Buffett/Berkshire - general news

[flesh]

Berkshire filed a standard correspondence note back and forth with the SEC today - no big deal, but some might find management's summary of Precision Castparts' business and the oligopoly markets it sells into interesting.  I did.  Starts on page five on this section of correspondence "As background, PCC..."  ->

 

https://www.sec.gov/Archives/edgar/data/1067983/000119312516732679/filename1.htm

 

Sweet, thanks for posting! Can anyone articulate the relevant effects on the financial statements in which brk would benefit from having these intangibles subjected to impairment opposed to amortization?

 

 

Although WEB does not specifically address impairment versus amortization as it relates to intangibles, here is something on the subject and it's potential to boost earnings 5 years or so down the road. The below is from the 2014 letter.

 

 

Our income and expense data conforming to GAAP is on page 49. In contrast, the operating expense

figures above are non-GAAP and exclude some purchase-accounting items (primarily the amortization of certain

intangible assets). We present the data in this manner because Charlie and I believe the adjusted numbers more

accurately reflect the true economic expenses and profits of the businesses aggregated in the table than do GAAP

figures.

I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand

the disparate nature of intangible assets. Some truly deplete over time, while others in no way lose value. For

software, as a big example, amortization charges are very real expenses. The concept of making charges against

other intangibles, such as the amortization of customer relationships, however, arises through purchase-accounting

rules and clearly does not reflect reality. GAAP accounting draws no distinction between the two types of charges.

Both, that is, are recorded as expenses when earnings are calculated – even though from an investor’s viewpoint

they could not be more different.

14

In the GAAP-compliant figures we show on page 49, amortization charges of $1.15 billion have been

deducted as expenses. We would call about 20% of these “real,” the rest not. The “non-real” charges, once nonexistent

at Berkshire, have become significant because of the many acquisitions we have made. Non-real

amortization charges will almost certainly rise further as we acquire more companies.

The GAAP-compliant table on page 67 gives you the current status of our intangible assets. We now have

$7.4 billion left to amortize, of which $4.1 billion will be charged over the next five years. Eventually, of course,

every dollar of non-real costs becomes entirely charged off. When that happens, reported earnings increase even if

true earnings are flat.

Depreciation charges, we want to emphasize, are different: Every dime of depreciation expense we report

is a real cost. That’s true, moreover, at most other companies. When CEOs tout EBITDA as a valuation guide, wire

them up for a polygraph test.

Our public reports of earnings will, of course, continue to conform to GAAP. To embrace reality, however,

you should remember to add back most of the amortization charges we report

 

I'm trying to think through the benefit or having pcp subject to impairment vs amortization. What motivated brk to do this? Shield taxes and maintain book value over time? Anything else I"m missing?

 

 

[John Hjorth]

flesh,

 

It's an accounting decision - related to the consolidation of PCP in the group financials for BRK at the first time - based on the assessed economics inherent in the aquisition, and based on the price paid for the company, compared to the book value of the company at the time of the aquisition.

 

It has nothing to do with taxes in BRK group financials.

[flesh]

Sure, I understood that part, probably reading into it too much. Thanks.

[gfp]

No big news but it's always nice to see the borrowing rates that Berkshire Energy subs get when they borrow post-acquisition.  One the the easiest levers to pull on these debt-heavy industries is borrowing under the BRK halo despite BRK not guaranteeing the debt (outside of BRK Finance Corp / Clayton, etc).

 

30 year, 3.7%

 

http://www.marketwired.com/press-release/altalink-lp-to-issue-450-million-in-medium-term-notes-2179086.htm

[Munger_Disciple]

New CEO named at Fruit of The Loom:

 

http://www.wsj.com/articles/fruit-of-the-loom-inc-names-melissa-burgess-taylor-as-chairman-ceo-1480636167

[Dynamic]

A non-paywalled press-release version:

http://www.businesswire.com/news/home/20161201006567/en/Fruit-Loom-Names-Melissa-Burgess-Taylor-Chairman-CEO

[gfp]

Warren resurfaced for another short interview with Fortune - only his second that I know of since the election

 

http://fortune.com/2016/12/05/warren-buffett-donald-trump-election/

 

Talking about the returns of Mid-American / BHE he took issue with the interviewer's characterization of BHE as producing a low return for BRK:

"But I think the return figures that you have are wrong. We paid $35.05 a share for the utility [in 2000]. And this year it’ll earn something around $30 a share, after tax."

