV), a large domestic insurance company.

Eliminations and Subtractions

As I have already mentioned, Berkshire continued to sell some of its stake in integrated oil company ConocoPhillips, which Berkshire has indicated will create tax losses for the conglomerate to use to shield future taxes.  Berkshire also trimmed its position in NRG Energy (NRG).  Berkshire also reduced it stakes in SunTrust Banks (STI) and health insurer Wellpoint (WLP).  I'll also note that Berkshire has been trimming its positions in the health insurance companies for some time now.  Earlier in the third quarter, Berkshire also indicated that it has continued to sell its position in bond rating firm Moody's (MCO), whose brand and business has likely been dramatically impacted in the aftermath of the credit crisis.

Berkshire fully eliminated one position during the quarter, selling its entire position in Wabco Holdings (WBC), which Berkshire received when Wabco was spun-off by old Berkshire holding American Standard Companies.  American Standard then changed its name to Trane, and was later acquired by Ingersoll-Rand Company (IR), a current Berkshire holding.  Berkshire also sold its entire position in Eaton (ETN) during the second quarter.

Given Berkshire's pending acquisition of Burlington Northern, it has also been indicated that Berkshire will sell its stakes in Norfolk Southern (NSC) and Union Pacific (UNP), the conglomerate's other railroad holdings.

Unchanged Positions

--American Express (AXP)

--Bank of America (BAC)

--Beckton Dickinson (BDX)

--Carmax (KMX)

--Coca-Cola (KO)

--Comcast (CMCSA)

--Comdisco (CDCOR)

--Costco (COST)

--Gannett (GCI)

--General Electric (GE)

--GlaxoSmithKline (GSK)

--Home Depot (HD)

--Ingersoll-Rand

--Iron Mountain (IRM)

--Johnson & Johnson (JNJ)

--Kraft (KFT)

--Lowes (LOW)

--M&T Bank (MTB)

--Nalco Holding (NLC)

--Nike (NKE)

--Procter & Gamble (PG)

--Sanofi Aventis (SNY)

--Torchmark Corp (TMK)

--US Bancorp (USB)

--USG Corporation (USG)

--United Parcel Service (UPS)

--United Health Group (UNH)

--Washington Post (WPO)

--Wesco Financial (WSC)

You might also be interested to know that this blog was mentioned in a Reuters article, which I have linked here.

As always, I welcome dialogue with my readers, so please do email me if you have any comments or questions you may have.

Justin

Copyright © 2009 Buffettologist.com

 

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.  This content is intended solely for the entertainment of the reader, and the author.

 

In what has seemed like an incredibly busy year for Berkshire Hathaway (BRK-B), the investment conglomerate continued to remain very active during the second quarter, re-positioning some of the holdings in its equity portfolio.  Berkshire, today, released its Form-13F, which details its equity holdings as of September 30, 2009.  And while typically Berkshire only makes one or two moves during a particular quarter, during this period there were a number of changes to note.

 

New Positions and Additions

 

Berkshire almost doubled its position in low-cost retailer Wal-Mart (WMT) during the second quarter, adding almost 18 million shares to its position.  As becoming more frugal has recently come into vogue (wasn’t it always cool?), Wal-Mart’s low prices have attracted more and more customers. Yet, despite its business improving, Wal-Mart’s stock has almost entirely missed out on the rally since the market made its lows in March 2009.  As such, for a larger buyer like Berkshire, Wal-Mart is big enough to soak up a bunch of capital, in addition to the possibility that the stock’s price/value proposition has also likely improved.  Hence, its not too surprising—in hindsight, of course—that Berkshire made this move.

 

Berkshire also established a new position in European consumer products company Nestle (NSRGY).  Nestle is--in many ways--a classic Berkshire investment, given that it is a large conglomerate with a stable of world-class brands that it would be almost impossible for a competitor to replicate.  It is also notable because Nestle competes with Kraft (KFT), another Berkshire holding.  Kraft is currently in a hostile takeover bid for Cadbury PLC (CBY), and while strategically this deal could benefit Kraft, it is much more difficult to justify the price that Kraft may have to potentially pay for Cadbury to consummate the deal.  As such, by initiating a position in Nestle, Berkshire may be hedging its bet to some extent.

 

Exxon Mobil (XOM) is another new position for Berkshire.  In my opinion, this seems to fit with a lot of Berkshire’s moves over the last few years.  Through its utility businesses, its investment in ConocoPhillips (COP)—which, I might add Berkshire has been selling to create tax losses—as well as Berkshire’s recent purchase of railroad Burlington Northern  (BNI), there seems to be an implicit bet on higher energy prices through many of Berkshire investments.  Perhaps Exxon Mobil is another investment made with this in mind, or perhaps it has simply done to avoid wash sales—thereby eliminating the tax benefit—of re-buying Conoco shares at current prices.

