Buffett/Berkshire - general news

[nickenumbers]

Ajit Jain purchasing $20M at $296,000 A share price...

 

Bless you SEC public reporting of insider activity.  Its a Christmas Miracle!

 

When a hands down Genius-Ajit who has made more money for Berkshire than a printing press, buys at $296K, and today that same security is trading at $292K, I continue to buy BRK, and I purchase LEAPs on BRK.

 

Anything short of purchasing at this point if you have the cash is risking THUMB SUCKING!!

[gfp]

Just a general data point some might find interesting.  Warren makes the decisions for BHFC and has once again chosen to refinance maturing floating rate debt with 30 year fixed debt.  Looks like he will get a (pre tax) interest rate of less than 4.5%...  Not too shabby.

 

https://www.bloomberg.com/opinion/articles/2019-01-03/is-warren-buffett-sending-a-signal-about-the-bond-market

 

Update with final pricing and quarter billion upsizing:

https://www.sec.gov/Archives/edgar/data/1067983/000119312519001670/d663847dfwp.htm

 

4.3% tax deductible interest on a 30yr issuance

[gfp]

Another RE brokerage acquisition (this one was already a franchisee):

https://www.businesswire.com/news/home/20190109005685/en/HomeServices-America®-Announces-Acquisition-Berkshire-Hathaway-HomeServices

[gfp]

New CEO for HomeServices, Peltier moving up to Executive Chairman -

 

https://www.businesswire.com/news/home/20190116005196/en/HomeServices-America®-Expands-Executive-Leadership-Team

 

http://www.startribune.com/homeservices-of-america-taps-new-ceo-to-lead-expansion/504437412/

[Guest longinvestor]

New CEO for HomeServices, Peltier moving up to Executive Chairman -

 

https://www.businesswire.com/news/home/20190116005196/en/HomeServices-America®-Expands-Executive-Leadership-Team

 

http://www.startribune.com/homeservices-of-america-taps-new-ceo-to-lead-expansion/504437412/

 

Across the subs, the Chairman/President duo model is being implemented. I see this as paving the pathway for the $100 B (& growing) cash pile by creating capacities for inorganic and organic growth. It is not hard to see that this is equivalent to thickening the (smaller) circle of competence. Or in other words, forget about master generalists like Buffett and Munger. Many specialists will fill those shoes. Tuck in M&A can happen without paying the investment bankers (folks with expensive tastes).   

[gfp]

A bunch of realtors wouldn't want to cut out investment bankers would they?  Heresy

 

Seriously though, the investment bankers probably still get paid on most of these bolt-on acquisitions

[Guest longinvestor]

A bunch of realtors wouldn't want to cut out investment bankers would they?  Heresy

 

Seriously though, the investment bankers probably still get paid on most of these bolt-on acquisitions

 

Don't believe so. Not if it is a for-sale-by-owner. I'm talking about the "finder's fee" which is the hefty part. Besides, Peltier, as Chairman of Home Services probably knows / will know more about the business than any analyst or deal guy will ever know. Being unencumbered with running the business is huge. Berkshire is doing this across-the-board.

 

 

[alpha]

 

 

Berkshire Hathaway HomeServices signed Maggi Group Real Estate, its third global franchisee, the company said Thursday in a statement. The business, which operates in northern Italy, expects to expand to Rome within two years.

 

https://www.bloomberg.com//news/articles/2019-01-17/warren-buffett-s-real-estate-network-expands-into-northern-italy?srnd=markets-vp

[alpha]

 

Berkshire Hathaway’s geothermal wells could produce up to 90,000 tonnes of lithium a year worth $1.5 billion at current prices, the report said, citing a fundraising document.

 

https://www.reuters.com/article/us-berkshire-lithium/berkshires-lithium-venture-may-supply-u-s-automakers-including-tesla-ft-idUSKCN1PE0SX

[gfp]

Here's a blog post with a look back on the BNSF acquisition almost 10 years ago.  He's taken out over $30 Billion in tax free cash distributions (not including BNSF tax payments to parent).

 

https://berkshirebuffettandbeyond.com/2019/01/15/10-years-since-bnsf/

[Cigarbutt]

Here's a blog post with a look back on the BNSF acquisition almost 10 years ago.  He's taken out over $30 Billion in tax free cash distributions (not including BNSF tax payments to parent).

https://berkshirebuffettandbeyond.com/2019/01/15/10-years-since-bnsf/

Just a comment about the issue that comes up at times about the growing irrelevance of book value as a valuation yardstick for the carrying value of consolidated subsidiaries and its effect on the P/B ratio for BRK.

