Buffett/Berkshire - general news

[Tim Eriksen]

Thanks jay,

To me that still would mean 10 billion of the 15 billion was from BNSF taking on more debt.  So I exclude that since it is more like return of capital than return on capital.  To pay 34 billion and only have it throw off 5 billion over the last 4 years doesn't seem impressive to me.  I am not saying that BNSF is not worth more today than when BRK purchased it.  Clearly it is.  I just didn't see high free cash flow then or now.  It is better than a utility, but not as good as a capital light business.

 

It really makes me wonder at times if Buffett is focused on free cash flow or reported earnings.  BNSF, MidAmerican and Net Jets (things purchased in the last 15 years) are not the same quality  of businesses as Geico, WaPost, See's, Coke, AmEx, Wells, Gillette, etc.(businesses or stocks of the 70's through 90's).   

 

 

[jay21]

I dont fully agree. Obviously if the distributions were fully FCF than it would be better than debt. But if you look at their debt/ebitda metric, they have kept it constant, not increased. So they are just maintaining their capital structure. Its not like he's putting on excessive leverage here, if anything BRK underlevers their assets (like every single asset they own, its crazy they generate the returns they do running with so much cash and little leverage).

 

See this presentation: http://www.bnsf.com/about-bnsf/financial-information/fixed-income-investors/pdf/fixed-income-investor-presentation-1-quarter-2014.pdf

 

Also, when I looked at their reported maintenance capex, I believe it approximated D&A. Their FCF returns look strong to me.

 

If you haven't, I would take a look at the BNSF thread in the subforum: http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/bnsf-and-midamerican/

 

 

[Guest ajc]

 

"Having identified a source of float in the capital intensive assets, Buffett's next trick is to make it grow thereby increasing its value.

It is therefore no surprise that large components of Berkshires capital expenditures are being directed towards BNSF and MidAmerican - the two assets we identified above as being long-term DTL float generators.

 

Capex in BNSF/MidAmerican has a number of impacts:

 

- It increases the level of fixed assets in long-term DTL float generators

- Capex above depreciation will cause the DTL float to grow

- As new capital depreciates quicker than existing capital given accelerated tax depreciation it creates more per dollar DTL float than the existing book.

- Given the above, ever rising amounts of new capital expenditures will make the DTL float start to balloon (or should i say float?) upward"

 

 

http://seekingalpha.com/article/2428045-how-buffett-is-changing-the-future-of-berkshires-float-from-insurance-to-uncle-sam

 

 

 

[Tim Eriksen]

 

"Having identified a source of float in the capital intensive assets, Buffett's next trick is to make it grow thereby increasing its value.

It is therefore no surprise that large components of Berkshires capital expenditures are being directed towards BNSF and MidAmerican - the two assets we identified above as being long-term DTL float generators.

 

Capex in BNSF/MidAmerican has a number of impacts:

 

- It increases the level of fixed assets in long-term DTL float generators

- Capex above depreciation will cause the DTL float to grow

- As new capital depreciates quicker than existing capital given accelerated tax depreciation it creates more per dollar DTL float than the existing book.

- Given the above, ever rising amounts of new capital expenditures will make the DTL float start to balloon (or should i say float?) upward"

 

 

http://seekingalpha.com/article/2428045-how-buffett-is-changing-the-future-of-berkshires-float-from-insurance-to-uncle-sam

 

Maybe my point is being missed.  Let me try another way.  DTL (deferred tax liability) float from accelerated depreciation is not as good as DTL float from unrealized gains, which is not as good as float from insurance.  Increasing DTL float from accelerated depreciation requires substantial capital expenditures (part of which is recouped from tax benefits).  Increasing DTL float from unrealized gains does not require any capital expenditures even though it does not generate any cash to invest.  Thus it is better.  Insurance float does not require  meaningful capital expenditures and it generates actual cash that can be invested.  It is by far the best of the three.

 

It seems to me that Buffett is moving down in terms of quality of float.       

[Guest longinvestor]

 

"Having identified a source of float in the capital intensive assets, Buffett's next trick is to make it grow thereby increasing its value.