 

There were a number of other purchases that Berkshire made during the second quarter.  Berkshire continued to increase its holdings of Wells Fargo (WFC), which isn’t too surprising given that Wells has issued new shares over the last year.  Berkshire also initiated a small stake in Republic Services (RSG), a waste disposal company.  Finally Berkshire also initiated a very small stake in Travelers (TRV), a large domestic insurance company.

 

Eliminations and Subtractions

 

As I have already mentioned, Berkshire continued to sell some of its stake in integrated oil company ConocoPhillips, which Berkshire has indicated will create tax losses for the conglomerate to use to shield future taxes.  Berkshire also trimmed its position in NRG Energy (NRG).  Berkshire also reduced it stakes in SunTrust Banks (STI) and health insurer Wellpoint (WLP).  I’ll also note that Berkshire has been trimming its positions in the health insurance companies for some time now.  Earlier in the third quarter, Berkshire also indicated that it has continued to sell its position in bond rating firm Moody’s (MCO), whose brand and business has likely been dramatically impacted in the aftermath of the credit crisis.

Berkshire fully eliminated two positions during the quarter, selling its entire position in Wabco Holdings (WBC), which Berkshire received when Wabco was spun-off by old Berkshire holding American Standard Companies.  American Standard then changed its name to Trane, and was later acquired by Ingersoll-Rand Company (IR), a current Berkshire holding.  Berkshire also sold its entire position in Eaton (ETN) during the second quarter.

 

Given Berkshire’s pending acquisition of Burlington Northern, it has also been indicated that Berkshire will sell its stakes in Norfolk Southern (NSC) and Union Pacific (UNP), the conglomerate’s other railroad holdings.

 

Unchanged Positions

 

--American Express (AXP)

--Bank of America (BAC)

--Beckton Dickinson (BDX)

--Carmax (KMX)

--Coca-Cola (KO)

--Comcast (CMCSA)

--Comdisco (CDCOR)

--Costco (COST)

--Gannett (GCI)

--General Electric (GE)

--GlaxoSmithKline (GSK)

--Home Depot (HD)

--Ingersoll-Rand

--Iron Mountain (IRM)

--Johnson & Johnson (JNJ)

--Kraft (KFT)

--Lowes (LOW)

--M&T Bank (MTB)

--Nalco Holding (NLC)

--Nike (NKE)

--Procter & Gamble (PG)

--Sanofi Aventis (SNY)

--Torchmark Corp (TMK)

--US Bancorp (USB)

--USG Corporation (USG)

--United Parcel Service (UPS)

--United Health Group (UNH)

--Washington Post (WPO)

--Wesco Financial (WSC)

 

You might also be interested to know that this blog was mentioned in a Reuters article, which I have linked here.

 

As always, I welcome dialogue with my readers, so please do email me if you have any comments or questions you may have.

 

Justin

 

Copyright © 2009 Buffettologist.com

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.  This content is intended solely for the entertainment of the reader, and the author.

 

Investment Conglomerate Berkshire Hathaway’s (BRK-B) third quarter earnings, released Friday, were somewhat of a reversal from what they were in latter half of 2008, but in my opinion, were still somewhat sluggish.

While Berkshire’s headline earnings number looked good, it was driven by the change in the value of the conglomerate’s derivative positions from the prior year, helping to push the earnings number up by almost $1.2 billion this quarter.  Even though it looks nice, these gains are non-cash, and should largely be ignored until Berkshire’s derivative contracts either expire or are settled, which—I might add--are still some years away.

Removing this from the analysis, Berkshire’s overall earnings were about flat, and the results in the majority of the conglomerates operating businesses remained somewhat weak.  As I had written about previously, Berkshire’s one bright spot remained insurance, where continued growth from auto-insurer GEICO and an incredibly quiet hurricane season produced a bevy of profits for shareholders.  Despite continuing to have a diversified stream of earnings, insurance continues to be the engine that drives Berkshire’s results, and this quarter--in particular--highlighted this.

Mid-American and PacifiCorp’s—Berkshire utilities---earnings also held up relatively well, despite reduced demand due to both the weaker economy and a milder climate.  As for the operating businesses, though, results were down almost across the board.  This isn’t surprising given that many competitors to Berkshire’s operating businesses have reported similarly weak earnings.  Given that the majority of these businesses tend to be tied to the health of the overall economy, I wouldn’t expect them to turn until the broader economy does as well.  NetJets continues to struggle the most, as it is now seeking to reduce its jet capacity to meet the reality of lower demand of today’s market.

