Berkshire Hathaway - Steven Wevodau
Buffett says government is doing the right things - Posted by Steven Wevodau
Billionaire Warren Buffett says US government is taking the right steps to help economy
- On Saturday May 2, 2009, 12:27 pm EDT
OMAHA, Nebraska (AP) — Billionaire Warren Buffett said Saturday the U.S. government is generally taking the right actions to help the economy recover, and it should be given some benefit of the doubt because officials have been reacting in the middle of a crisis.
The state of the economy was one of the first things addressed at Saturday’s daylong Berkshire Hathaway Inc. shareholders meeting. Roughly 35,000 people packed an arena and overflow rooms to listen to Buffett and Berkshire vice chairman Charlie Munger answer questions for hours.
“Overall, I commend the actions that were taken,” Buffett said. But he said no one should expect perfection because the economy experienced a “financial hurricane.”
But Buffett said he can’t predict how quickly the economy and the markets will improve. He said last fall that the U.S. was facing an “economic Pearl Harbor.”
To illustrate the challenges the U.S. faced last year, Buffett showed a sales receipt for $5 million in U.S. Treasury bonds that Berkshire sold in December for $90.07 more than face value, ensuring a negative return for the buyer. Buffett said he does not think most investors will see negative returns on U.S. bonds again in their lifetimes.
“It’s been a very extraordinary year,” he said.
In the exhibit hall Saturday morning, Buffett was mobbed like a movie star by shareholders seeking photos of the CEO as he walked between exhibits for subsidiaries Justin Boots and Dairy Queen.
The meeting began as usual with a humorous movie, but instead of the traditional comical cartoon, Berkshire offered a reassuring message from animated versions of its products.
An animated Mrs. See of See’s Candy told the crowd that it didn’t seem right to have a humorous cartoon when so many things in the world don’t seem sweet. And a talking Dairy Queen ice cream treat said the security of the company’s balance sheet would help it withstand any blizzard.
The economy, succession at the top of Berkshire and the state of the company, which last year had its worst year since Buffett took over in 1965, were on the minds of many shareholders.
Berkshire’s Class A stock lost 32 percent in 2008, and Berkshire’s book value — assets minus liabilities — declined 9.6 percent, to $70,530 per share. That was the biggest drop in book value under Buffett and only the second time its book value has declined.
But despite Berkshire’s rough year — which was depressed by unrealized multibillion-dollar derivative losses — the company still outpaced the market index Buffett uses as a measuring stick. The S&P 500 fell 37 percent in 2008.
Berkshire reported a 2008 profit of $4.99 billion, or $3,224 per Class A share. That was down 62 percent from the previous year, but better than many companies.
Retired shareholder Paul Gallmeyer of the Chicago area said he wasn’t especially worried about who will replace the 78-year-old Buffett as Berkshire’s chairman and CEO. He said all of Berkshire’s more than 60 subsidiaries are run by people who will keep the company going after Buffett is gone.
“I truly don’t see that as much of an issue as other people make it,” Gallmeyer said.
But some shareholders, like Dennis Hospodarsky of Waterloo, Iowa, were a little worried about the succession issue.
“I hope he’s as good at picking a successor as he is at stocks,” Hospodarsky said.
Buffett offered a few new clues about who will replace him at the helm of Berkshire Hathaway, but Buffett still refused to name the people who will become Berkshire’s next chief executive or its next chief investment officer. Buffett received several succession questions.
Three of Berkshire’s internal managers are candidates to be CEO. And the board has a list of four internal and external investment managers who could manage Berkshire’s $49 billion stock portfolio and investing its $24.3 billion cash.
Buffett says none of the investment managers likely beat the S&P 500 last year, but over the past 10 years they all beat the average performance at least modestly if not significantly.
Buffett said he doesn’t see any value in choosing a CEO successor now to follow him around Berkshire’s 19-person headquarters because all the candidates are already running businesses now. Plus the other two might leave Berkshire if a successor was named.
“It’d be a waste of talent,” Buffett said. “I don’t really see any advantages in having some crown prince around.”
Buffett has said his son Howard will take over as chairman to ensure Berkshire’s culture is preserved. Howard Buffett already serves on the board.
Berkshire Hathaway Inc.: http://www.berkshirehathaway.com/
Buffett Is Not a Leader, Just a Great Investor - posted by Steven Wevodau
I recently finished reading the new Buffett biographay, Snowball. I’m not going to write a proper review of it as I didn’t enjoy the book much and am not sure if my views on it would be helpful for those who are considering the book. Perhaps it was my own expectation that prevented me from enjoying Alice Schroeder’s book. I was hoping for more insight into Buffett’s investing methodology; instead, I got reams of pages discussing Buffett’s strained relationship with his mother, his absentee relationship with his children and Susie Buffett’s (his first wife) bohemian relationship with the world. But Schroeder promised a biography, not a how-to investing Buffettology, so the fault lays with me.