 

According to the blog, purchase price in 2009 was 34-35B and market value now (relative to Union Pacific) is about 105B whereas carrying value now is reported at 43B, suggesting a large and growing gap.

 

While this gap is significant and growing, BRK has collected about 31B over the years (capitalized value of this cash flow stream at about 47B, using 10%) so 47B has found its way in retained earnings elsewhere on BRK balance sheet. 82B (35B + 47B) is still short of the 105B equity present valuation according to the blog and Mr. Buffett paid a control premium at acquisition but valuation now will tend to look favorable to 2010 which was pretty much a cyclical low for earnings and valuation. In 2010, CNR, a railway I know fairly well, had a PE of around 8-9 and, since then, earnings (fundamentals) have grown ++ but valuation now also reflects a higher PE (14-15) reflecting also stronger sentiment, typical of where we are in the cycle. I guess this multiple expansion also applies to BNSF.

 

The point being that there is a growing gap between book value and intrinsic value but taking into account retained earnings makes the size of this gap relatively small.

[shalab]

cigarbutt - I don't understand the last statement. Can you please explain in more detail?

 

Let us say carried value is 45B, current market value is 100B and retained earnings are 30B.

Book value would be 75B actual value would be 130B.

If one uses the morningstar P/B methodology, the fair value would be 105B.

The actual value would be 130B and the gap is around 24% - it doesnt seem miniscule to me.

 

However the above methodology is fraught with errors as the retained earnings may have been used to buy other businesses. Meanwhile the valuation of other businesses have also changed as many of them are growing at double digit clip.

 

My problem with the P/B valuators is that they will never apply this to comparable businesses. They won't apply it to UNP (P/B 5.66), Hershey (P/B 18.37), AMZN (P/B 21.20), PGR (P/B 3.31) or even MKL (P/B 1.52)

 

Here's a blog post with a look back on the BNSF acquisition almost 10 years ago.  He's taken out over $30 Billion in tax free cash distributions (not including BNSF tax payments to parent).

https://berkshirebuffettandbeyond.com/2019/01/15/10-years-since-bnsf/

...

The point being that there is a growing gap between book value and intrinsic value but taking into account retained earnings makes the size of this gap relatively small.

[Guest longinvestor]

+1. The gap between BV and IV is vast. The market is discounting a business when it is subsumed by Berkshire while it should be placing a premium versus the comparable competitors instead. Why? The capital discipline, mostly the wait for the fat pitch and deploying it elsewhere within Berkshire are not even part of the conversation at these competitors. They are likely pi$$ing away capital as we speak. I have been posting for a while that the 1.2x BV buyback has messed with people’s thinking and it will take Berkshire buying 1%, 2%...10%, 20% of the company back to bring the market to it’s senses. In due course.

[Dynamic]

+1. The gap between BV and IV is vast. The market is discounting a business when it is subsumed by Berkshire while it should be placing a premium versus the comparable competitors instead. Why? The capital discipline, mostly the wait for the fat pitch and deploying it elsewhere within Berkshire are not even part of the conversation at these competitors. They are likely pi$$ing away capital as we speak. I have been posting for a while that the 1.2x BV buyback has messed with people’s thinking and it will take Berkshire buying 1%, 2%...10%, 20% of the company back to bring the market to it’s senses. In due course.

 

As a net buyer of Berkshire over the years, generally ploughing new cash and excess gains I make from those rare high conviction ideas elsewhere in Berkshire's direction in the end, I'm happy for this to persist for a long period of time, at least until my retirement and probably much longer. Berkshire being persistently undervalued and misunderstood makes it easy for me to have great comfort in buying the stock at modest prices and holding on even as prices rise and narrow the margin of safety, both as a long-term compounding vehicle for my portfolio growth and as a substitute for index and cash investments while I'm waiting for my next big idea.

 

One of the things that suddenly hit me when I was fairly new to investing and to Berkshire Hathaway was the idea that even companies with little or no growth opportunities could become valuable parts of Berkshire's compounding machine, simply by returning excess capital to Omaha for it to be invested in the best opportunities available at good rates of return. All parts of the machine did not need to experience compound growth for the whole machine to generate compound growth over the years.

 

When no-growth boring companies are available at low P/E or low P/FCF ratios, the after tax cash they churn out year after year after maintaining their moats can be collected tax-free at Omaha and reinvested in ways that tend to aid in compounding the whole of Berkshire over time, even if that means great companies like See's Candies gradually fade into comparative  insignificance over a few decades within Berkshire. Even decades after purchase, See's is churning out far more cash than needs to be reinvested in the business to maintain its position. If it had pursued significant geographical expansion thanks to a growth imperative handed down by its owners, it would almost certainly have resulted in lower returns on invested capital from Berkshire's perspective.