 

edit:

In other news, BHE Renewables has just purchased Alamo 6 Solar San Antonio for $385 million-

http://renewables.seenews.com/news/to-the-point-oci-selling-us-unit-for-usd-385m-549362

https://www.hubs.biz/power/explore/2016/10/110-mw-oci-alamo-6-solar-project-in-texas-to-go-commercial-by-dec-31

[Munger_Disciple]

Buffett

But I think the return figures that you have are wrong. We paid $35.05 a share for the utility [in 2000]. And this year it’ll earn something around $30 a share, after tax.

 

Most of the earnings growth at BHE/Mid American occurred prior to 2007. Per the 2007 annual report, Mid American earned $15 per share in 2007. So its per share earnings doubled in 9 subsequent years, a pretty decent result (8% CAGR) given what we went thru' during 2008-2009.  But it is not amazing.

 

However from 1999-2007, Mid American earnings per share increased at a CAGR of 24.5%, a stunning result.

[Guest longinvestor]

Buffett

But I think the return figures that you have are wrong. We paid $35.05 a share for the utility [in 2000]. And this year it’ll earn something around $30 a share, after tax.

 

Most of the earnings growth at BHE/Mid American occurred prior to 2007. Per the 2007 annual report, Mid American earned $15 per share in 2007. So its per share earnings doubled in 9 subsequent years, a pretty decent result (8% CAGR) given what we went thru' during 2008-2009.  But it is not amazing.

 

However from 1999-2007, Mid American earnings per share increased at a CAGR of 24.5%, a stunning result.

Does this $30 per share include the earnings from Home Services?

[rb]

It's true that earnings at Mid-American are up a lot. But Berkshire also dropped a lot of capital into Mid-American.

[Munger_Disciple]

Does this $30 per share include the earnings from Home Services?

 

My guess is yes. There is a line called "Real estate brokerage" under BHE earnings in all the annual reports.

[Munger_Disciple]

But Berkshire also dropped a lot of capital into Mid-American.

 

Additional shares were issued by BHE to Berkshire due to the additional capital invested along the way, so per share comparisons are quite valid.

[rb]

But Berkshire also dropped a lot of capital into Mid-American.

 

Additional shares were issued by BHE to Berkshire due to the additional capital invested along the way, so per share comparisons are quite valid.

Still BHE doesn't pay a dividend to BRK and plows all earnings back. That's basically still a lot of capital being dropped in but gets you better PR.

[DooDiligence]

But Berkshire also dropped a lot of capital into Mid-American.

 

Additional shares were issued by BHE to Berkshire due to the additional capital invested along the way, so per share comparisons are quite valid.

Still BHE doesn't pay a dividend to BRK and plows all earnings back. That's basically still a lot of capital being dropped in but gets you better PR.

 

This seems like a huge advantage for them over other utlilities.

 

What do you think the effect will be on the competitive landscape & will capital allocation change for other utilities?

[rb]

But Berkshire also dropped a lot of capital into Mid-American.

 

Additional shares were issued by BHE to Berkshire due to the additional capital invested along the way, so per share comparisons are quite valid.

Still BHE doesn't pay a dividend to BRK and plows all earnings back. That's basically still a lot of capital being dropped in but gets you better PR.

 

This seems like a huge advantage for them over other utlilities.

 

What do you think the effect will be on the competitive landscape & will capital allocation change for other utilities?

Well being part of Berkshire is a huge advantage for them. But I don't think that other utilities will change their capital allocation to match.

 

The point i was trying to make though is that if I retain all earnings and reinvest I'm gonna grow my EPS a lot faster than my dividend paying competitors even if I have no idea what I'm doing. Obviously the people at BHE know what their doing. But still a larger EPS CAGR should not be that surprising since they employ larger and larger amounts of capital.

[Munger_Disciple]

But still a larger EPS CAGR should not be that surprising since they employ larger and larger amounts of capital.

