Warren Buffett, Chairman and CEO of Berkshire
Hathaway, is perhaps the greatest investor of our time, if not ever. At buffettologist.com, we have been studying, practicing,
and learning from the teachings of the Oracle of Omaha for years. As such, we have created this blog to share our insights
on Mr. Buffett, other Buffett disciples, and value investing.
Friday, May 14, 2010
Berkshire Hathaway 1Q 2010 Earnings
4:41 pm edt | link
Last week, Berkshire Hathaway
(BRK-B) reported first quarter earnings that showed a marked improvement from the prior year’s results.
Generally speaking, as Berkshire has evolved from a leveraged investment vehicle to a conglomerate, the company’s
results have become more tied to the overall fate of the US economy. As such, given the signs of improvement
in many of Berkshire’s businesses, some investors could take this as a proxy that the overall economy may be starting
to show some improvement relative to the dark days of 2009.
Despite the varied businesses under the Berkshire umbrella, insurance continues to be the segment that carries the
flag. And within the insurance segment, auto-insurer Geico continues to turn out the profits, growing earnings
by almost 6% during the first quarter. This growth is a mix of an increase in policies-in-force plus a
slight improvement in pricing. That said, new policy growth in the voluntary auto channel was down compared
to the first quarter of 2009. Berkshire Hathaway Reinsurance Group also continued to do well, which is
evident after stripping out the amortization charges (non-cash) from their retroactive reinsurance policies. However, earnings
were still lower than they were in the prior year, as the segment curtailed some of its exposures.
The first quarter of 2010 marked the first reporting
period that Burlington Northern Santa Fe was included in Berkshire’s earnings. Prior to this it had
been accounted for via the equity method, which for you non-accounting professionals, means only booking a portion of the
Burlington’s earnings into Berkshire’s results. Burlington’s results this year were also positive compared
to 2009, as overall revenue grew 13%. This was due primarily to an increase in revenue per car, which was
driven by higher yields and additional fuel surcharges. Berkshire’s utility earnings via Mid-American
energy and PacifiCorp were relatively flat from the prior year period. In each subsidiary the mix of business
moved away from wholesale electricity (buying and selling electricity on the open market) where demand continued to be down,
to retail energy, where the companies had both customer growth and favorable weather conditions for its business.
In the operating businesses, Marmon has started to rebound
quite nicely with overall revenue up 11% and earnings were up 17%, as management continues to aggressively manage costs.
Food service distributor, McLane, which has held up well during the recessionary period of the last couple years, continued
to do alright with revenue up 6%. Profits were down compared to 2009, as in the prior year McLane benefited
from an inventory valuation adjustment due to higher cigarette taxes. Many of the other businesses, while
not running at full throttle by any means, saw rebounds versus the first quarter of 2009, which is consistent with some of
the improvement in the overall economy. One weak spot remains Berkshire’s building products group,
which continues to struggle given the slack demand in the commercial and residential construction areas of the economy.
Running through the income statement this quarter were
gains related to derivative contracts, which are non-cash, but impact recorded earnings. Last year these
contracts produced hefty losses on Berkshire’s recorded earnings. These periodic accounting gains
and losses are meaningless until the contracts are settled at some point in the distant future. In the
meanwhile, their existence will continue to make Berkshire’s reported results much more volatile than they historically
have been. Berkshire also booked a gain related to its investment in Burlington Northern when the conglomerate
acquired the remaining shares earlier this year.
Given the unprecedented low interest rates that now exist globally, Berkshire’s move into higher yielding securities
during 2008 and 2009 has proven to be very prescient. The conglomerate’s investment income while
down from the prior year period continues to hold up reasonably well especially compared to other insurance companies.
This is due in part to the higher yielding investments in preferred securities of Dow Chemical (DOW), Goldman Sachs
(GS), General Electric (GE), Swiss Re, and Wrigley among others. In addition, Berkshire’s financial
position is healthy, as the conglomerate still has over $22 billion of cash on its balance sheet.
All in all, Berkshire’s earnings showed a lot
of signs of improvement. Should the economy continue to recovery more quickly, so likely will Berkshire’s
businesses. And should the recovery stall, I’d expect Berkshire’s earnings to also grow more slowly.
As always, please do send me any questions or comments
you may have.
You also might be interested
to know that this site was mentioned in a Wall Street Journal article linked here, as well as an article from the Associated Press linked here.
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.
Friday, May 7, 2010
Berkshire Hathaway Annual Meeting Recap
3:30 pm edt | link
About a week ago over 40,000 people descended upon Omaha,
Nebraska to listen to Berkshire Hathaway (BRK-B) Chairman Warren Buffett and his partner, Charlie Munger, answer questions
about Berkshire, the economy, investing, in addition to several other topics. And, generally speaking,
it was a very informative session. Here is a selected run-down of the day and some of my thoughts on it.
Not surprisingly, the first question
for Buffett and Munger was about their views on Goldman Sachs (GS), given that Goldman is presently in the cross hairs of
a Securities and Exchange Commission (SEC) investigation, as well as a negative media spotlight. Buffett
quickly came to Goldman’s defense, correcting what he referred to as mis-reporting of the SEC’s complaint against
the company. He accompanied this defense with several pre-prepared slides, including a tangentially similar
bond insurance deal of Berkshire’s that Buffett said was somewhat analogous to the Goldman transaction.