 

The mirror to this approach is companies with sensible buy-back policies, potentially compounding per-share value for year after year with negligible growth in total revenues and earnings and with negligible expenditure required to generate growth or establish the firm in new markets. It's potentially these sort of places that value can be hidden in plan sight when everyone is hunting the next growth story.

[Cigarbutt]

cigarbutt - I don't understand the last statement. Can you please explain in more detail?

 

Let us say carried value is 45B, current market value is 100B and retained earnings are 30B.

Book value would be 75B actual value would be 130B.

If one uses the morningstar P/B methodology, the fair value would be 105B.

The actual value would be 130B and the gap is around 24% - it doesnt seem miniscule to me.

 

However the above methodology is fraught with errors as the retained earnings may have been used to buy other businesses. Meanwhile the valuation of other businesses have also changed as many of them are growing at double digit clip.

 

My problem with the P/B valuators is that they will never apply this to comparable businesses. They won't apply it to UNP (P/B 5.66), Hershey (P/B 18.37), AMZN (P/B 21.20), PGR (P/B 3.31) or even MKL (P/B 1.52)

shalab,

Thanks for your post that made me realize there was a conceptual flaw in my argument.

A comforting thought may be that I realize, at times, a certain level of unrecognized stupidity. :)

Just disregard what I wrote.

[Dynamic]

Hope it's not too far off-topic to post here, but I noticed when reviewing Wikipedia's list of requested photos of people, that at least two names relevant to Berkshire Hathaway were there (and I've only been skim reading until part way through the B's):

Rose Blumkin, late founder of Nebraska Furniture Mart and

Susan Alice "Susie" Buffett, philanthropist and daughter of Warren Buffett and the late Susan Thompson-Buffett. I think she's the one who remarked that as a child she told a teacher she thought her father worked in burglar alarms. He'd told her he was a Securities Analyst.  :D

 

If anyone has any that they took themselves and are willing to release on a suitable copyright-free licence to Wikimedia Commons, they might make a good addition to their Wikipedia biographies. It's easiest if the copyright-owner submits the photos but I think I know enough to help guide you through the process.

 

And now back to your regular scheduled programming...

[Libs]

Here's an alternative take, from one of our own (I hope Tim doesn't mind me posting this)

 

 

Tim Eriksen

January 15, 2019 at 10:15 pm

Can I play devil’s advocate and say I think the purchase was mediocre and the decision to use equity was terrible. The dividends far exceed actual cash generation from the business. A better term would be distribution from cash and leveraging. Total dividends are over $31 billion. Free cash flow (cash from operations less cash used in investing) is only $19.5 billion. BNSF has taken on $18 billion in debt to cover the dividends beyond the cash flow.

 

The decision to use equity means the acquisition price was actually much higher than $33 billion. Based on today’s $295,000 market price for A shares the true cost is over $50 billion. $50 billion spend to earn free cash flow of less than $20 billion in nearly nine years is not impressive.

 

Here is another way of looking at it BRK spent $26 billion for the 75% of BNSF it did not own, 20% of BRK’s $131 billion of book value at the end of 2009. Since then BNSF has earned $39 billion. 75% of that is $30 billion. Since the beginning of 2010 BRK has earned $200 billion. The $26 billion buyout of BNSF has only generated 15% of earnings. Thus, the purchase was value destructive.

 

Tim

[John Hjorth]

Thank you for posting it, Libs,

 

I saw that comment too on the blog, but wouldn't post it here on CoBF, untill I've fact-checked it myself [which is doable, because BNSF files with SEC because of its debt issuances].

 

If what Tim Eriksen commented on the blog is correct [ right now, I do not know with certainty - please take no offense, Tim, if you read this], BNSF looks more like some kind of "PE-like" investment, without the "flipping" at the end [, which we know will not happen in this case].

[thepupil]

Quick glance using bloomberg:

 

12/2010 to 9/2018:

 

Net Debt to EBITDA increased from 1.5x to 2.1x

EBITDA - Capex to Interest expense went from 7x to 7x

Long Term Debt to Assets went from 16% to 27%

Cash interest: $636mm to $848mm ($1.1 billion if you annualize Q3)

 

One could make the argument that the through the cycle leverage has increased, but I'd hardly call it a PE-like levering up of the business. Part of the analysis of the investment was a monopolistic's railroad's ability to carry debt and extract cash, right? I think you have to give them credit for the "dividend recaps" as they'd be called in PE land. Capacity increase = capex = more rate base = more EBITDA = more extremely low cost debt capacity = cash extraction, no?