On the investing side of the house, Berkshire’s results looked solid.  As both equity prices have risen and credit spreads have narrowed, so have the prices of Berkshire’s stock and bond portfolios improved.  What’s more, thanks to inking several income producing deals last year, including investing in preferred stock in Goldman Sachs (GS), General Electric (GE), Dow Chemical (DOW, as well as convertible debt financing deal for Swiss Re (SWCEY), Berkshire’s investment income improved from the prior year. 

In my opinion, Berkshire’s financial health remains good.  After eventually completing the acquisition for the remainder of Burlington Northern Santa Fe (BNI), Berkshire will still have about $16 billion of cash on its balance sheet, as it is planning to borrow $8 billion to help pay for the Burlington deal.  While this cash balance will likely still be adequate for insurance regulatory purposes, it’s the lowest Berkshire’s cash balance as been in some time, and in my mind is just indicative of the myriad of new investments Berkshire has had the opportunity to make this past year.  What’s more Berkshire could simply sell some of its equity or fixed income holdings to raise cash, if it needed to.  Berkshire’s total investments—including cash--now amount to $135 billion.

In summary, it was a relatively flat quarter for Berkshire, though as the economy eventually improves, so should Berkshire’s earnings.

You might be interested to know that this blog was mentioned in an Associated Press article that I have linked here, a msn.com article linked here, and a Wall Street Journal article which I have linked here.

As always, I enjoy dialogue with my readers, so please do email me any questions or comments you may have.

Justin 

Copyright © 2009 Buffettologist.com

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.  This content is intended solely for the entertainment of the reader, and the author.

After years of searching for his next elephant, Berkshire Hathaway (BRK-B) Chairman Warren Buffett found it today in railroad company Burlington Northern Santa Fe (BNI).  Berkshire had already owned 22% of Burlington, and today announced that it will be acquiring the remainder of the railroad company for a mix of cash and stock that values Burlington at $100 per share, or $34 billion in total.

This deal is significant for a number of reasons.  Burlington is the biggest deal that Berkshire has done in a few years, and as such, it will put a lot of the conglomerate’s capital to work at rates better than cash is earning right now.  Furthermore, Burlington will continue to diversify Berkshire’s stream of earnings, and add yet another business to its stable of firms with decent competitive strengths.

After decades of under-investment and brutal competition, the railroad industry has improved dramatically over the last several years.  Some consolidation has reduced some of the competitive pressures that had afflicted the industry.  In addition, railroads have become more efficient, using double-decker rail cars, as well as having the ability to load containers directly from ships onto railcars.  And finally, with relatively higher fuel prices, railroads have gained a cost advantage over trucking, potentially making it cheaper to ship via rail.

These improvements were not lost on Buffett or Berkshire Vice-Chairman Charlie Munger, who have commented on these factors at the last couple Berkshire Hathaway Annual Meetings.  More than simply observing, though, Berkshire put its money where its mouth was and began amassing stakes in several railroads including Norfolk Southern (NSC), Union-Pacific (UNP), and the aforementioned 22% stake in Burlington.  What’s more Berkshire was so interested in Burlington that it even wrote puts on Burlington’s stock in the last couple years.

In my opinion, this deal can be summed up as the purchase of a decent business at a fair price—at trough earnings, perhaps.  Furthermore, I think Burlington will benefit from being under the Berkshire umbrella.  For example, as Burlington continues to make investments in its business, including upgrading its infrastructure—perhaps with the help of government funding—it will likely be able to make more longer term investments than some of the other publicly traded railroads, that are often subject to more short-term pressures from Wall Street.  What’s more, it’s possible that over time Burlington will also benefit from Berkshire’s funding advantage, thereby being able to borrow money at rates cheaper than competitors.  Should this eventuate it would give Burlington another leg up on its peers.

There is one other component to this deal that is interesting.  In order to promote liquidity for Burlington shareholders, to potentially sell portions of their Berkshire stake should they decide to take stock in the deal, Berkshire announced that it has effected a 50 for 1 stock split on its class-B shares.  While stock splits are by definition un-economic events, this split could aid in increasing the liquidity of Berkshire’s stock.  If one also considers that Buffett is slowly gifting his stock to the Gates Foundation, and that he has also stipulated that these gifts be sold fairly quickly, the stock split could hasten an even greater trading volume and liquidity in Berkshire’s stock.  This could allow Berkshire to eventually be included in the S&P 500 stock index, which would force legions of index funds to buy the stock, potentially creating a huge demand for the shares.

You also might be interested to know that this blog was mentioned in an Associated Press article that I have linked here, a Bloomberg article which I have linked here, a Marketwatch article that I have linked here, and a Reuters article that I have linked here.

As always, I enjoy dialogue with my readers, so please do email me any questions or comments you may have.

Justin  

Copyright © 2009 Buffettologist.com

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.  This content is intended solely for the entertainment of the reader, and the author.