In addition, he spoke about he and Berkshire’s long association with Goldman and its various leaders over the
years, all the way back to the mid-1970’s when Goldman helped Diversified Retailing, a company controlled by Buffett
and Munger, raise $5 million in debt. He also said that he thinks that the current investigation into Goldman’s
business practices will make it likely that Goldman will not call Berkshire’s preferred investment in the company anytime
soon. Later in the day, both Buffett and Munger stood behind Goldman CEO Lloyd Blankfein, indicating that
they would rather see many other corporate CEO’s dismissed rather than see Blankfein be forced to step aside.
While I understand Buffett’s defense of Goldman,
I was still a little surprised by the voracity of the defense he mounted for the company. Just a few minutes
before the Goldman question was asked, shareholders had just finished watching the movie, a mix of parodies and advertising,
which always kicks-off the start of each annual meeting. In it, a clip is always played which re-visits
Buffett’s Solomon Brothers episode in the late 1980’s where he is very critical of the bank and the overall Wall
Street culture. So, given this reference point--though admittedly the situations then and now are totally
different--the strength of his defense of Goldman seemed a tad incongruous. That said, Munger did indicate
that just because it was possible to do some business or transactions, it didn’t necessarily mean that people should
engage in these activities.
topic that continually came up in questions for both Buffett and Munger was the role derivatives have played in the financial
meltdown of the prior couple years, and in particular the impact new regulations surrounding derivative contracts could have
on Berkshire. On the former, Munger said it is only slightly beneficial to have derivatives so that some
people can hedge their risks. He went on to say that the world would be a better place if we went back
to only hedging currencies and commodities. Both Munger and Buffett indicated that to get an idea of what
happened in the derivatives market, attendees should read Chapter 12 of Keynes’ General Theory. As to Berkshire, Buffett said that under current regulations the conglomerate’s collateral
posting requirements are ostensibly zero. He also said that if Berkshire was deemed to be a threat to the
financial system under the new proposed regulation, then the conglomerate could be required to post collateral on retroactive
contracts. He went on to say that Berkshire has only 250 derivative contracts, and that its position is
only 1% the size of the derivatives positions of several other institutions. And finally, he said that
if Berkshire were forced to post collateral under new rules, it would naturally comply, but that he would also look to renegotiate
the contracts, as there is one price he would charge for collateralized contracts and one price he would charge for non-collateralized
Inflation was another
topic on the minds of several attendees, and Buffett told the audience that there has always been a lot of inflation, and
that the prospects for inflation around the world have increased in recent years. He went on to say that
the easy money provided by the government might well have been the correct response to dealing with the crisis of the last
couple of years, but that it might be harder to wean ourselves from this medicine than many think, as the medicine was massive
amounts of debt. Later in the meeting, an attendee asked about the key metrics that Buffett uses for inflation,
and he responded that once inflation gets going it takes on a dynamic of its own, which was demonstrated 30 years ago when
people got a little fearful about money. The only way that this was cured is when Paul Volcker—then
Federal Reserve Chairman—took a sledgehammer to the economy. He further said that based on the current
policies countries are pursuing, another experience like the one 30 years ago could be possible. He said
currencies were a poor bet against inflation, and that the best way to combat inflation is through the development of your
own merits and talents. The direct quote was “money can be inflated, talent cannot be.”
There were also a few topical questions
about Greece and the Euro. While Munger said he was generally agnostic about currencies, Buffett made a
distinction between countries that borrow in their own currency and those that are forced to borrow in other countries currencies.
He further said that Greece is a test case of a country not using its own currency, as it borrows in Euros.
Buffett indicated that he didn’t know how this event would end, but that the events over the last few years makes
him feel more bearish about all currencies. He said that if countries could run 10% budget deficits for long periods of time,
the world would have done it a long time ago. He then stated that as long as the United States borrows
in dollars there would be no risk of default, because it can print its own currency.
Buffett and Munger were also asked a smattering of questions about Berkshire, with
many directed towards Berkshire’s move to investing in capital intensive businesses—think Berkshire’s utility
and railroad operations. Buffett said that his universe of potential elephants has gotten smaller, that
there are fewer Coca-Cola’s available, and that the push into capital-intensive businesses has worked well so far.
Succession was another question that came up repeatedly, and Buffett said that the potential investment officers could
change, but that it was less likely that the CEO candidate would change. It has long been rumored that current NetJets CEO
David Sokol would be in line to eventually step into Berkshire’s CEO role. Buffett also said that
one of the potential investment candidates was up around 200% last year, without employing any leverage.
All in all, it was another informative session out in Omaha
last weekend. There was a fair amount of discussion about current topics and new ideas, in addition to
the reinforcement of concepts touched on at virtually every annual meeting. Please check back at buffettologist.com
soon for an analysis of Berkshire’s first quarter earnings.
You also might be interested to know that I was mentioned in a recent Wall Street Journal article, linked here.
Copyright © 2010 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.
Justin Fuller, CFA provides his market and investment commentary on this website. Justin
has been following and studying Warren Buffett, Berkshire Hathaway, and other leading value investors for years. If
you'd like to be put on his distribution list, or to send him any questions or comments, he can be reached at: email@example.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 in any way.
This content is intended solely for the entertainment of the reader, and the author.