It is therefore no surprise that large components of Berkshires capital expenditures are being directed towards BNSF and MidAmerican - the two assets we identified above as being long-term DTL float generators.

 

Capex in BNSF/MidAmerican has a number of impacts:

 

- It increases the level of fixed assets in long-term DTL float generators

- Capex above depreciation will cause the DTL float to grow

- As new capital depreciates quicker than existing capital given accelerated tax depreciation it creates more per dollar DTL float than the existing book.

- Given the above, ever rising amounts of new capital expenditures will make the DTL float start to balloon (or should i say float?) upward"

 

 

http://seekingalpha.com/article/2428045-how-buffett-is-changing-the-future-of-berkshires-float-from-insurance-to-uncle-sam

 

Maybe my point is being missed.  Let me try another way.  DTL (deferred tax liability) float from accelerated depreciation is not as good as DTL float from unrealized gains, which is not as good as float from insurance.  Increasing DTL float from accelerated depreciation requires substantial capital expenditures (part of which is recouped from tax benefits).  Increasing DTL float from unrealized gains does not require any capital expenditures even though it does not generate any cash to invest.  Thus it is better.  Insurance float does not require  meaningful capital expenditures and it generates actual cash that can be invested.  It is by far the best of the three.

 

It seems to me that Buffett is moving down in terms of quality of float.      

 

Actually the reverse order is true when it comes to control and time frame the float is held. Captive capital allocation for "as far as the eye can see" and a shareholder base willing to go along with 100% retained earnings are wonderful.  Time will tell if the quality of float actually got better.

[fareastwarriors]

Is the author reading this forum?

:o

 

 

Buffett, Not a Fan of Capital-Heavy Firms, Spends $12B on Them in 2014

http://blogs.wsj.com/moneybeat/2014/11/11/buffett-not-a-fan-of-capital-heavy-firms-spends-12b-on-them-in-2014/

[Palantir]

Anybody selling BRK? Looks to have hit 1.5xBV, which seems to be many people's estimate of FV...

[Guest longinvestor]

http://www.bloomberg.com/news/2014-12-01/berkshire-to-buy-weatherford-units-for-at-least-750-million-1-.html?cmpid=yhoo

 

Operating units doing their part, billion at a time.

[gfp]

It's the second bolt-on at Lubrizol in a week.  They are going to combine today's two companies with the PSX sub they swapped for.

 

Here is last week's LZ bolt-on - probably a couple hundred million but not disclosed:

 

http://newscenter.lubrizol.com/phoenix.zhtml?c=250972&p=irol-newsArticle&ID=1992404

 

http://www.bloomberg.com/news/2014-12-01/berkshire-to-buy-weatherford-units-for-at-least-750-million-1-.html?cmpid=yhoo

 

Operating units doing their part, billion at a time.

[petec]

Anybody selling BRK? Looks to have hit 1.5xBV, which seems to be many people's estimate of FV...

 

Certainly isn't mine ;)

 

I think it's on a mid-teens look-through PE which given the quality of the businesses and the capital allocation is absolutely fine by me.

[redskin]

Buffett stated in last years annual report that, 'When our current projects are completed, MidAmerican’s renewables portfolio will have cost $15 billion.'  If you look at the Q3 filing of BH Energy, the renewables segment had operating income of only $252 million for the 9 months year to date.  A 10% return on the $15 billion portfolio should produce $1.5B pre tax.  There is going to be a big jump in earnings as these projects come online in the next few years and new projects are added. 

 

During the annual meeting a couple years ago Buffett mentioned he could see an additional $100 billion invested in utilites over the next 10 years.

[Palantir]

Anybody selling BRK? Looks to have hit 1.5xBV, which seems to be many people's estimate of FV...

 

Certainly isn't mine ;)

 

I think it's on a mid-teens look-through PE which given the quality of the businesses and the capital allocation is absolutely fine by me.

 

So what is your estimate of FV?

[petec]

Anybody selling BRK? Looks to have hit 1.5xBV, which seems to be many people's estimate of FV...

 

Certainly isn't mine ;)

 

I think it's on a mid-teens look-through PE which given the quality of the businesses and the capital allocation is absolutely fine by me.

 

So what is your estimate of FV?