Despite the minutiae delving into Buffett’s personal life, I did glean some investment insights. I appreciated Buffett’s enthusiastic endorsement of coattailing (piggybacking, whale-watching, copycatting, etc.) and I will discuss that in another post.
Reading the book crystallized my feeling that Berkshire Hathaway (BRK.A) deserves a Buffett discount, not a premium. Obviously, this discount is premised largely on Buffett’s advanced age but also on my impression that Buffett has failed one of the true tests of leadership: developing new leaders.
Buffett has always been credited with finding great managers to run Berkshire’s various enterprises: Ken Chace at the Berkshire textile business, Ajit Jain with insurance, Lou Simpson at GEICO, even Mrs. B. at Nebraska Furniture. The problem is these managers were largely self-formed — one could hardly credit Buffett as being a primary factor in their development.
Contrast that with Buffett’s investing mentor, Benjamin Graham. In fact, Buffett himself has discussed the many oaks which have fallen from the tree of Graham-and-Doddsville. While Graham wasn’t trying to create a new generation of followers to carry his mantle, by all accounts, he was generous with his time and knowledge. Buffett acknowledges that Graham put him on the true path of value investing.
Buffett, despite his fondness for holding an audience, has never been as generous a teacher. His shareholder letters, the Partnership letters, his various speeches and articles through the years are all valuable study guides, hinting at the path to investment success. But these pale in comparison to the work Benjamin Graham left behind in Security Analysis and The Intelligent Investor, which laid the path bare for all who chose to follow it.
As Schroeder portrays in her book, Buffett is given more to “preaching”, which is quite different than teaching/mentoring. Ultimately, Buffett has always been too much of a “taker” to give enough to develop leaders.
Bringing it back to Berkshire, one of Buffett’s most well-known witticisms talks about buying great companies that can be run by a ham sandwich because one of these days, it probably will be run by one. There is a high risk of Berkshire being run counter to Buffett’s core values or competencies. To this day, Buffett keeps his succession plans under wrap; Schroeder implies some combination of ego and mortality prevents Buffett from sharing the spotlight with his chosen successor.
Investors should be wary that there is only one Warren Buffett. As he has never taken the time to mentor another, any combination of successors would likely be far different in approach, temperament and perhaps, ability.
Source: SeekingAlpha
Buffett Behind Stock Buy Backs - posted by Steven Wevodau
Warren Buffett took the opportunity last Friday to lend his considerable intellectual weight to the debate about buy backs, saying, “I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity.”
We’ve been banging the drum for buy backs quite a bit recently. We wrote on Friday that they represent the lowest risk investment for any company with undervalued stock and we’ve written on a number of other occasions about their positive effect on per share value in companies with undervalued stock.
In a Nightly Business Report interview with Susie Gharib, Buffett discussed his view on stock buy backs:
Susie Gharib: What about Berkshire Hathaway (BRK.A) stock? Were you surprised that it took such a hit last year, given that Berkshire shareholders are such buy and hold investors?
Warren Buffett: Well most of them are. But in the end our price is figured relative to everything else so the whole stock market goes down 50 percent we ought to go down a lot because you can buy other things cheaper. I’ve had three times in my lifetime since I took over Berkshire when Berkshire stock’s gone down 50 percent. In 1974 it went from $90 to $40. Did I feel badly? No, I loved it! I bought more stock. So I don’t judge how Berkshire is doing by its market price, I judge it by how our businesses are doing.
SG: Is there a price at which you would buy back shares of Berkshire? $85,000? $80,000?
WB: I wouldn’t name a number. If I ever name a number I’ll name it publicly. I mean if we ever get to the point where we’re contemplating doing it, I would make a public announcement.
SG: But would you ever be interested in buying back shares?
WB: I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity. That used to be the way people bought back stocks, but in recent years, companies have bought back stocks at high prices. They’ve done it because they like supporting the stock…
SG: What are your feelings with Berkshire? The stock is down a lot. It was up to $147,000 last year. Would you ever be opposed to buying back stock?
WB: I’m not opposed to buying back stock.
You can see the interview with Buffett here (via New York Times’ Dealbook article Buffett Hints at Buyback of Berkshire Shares
Source: SeekingAlpha
Constellation repays MidAmerican $1B plus interest - Steven Wevodau
Constellation repays MidAmerican $1B plus $5M interest for loan made during failed takeover
- Wednesday January 14, 2009, 10:05 pm EST
BALTIMORE (AP) — Constellation Energy Inc. has repaid MidAmerican Energy Holdings Co. $1 billion plus about $5 million in interest as part of its unwinding of an aborted takeover by the Warren Buffett unit, according to a filing with the federal Securities and Exchange Commission.
Baltimore-based Constellation said in the filing Tuesday that the payment was made Monday to MidAmerican, which offered $4.7 billion in September for the energy wholesaler.
Constellation was struggling with liquidity concerns at the time, but shareholders later complained about price, including Electricite de France SA, which eventually increased its holdings by buying half of Constellation’s lucrative nuclear energy business, scuttling the deal with Des Moines, Iowa-based MidAmerican.