 

 

 

[KCLarkin]

Here's an alternative take, from one of our own (I hope Tim doesn't mind me posting this)

 

 

Tim Eriksen

January 15, 2019 at 10:15 pm

Can I play devil’s advocate and say I think the purchase was mediocre and the decision to use equity was terrible. The dividends far exceed actual cash generation from the business. A better term would be distribution from cash and leveraging. Total dividends are over $31 billion. Free cash flow (cash from operations less cash used in investing) is only $19.5 billion. BNSF has taken on $18 billion in debt to cover the dividends beyond the cash flow.

 

This is a really interesting philosophical question. I encountered it when UNP was really cheap in 2016. The FCF profile of railroads is not attractive. Depreciation is less than maintenance CapEx. And "growth" is very capital intensive. So railroads should have a low P/E since accounting earnings are higher than owner's earnings.

 

On the other hand, they are able to fund their investments with debt. So the earnings are distributable and sustainable even if they aren't covered by FCF.

 

In the end, I decided against buying UNP because of this gap between accounting earnings and owner's earnings. But the idea of railroads as a PE-like investment has merits. Even if the economics of RRs aren't as great as you'd expect, the "safe" leverage can give very attractive returns.

[cubsfan]

There has been a debate on the Berkshire board (Motley Fool) re: the BNSF deal - there are some smart guys there. Here is the best post on the issue (IMO):

 

 

I love the BNSF deal. Best thing ever.

 

Quite aside from any increase in the value of the firm and retained earnings, it returned an after tax dividend

yield to BRK averaging maybe 10% in the first 10 years of ownership, depending on how you estimate the cost of the acquisition.

 

 

After the purchase, former BNSF shareholders represented owned 5.765% of Berkshire shares.

So, did we get good value for that dilution?

 

Even if you assume (somewhat heroically) that Berkshire was worth 1.75 times known book on closing day when BNSF

was purchased rather than the market price at 1.403 P/B on closing day, the total purchase cost was $35.95bn of intrinsic value.

That includes $2.92bn of "invisible" cost for our estimate of the gap between market price and intrinsic value on closing day.

$8bn of that total cost was and remains financed at low interest rates.

For practical purposes that debt can be considered to be secured by the BNSF shares acquired, even though it's a general obligation.

In any case, Berkshire's head office gearing has been lower than usual in recent years. It's not like they stretched.

My main point: overall I think that block of financing is best viewed as part and parcel of the acquisition.

So, for ~$28bn out of pocket value paid we got all the ongoing returns from BNSF less the ongoing interest cost on that debt.

 

It's hard to estimate the value of the railway these days in a way we'd all agree on, but we can look at the cash return in hand.

Dividends averaged $3.43bn/year in the first 7.88 years of ownership, net after tax in Berkshire's hands.

Interest has been maybe $160m a year on the $8bn financed, for a net after tax yield of 11.72% on the ~$28bn notional acquisition cost.

Yes, debt has risen at BNSF HQ, but the value of the firm has risen even more, so that's a net hidden gain on top of the cash yield, not a drag.

 

Arguably the railroad has outperformed the average other asset at Berkshire.

By extension, the modest amount of stock used to purchase a fraction of it was well spent.

If the railway had been bigger it would have been sensible to issue even more stock to buy more of it. But it was only so big.

 

[John Hjorth]

This is a really interesting philosophical question. ...

 

KCLarkin,

 

No, it's not. It's analyzing an investment decision based on the sight in the clear rear mirror, but from different angles, in retrospect. -If we can't do that, what does that tell us about ourselves?

[DooDiligence]

Wow!

 

"Geico was the top-spending brand, making up six percent of YouTube ad revenue in 2018. The insurance company increased YouTube spending by 40 percent year-over-year last year, MediaRadar found."

 

https://marketingland.com/report-youtube-ad-revenue-jumped-11-in-2018-thanks-to-repeat-advertisers-256343

 

Courtesy of,

 

[gfp]

This announcement from last year discusses Ajit's unsolicited offer to take over MAC's (South Australia's Motor Insurance company) run-off book.  The offer was only good on a private, exclusive, no-bid basis.  Doesn't say the premium or float asset/liability transfer, but it is over $300 million, since $300m of the insurance premium paid will remain in Australia, $100m will remain for at least 5 years.

 

https://premier.sa.gov.au/news/warren-buffett’s-berkshire-hathaway-expands-into-south-australia

 

https://www.insurancebusinessmag.com/au/news/breaking-news/berkshire-hathaway-to-manage-sas-back-book-of-ctp-claims-118716.aspx

[John Hjorth]

Isen't the sustainability link on the Berkshire main webpage to the Berkshire sustainability sub page new?