 

So do you think 24.5% CAGR in earnings from 1999-2007 at BHE is not impressive?

 

With or without dividends, 24.5% CAGR is stunning in my mind especially given that return on invested capital is decent.

[Guest longinvestor]

But Berkshire also dropped a lot of capital into Mid-American.

 

Additional shares were issued by BHE to Berkshire due to the additional capital invested along the way, so per share comparisons are quite valid.

Still BHE doesn't pay a dividend to BRK and plows all earnings back. That's basically still a lot of capital being dropped in but gets you better PR.

 

This seems like a huge advantage for them over other utlilities.

 

What do you think the effect will be on the competitive landscape & will capital allocation change for other utilities?

Well being part of Berkshire is a huge advantage for them. But I don't think that other utilities will change their capital allocation to match.

 

The point i was trying to make though is that if I retain all earnings and reinvest I'm gonna grow my EPS a lot faster than my dividend paying competitors even if I have no idea what I'm doing. Obviously the people at BHE know what their doing. But still a larger EPS CAGR should not be that surprising since they employ larger and larger amounts of capital.

BHE is a thorn to other Utilities by holding rates charged for long periods. Iowa as an example. While Illinois is deliberating adding surcharges to keep nuclear plants operating.

[rb]

But still a larger EPS CAGR should not be that surprising since they employ larger and larger amounts of capital.

 

So do you think 24.5% CAGR in earnings from 1999-2007 at BHE is not impressive?

 

With or without dividends, 24.5% CAGR is stunning in my mind especially given that return on invested capital is decent.

No I didn't say that at all. They've done well. I'm just saying that those numbers are juiced up. So you can't really do a side by side comparison.

 

I also think that the reporter was trying to get some sort of reaction but didn't do the homework to understand how the utility is being run as a part of the Berkshire black hole.

[Ballinvarosig Investors]

Warren resurfaced for another short interview with Fortune - only his second that I know of since the election

 

http://fortune.com/2016/12/05/warren-buffett-donald-trump-election/

 

Talking about the returns of Mid-American / BHE he took issue with the interviewer's characterization of BHE as producing a low return for BRK:

"But I think the return figures that you have are wrong. We paid $35.05 a share for the utility [in 2000]. And this year it’ll earn something around $30 a share, after tax."

 

edit:

In other news, BHE Renewables has just purchased Alamo 6 Solar San Antonio for $385 million-

http://renewables.seenews.com/news/to-the-point-oci-selling-us-unit-for-usd-385m-549362

https://www.hubs.biz/power/explore/2016/10/110-mw-oci-alamo-6-solar-project-in-texas-to-go-commercial-by-dec-31

Not much there, but I did think that this bit was interesting.

More and more investors have embraced passive management—investing in index funds and ETFs. Is the next Warren Buffett going to be an index fund?

 

I don’t know about ETF, but passive will beat active over time. But not for the manager. The manager’s going to make money out of active and the investor’s going to do better with passive. I’m writing a lot about this subject in next year’s annual report. I really am. A lot.

 

[gfp]

i didn't know that HBO had made a new Warren Buffett documentary - release date set:

http://www.thewrap.com/becoming-warren-buffett-hbo-premiere-date/

 

Looks like it is with his cooperation and he will be largely narrating the film -

http://www.thisisinsider.com/hbo-documentary-on-warren-buffett-becoming-warren-buffett-2016-12

[Guest longinvestor]

A shares crossed a new threshold, can start stating in millions. All right, in proper fractions thereof.

[John Hjorth]

Honestly, - about time!

 

Since the beginning of 2014: 2014: Up some, 2015: Down some, 2016: Up some [so far].

 

Since the beginning of 2014:

 

Net cash flow from operations: USD 88.672 B

Cash flow from investing activities [negative]: USD 70.289 B,

 

Both, a lot! ... so, about time.

[fareastwarriors]

Buffett Era of 8.5% Dividends Ends as Dow Swaps Stake

https://www.bloomberg.com/news/articles/2016-12-15/buffett-era-of-8-5-dividends-ends-as-dow-swaps-3-billion-stake

[rb]

And so the cash pile grows some more.

[Mephistopheles]

They're converting to common stock, cashless (and taxless) transaction