The “Fasten Your Seatbelts” public announcement that the Berkshire Hathaway Annual Meeting was about to begin in Omaha’s packed convention center this past Saturday was like a plane steward’s admonition before a perfectly smooth flight. It’s difficult to imagine how anything could be going better for Berkshire Hathaway.
Warren Buffett reported that his company’s operating earnings during the first three months of 2013, $4.9 billion, 51% above the first three months of 2012, were the highest for any quarter ever reported. Berkshire’s four major industry operating sectors all performed well including their largest components: insurance companies Berkshire Hathaway Insurance Groups and GEICO; regulated companies BNSF (railroad) and MidAmerica (public utility); manufacturing/service/retailing companies Marmon (150 different businesses); and financial companies Clayton Homes (manufactured housing/finance) and CORT (leasing).
But Berkshire’s operating company earnings were only part of the story. In addition to its $4.9 billion of reported net income was another $5.5 billion of net appreciation of investments representing the increase in book value of Berkshire’s fixed income and equity marketable securities in its investment portfolio. The largest of these investments were Wells Fargo, Coca-Cola, IBM and American Express aggregating $52 billion at year-end 2012.
On the acquisition front, Buffet is still looking for a couple of “elephants” to purchase with readily available proceeds from Berkshire’s $48 billion in short term Treasuries. He expressed his satisfaction with Berkshire’s $12 billion investment in Heinz during the first quarter, and he believes that there are other good large investment opportunities to pursue for the benefit of Berkshire shareholders in the future.
Finally in terms of valuation, there is the unrecorded intrinsic value of Berkshire’s operating subsidiaries. Buffett used the example of GEICO’s first quarter insurance underwriting operations to explain. Based on its first quarter new insurance policies, GEICO is positioned to write $1 billion of new US auto insurance in 2013 out of $1.5 billion industry-wide. The intrinsic value of GEICO’s growing insurance business is worth far more than the company’s book value carried on Berkshire’s financial statements, and the same is true for most of Berkshire’s other operating businesses.
Buffett said that Berkshire will acquire its own stock whenever its market value falls below 120% of book value (currently at 140%). Don’t hold your breath. The market has responded positively to all the good news from Berkshire Hathaway, and it is now the fifth largest company in total market value after Apple, Exxon Mobil, Microsoft and Google.
As always in recent years, questions were raised about what happens to Berkshire after Buffett is no longer around, and a particular question was raised about the future role of Buffett’s son, Howard. Warren explained that his recommendation for Berkshire’s future Chief Executive Officer and Chief Investment Officer(s) were confidential, but well known to Berkshire’s Board of Directors. However, as assurance that Berkshire continue to operate the same, he has recommended to his Board of Directors that after his departure, his son Howard become the non-paid, non-executive Chairman of the Board. As a Berkshire director and major shareholder, Howard is immersed in Berkshire’s principles and culture. He would assure that Berkshire’s management would either continue successfully on the same path as before, or if not, request the board make appropriate management changes.
While questions about Berkshire were answered confidently and completely, questions about the ultimate impact of the Federal Reserve Bank’s quantitative easing were not. Both Buffett and his longtime investment partner, Charlie Munger, agreed that the Fed, led by Chairman Ben Bernanke, responded correctly to the financial market crisis of 2008 and subsequent slow economic recovery, but neither could offer an opinion of its aftermath results. Munger simply said, “I don’t know,” and Buffett agreed, comparing it to an interesting movie where you don’t know the ending. However, Buffett did comment that that the Fed’s quantitative easing has the potential to be very inflationary and that “bonds are a terrible buy right now,” with which we at Edgemoor concur. He said that the Fed’s balance sheet, which has swollen to $3.4 trillion, is in unchartered territory, and he observed that when the market gets the signal that the Fed is going to stop purchasing $85 billion of mortgage backed securities per month, it could be a “shot heard around the world.”
Be that as it may, it is this author’s opinion that Berkshire Hathaway’s stock is a good value in today’s market.