 

To be completely blunt, I don't make one.  My main point (poorly expressed perhaps) was more that I find it easy to believe that a company like Berkshire might be worth a substantial premium to BV.  My subsidiary point is that 15x 2014 doesn't strike me as expensive when you look at the quality of the underlying businesses, the multiples that peers trade on (railcos for example), and the quality of the capital allocation which should have a huge impact on multiples.

 

Now clearly if I don't have a specific FV estimate I don't know where I'd sell.  That's true.  As long as I don't think it looks overvalued on a basic metric such as lookthrough PE, I won't think much more about it.  If it gets to the point where the basic metrics make me twitchy, I'll have a more serious dig into how fast IV might grow.  E.g., I might start thinking seriously at 2x bv, or 20x 1y fwd lookthrough earnings.  A big part of my investment philosophy is to ask if I'd like to own this operating business forever, get in at the right price, and then apply "lethargy bordering on sloth", as WB would put it.

 

P

[Guest longinvestor]

Anybody selling BRK? Looks to have hit 1.5xBV, which seems to be many people's estimate of FV...

 

Certainly isn't mine ;)

 

I think it's on a mid-teens look-through PE which given the quality of the businesses and the capital allocation is absolutely fine by me.

 

So what is your estimate of FV?

 

To be completely blunt, I don't make one.  My main point (poorly expressed perhaps) was more that I find it easy to believe that a company like Berkshire might be worth a substantial premium to BV.  My subsidiary point is that 15x 2014 doesn't strike me as expensive when you look at the quality of the underlying businesses, the multiples that peers trade on (railcos for example), and the quality of the capital allocation which should have a huge impact on multiples.

 

Now clearly if I don't have a specific FV estimate I don't know where I'd sell.  That's true.  As long as I don't think it looks overvalued on a basic metric such as lookthrough PE, I won't think much more about it.  If it gets to the point where the basic metrics make me twitchy, I'll have a more serious dig into how fast IV might grow.  E.g., I might start thinking seriously at 2x bv, or 20x 1y fwd lookthrough earnings.  A big part of my investment philosophy is to ask if I'd like to own this operating business forever, get in at the right price, and then apply "lethargy bordering on sloth", as WB would put it.

 

P

+1

BRK was selling for BV and below BV 3-5 years ago. Bought then, it was the ultimate value buy in a lifetime. My BRK is not for sale until the money is needed.

 

[Charlie]

"BRK was selling for BV and below BV 3-5 years ago. Bought then, it was the ultimate value buy in a lifetime."

 

+1

At the time I had 50% in Berkshire and bought more just before the repurchase announcement.

Since then I enjoyed the ride.  ;)

At the moment I´m invested 99% in Berkshire and 1% in IBM.

Regarding selling I am constantly reminded of Munger who said to his relatives at the Berkshire Meeting:

"Don´t be so dumb to sell your Berkshire shares."

and Buffett said: "That goes for the Buffett family as well."

 

:)

 

 

[fareastwarriors]

Buffett Says ‘Fun Has Just Started’ for Auto Sales at Berkshire

 

 

http://www.bloomberg.com/news/articles/2015-03-10/buffett-says-fun-has-just-started-for-auto-sales-at-berkshire

[Guest longinvestor]

Buffett Says ‘Fun Has Just Started’ for Auto Sales at Berkshire

 

 

http://www.bloomberg.com/news/articles/2015-03-10/buffett-says-fun-has-just-started-for-auto-sales-at-berkshire

 

http://www.berkshirehathawayautomotive.com/index.htm is the newly minted website. They also bought a Fort Worth dealership in the first week.

[Jurgis]

Buffett Says ‘Fun Has Just Started’ for Auto Sales at Berkshire

 

 

http://www.bloomberg.com/news/articles/2015-03-10/buffett-says-fun-has-just-started-for-auto-sales-at-berkshire

 

Is it going to be the same "screw the customer" experience as in other auto dealerships?

[oddballstocks]

Buffett Says ‘Fun Has Just Started’ for Auto Sales at Berkshire

 

 

http://www.bloomberg.com/news/articles/2015-03-10/buffett-says-fun-has-just-started-for-auto-sales-at-berkshire

 

Is it going to be the same "screw the customer" experience as in other auto dealerships?