MidAmerican is a unit of Buffett’s Omaha, Neb.-based Berkshire Hathaway Inc.
Considering the repayment, Constellation said its estimated liquidity on Dec. 31 was about $2.4 billion.
Burlington Northern: Then and Now
posted by Steven Wevodau
Blasphemy: Burlington Northern Shouldn’t Be Held
By: Paul Price April 21, 2008
Go ahead and attack the thought. Sell a Buffett stock? Am I nuts?
Read this and you decide.
Berkshire Hathaway (BRK.A) started reporting buys in Burlington Northern (BNI) a year ago in early April 2007 with 1.646 million shares for an average price of about $81.37/share. Buffett and Berkshire bought quite a few times after that by averaging down. Their last reported purchase was on January 22 at a price of $75.51 /share.
At Tuesday’s price of $99.77 these shares now trade at 16.8x estimated 2008 earnings of $5.90 - $6.00 and about 14.7x 2009 estimates of $6.75 - $6.80. The current yield on BNI shares is a historically meager 1.28%.
Value Line lists Burlington Northern’s 10-year median P/E as 14x and MSN MoneyCentral’s 10-year average P/E calculates to 14.13x. If BNI shares retreated to even 14.5 times this year’s consensus view of $5.95, the shares would drop back to $86.28.
If BNI shares regressed to a [still higher than typical] 1.5x projected 2008 sales, the shares would decline to $74.95. At a higher than normal 2.4x book value BNI shares would be $86.16 at year-end 2008.
The yield is now near the all-time low of just 1.2% even after the rise to $0.32 quarterly. For the current dividend to return to a more typical 1.5%, the shares would need to dip back to $85.33.
Is Burlington Northern a good company in a favored industry group? Yes. Are BNI shares likely to be higher at year end 2008 than yesterday? I doubt it.
Burlington Northern is riding the ‘Buffett effect’ and the tailwinds of the commodities frenzy right now. This seems to be more than fully reflected in its valuation.
I see much more risk of a share price decline back to $75 - $88 than a move up to $110 or better.
Go ahead and blast me, but I feel strongly that there are much better places for your investment dollars from now through December.
Now, with BNI shares closing yesterday at $66.86 I’m ready to take a position alongside that somewhat well known fellow Mr. Buffett. The shares actually made a new 2 ½ -year low intraday at $65.55 before bouncing back a bit with the overall market.
Berkshire Hathaway owned about 70.09 million shares or 20.47% of the entire company as of December 11, 2008 giving us some indication of his long-term belief in BNI’s prospects. Zack’s now carries estimates of $6.32 and $6.53 for 2008 and 2009 respectively. Both those numbers would represent all time high EPS.
Burlington Northern’s multiple has regressed to about 10.6x last year’s and < 10.3x forward estimates bringing the present valuation to a nice discount to its 10-year average P/E of 14x. The dividend was recently raised to $0.40 quarterly making the current yield 2.39%. That’s the highest rate on these shares in about 8 years.
Value Line calls BNI’s financial strength an ‘A’ while assigning them 85th percentile ratings for both ’stock price stability’ and ‘earnings predictability’ (with 100th being best).
A return to a more normal P/E of even 13 times 2009’s $6.53 estimate leads me to a $84.90 12-month target price. That’s almost 27% above yesterday’s close. Add in the 2.39% dividend and you could see almost 30% total return by year-end.
Is $84.90 achievable? BNI shares hit highs of $88, $95.50 and $114.60 in 2006-2007-2008 all on lower sales, earnings and book value than Tuesday’s comparables.
Want an even lower risk play on Burlington Northern? Consider this:
If BNI shares are $70 or higher [up at least 5% from Tuesday's close] on the January 15, 2010 expiration date:
- You will have no further option obligations.
- You will have $7,160 for your original $4,326 outlay.
- Your $70 call will be exercised.
- Your shares will be sold for $7,000.
- Your $70 put will expire worthless (a good thing for you as a seller).
- You will have collected $160 in dividends (at the current rate).
- That’s a 65% cash-on-cash gain in this best case scenario.
If BNI shares are unchanged at $66.86 next January 15th:
- Your $70 call will expire worthless.
- Your $70 put will be exercised.
- You will be forced to buy an additional 100 shares for $7,000 more cash.
- You will now own 200 shares of BNI total.
- You could sell those 200 shares for better than a $10/share immediate profit.
What’s the risk?
- On the original 100 shares it’s your $66.86 purchase price less the $9.60 call premium.
- That’s $57.26 /share.
- On the put it’s the $70 strike price less the $14 put premium = $56 /share.
- Your overall break-even is thus $56.63 /share.
While BNI certainly could be trading lower than that price next January, it has not changed hands that cheaply since the middle of 2005 (on trailing earnings at that time that were only about half of today’s). The dividend in 2005 was also less than 50% of the current level.
Disclosure: Author bought BNI shares and sold BNI puts Tuesday.
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