 

I guess I don't understand this purchase.  I have a friend who is in car dealerships and he's been saying valuations have been stretched for years.  When he and others are thinking of getting out you have Buffett climbing in.  The industry has completely changed in the last few years.

 

Previously there was a greater margin on new cars.  Now that margin has shrunk and dealers make their money on incentives from the manufacturers.  They also make money on service.

 

Used car sales offer some promise.  There is a LOT of margin in most sales especially in the $5-15k range.

 

Incentives have changed with online sales.  We recently purchased a car from a volume dealer near us.  The price changed on a fairly regular basis based on the surrounding market.  The dealer didn't actually set the price, they set parameters in the software and let the software set the price.  We paid what I'd consider a fair price.  The car is in great shape and is somewhat rare.  It was cheaper than other cars in the area by a few percentage points.  The dealer said the slight discount is how he moves volume.  They do 150-200 cars a month and have found for them that's the only way to make money.  It's an interesting business model.  I ran this by my friend who's in the dealer business, he knew the software immediately and said it's what everyone has moved to.  There isn't a guy out there guestimating a value anymore.

 

Part of me thinks Buffett is out of touch on this.  He's thinking dealerships are still full of guys in corduroy blazers with elbow patches working customers over for every last cent.  With the Internet and mobile I don't think too many customers have patience for that business model anymore.  Especially if you can go on TrueCar or a million other sites while at the dealer and see what others have paid.

[Jurgis]

Interesting perspective oddball. +1  :)

[CorpRaider]

I like KMX but it never gets cheap enough for me.  Or it hasn't in a long while.

[Guest longinvestor]

Van Tuyl's attractiveness to Berkshire

 

- their consistently high volume per dealership. Buffett's words when the deal was announced.

 

-  they are heavily in smaller towns, mostly Southern states. Kinda follows the recent newspaper purchases

 

-  own collision centers in most states where they have dealerships. Having been to collision centers thrice in 5 years, I know that is a nice business,  and btw, also have to work closely with auto insurance companies.

 

- VanTuyl has pioneered the owner-operator model for a long time already.

 

Berkshire can sell insurance along with cars. arrange financing with partners (perhaps soon start lending money to Van Tuyl a la Clayton Homes) and deal with wrecks and insurance claims at the other end.

 

Van Tuyl will continue to run the business while this can become a capital allocation pathway for the gusher of cash flow at Berkshire.

 

 

[Guest Schwab711]

Buffett Says ‘Fun Has Just Started’ for Auto Sales at Berkshire

 

 

http://www.bloomberg.com/news/articles/2015-03-10/buffett-says-fun-has-just-started-for-auto-sales-at-berkshire

 

Is it going to be the same "screw the customer" experience as in other auto dealerships?

 

I guess I don't understand this purchase.  I have a friend who is in car dealerships and he's been saying valuations have been stretched for years.  When he and others are thinking of getting out you have Buffett climbing in.  The industry has completely changed in the last few years.

 

Previously there was a greater margin on new cars.  Now that margin has shrunk and dealers make their money on incentives from the manufacturers.  They also make money on service.

 

Used car sales offer some promise.  There is a LOT of margin in most sales especially in the $5-15k range.

 

Incentives have changed with online sales.  We recently purchased a car from a volume dealer near us.  The price changed on a fairly regular basis based on the surrounding market.  The dealer didn't actually set the price, they set parameters in the software and let the software set the price.  We paid what I'd consider a fair price.  The car is in great shape and is somewhat rare.  It was cheaper than other cars in the area by a few percentage points.  The dealer said the slight discount is how he moves volume.  They do 150-200 cars a month and have found for them that's the only way to make money.  It's an interesting business model.  I ran this by my friend who's in the dealer business, he knew the software immediately and said it's what everyone has moved to.  There isn't a guy out there guestimating a value anymore.

 

Part of me thinks Buffett is out of touch on this.  He's thinking dealerships are still full of guys in corduroy blazers with elbow patches working customers over for every last cent.  With the Internet and mobile I don't think too many customers have patience for that business model anymore.  Especially if you can go on TrueCar or a million other sites while at the dealer and see what others have paid.

 

What was the software?

[fareastwarriors]

Buffett Says ‘Fun Has Just Started’ for Auto Sales at Berkshire

 

 

http://www.bloomberg.com/news/articles/2015-03-10/buffett-says-fun-has-just-started-for-auto-sales-at-berkshire

 

Is it going to be the same "screw the customer" experience as in other auto dealerships?

 

I guess I don't understand this purchase.  I have a friend who is in car dealerships and he's been saying valuations have been stretched for years.  When he and others are thinking of getting out you have Buffett climbing in.  The industry has completely changed in the last few years.

 

Previously there was a greater margin on new cars.  Now that margin has shrunk and dealers make their money on incentives from the manufacturers.  They also make money on service.

 

Used car sales offer some promise.  There is a LOT of margin in most sales especially in the $5-15k range.

 

Incentives have changed with online sales.  We recently purchased a car from a volume dealer near us.  The price changed on a fairly regular basis based on the surrounding market.  The dealer didn't actually set the price, they set parameters in the software and let the software set the price.  We paid what I'd consider a fair price.  The car is in great shape and is somewhat rare.  It was cheaper than other cars in the area by a few percentage points.  The dealer said the slight discount is how he moves volume.  They do 150-200 cars a month and have found for them that's the only way to make money.  It's an interesting business model.  I ran this by my friend who's in the dealer business, he knew the software immediately and said it's what everyone has moved to.  There isn't a guy out there guestimating a value anymore.

 

Part of me thinks Buffett is out of touch on this.  He's thinking dealerships are still full of guys in corduroy blazers with elbow patches working customers over for every last cent.  With the Internet and mobile I don't think too many customers have patience for that business model anymore.  Especially if you can go on TrueCar or a million other sites while at the dealer and see what others have paid.

 

What was the software?

 

 

Excuse my ignorance, I thought dealers make money on the service side of the business. It seems like every time I go to a dealership their service bays are always full....

 

[Guest longinvestor]

Buffett Says ‘Fun Has Just Started’ for Auto Sales at Berkshire

 

 

http://www.bloomberg.com/news/articles/2015-03-10/buffett-says-fun-has-just-started-for-auto-sales-at-berkshire

 

Is it going to be the same "screw the customer" experience as in other auto dealerships?

 

I guess I don't understand this purchase.  I have a friend who is in car dealerships and he's been saying valuations have been stretched for years.  When he and others are thinking of getting out you have Buffett climbing in.  The industry has completely changed in the last few years.

 

Previously there was a greater margin on new cars.  Now that margin has shrunk and dealers make their money on incentives from the manufacturers.  They also make money on service.

 

Used car sales offer some promise.  There is a LOT of margin in most sales especially in the $5-15k range.

 

Incentives have changed with online sales.  We recently purchased a car from a volume dealer near us.  The price changed on a fairly regular basis based on the surrounding market.  The dealer didn't actually set the price, they set parameters in the software and let the software set the price.  We paid what I'd consider a fair price.  The car is in great shape and is somewhat rare.  It was cheaper than other cars in the area by a few percentage points.  The dealer said the slight discount is how he moves volume.  They do 150-200 cars a month and have found for them that's the only way to make money.  It's an interesting business model.  I ran this by my friend who's in the dealer business, he knew the software immediately and said it's what everyone has moved to.  There isn't a guy out there guestimating a value anymore.

 

Part of me thinks Buffett is out of touch on this.  He's thinking dealerships are still full of guys in corduroy blazers with elbow patches working customers over for every last cent.  With the Internet and mobile I don't think too many customers have patience for that business model anymore.  Especially if you can go on TrueCar or a million other sites while at the dealer and see what others have paid.

 

What was the software?

 

 

Excuse my ignorance, I thought dealers make money on the service side of the business. It seems like every time I go to a dealership their service bays are always full....

 

+1. Especially right after the warranty period is over. Best to promptly take it to the independent service shops.

 

A related juicy business is the same-hour-auto-repair-parts business that supports the service shops. I know a guy who is in this business, he rakes it in. The auto manufacturers try to protect this business very hard but are limited by the warranty period.