Buffett/Berkshire - general news

[Guest longinvestor]

Extra! Extra! Headline on Marketwatch; That's the smartest piece of stock insight I've read lately!

 

*Berkshire Hathaway Class A stock price target cut to $362,000 from $367,000 at UBS

BY MarketWatch

— 12:16 PM ET 10/17/2019

 

 

  (END) Dow Jones Newswires

  10-17-19 1216ET

  Copyright © 2019 Dow Jones & Company, Inc.

[Cigarbutt]

https://www.insurancejournal.com/news/national/2019/10/21/545886.htm

This is not going according to plan and there may be more than a fly in the ointment.

[gfp]

Acquisition at Marmon (another from the Pritzker family)

https://www.marketwatch.com/press-release/marmon-acquires-majority-interest-in-colson-medical-companies-2019-11-01?siteid=bigcharts&dist=bigcharts

[Viking]

Extra! Extra! Headline on Marketwatch; That's the smartest piece of stock insight I've read lately!

 

*Berkshire Hathaway Class A stock price target cut to $362,000 from $367,000 at UBS

BY MarketWatch

— 12:16 PM ET 10/17/2019

 

 

  (END) Dow Jones Newswires

  10-17-19 1216ET

  Copyright © 2019 Dow Jones & Company, Inc.

 

So Berkshire’s largest equity holdings (Apple and big US banks) are on fire. And we look to be entering a hard market in isurance (which will benefit diciplined operators like BRK in a big way). US economy continues to chug along... all this = price cut for BRK. :-)

[Gregmal]

I put on a quick trade here today. It seems this has lagged everything, including some of the stuff mentioned above regarding its larger holdings, not to mention the broader market. The stock traded at levels we know they were buying back stock at, into the Q3 close. While I am sure Warren doesnt fret what others think or are saying about him, I am sure he 's not totally deaf or blind, even at 90+. So in other words, I think theres more negativity baked into this than necessary, and that Mr. Market could be pleasantly surprised by whats reports, in which case, Im looking for a relatively risk free $5-10 a share in short order. As always, I could be wrong, but in that event, theres worse things to own.

[boilermaker75]

I put on a quick trade here today. It seems this has lagged everything, including some of the stuff mentioned above regarding its larger holdings, not to mention the broader market. The stock traded at levels we know they were buying back stock at, into the Q3 close. While I am sure Warren doesnt fret what others think or are saying about him, I am sure he 's not totally deaf or blind, even at 90+. So in other words, I think theres more negativity baked into this than necessary, and that Mr. Market could be pleasantly surprised by whats reports, in which case, Im looking for a relatively risk free $5-10 a share in short order. As always, I could be wrong, but in that event, theres worse things to own.

 

I have a similar take and put on a little more conservative trade. Yesterday morning I wrote 210-strike Nov 8 expiration puts.

[Cigarbutt]

The Applied sale gets more complicated.

Regulatory noise and overreach or do they feel like corners are being cut?

http://www.insurance.ca.gov/0400-news/0100-press-releases/2019/release086-19.cfm

Whatever the situation, the California Department of Insurance is very powerful and the strategy put forth by Applied seems to be counter-productive and is becoming more and more distanced from Berkshire's etiquette.

[xo 1]

The Applied sale gets more complicated.

Regulatory noise and overreach or do they feel like corners are being cut?

http://www.insurance.ca.gov/0400-news/0100-press-releases/2019/release086-19.cfm

Whatever the situation, the California Department of Insurance is very powerful and the strategy put forth by Applied seems to be counter-productive and is becoming more and more distanced from Berkshire's etiquette.

Agreed.  It's speculation, but each twist provides more rationale for why Berkshire abandoned its never-sell approach for Applied.

[Spekulatius]

The Applied sale gets more complicated.

Regulatory noise and overreach or do they feel like corners are being cut?

http://www.insurance.ca.gov/0400-news/0100-press-releases/2019/release086-19.cfm

Whatever the situation, the California Department of Insurance is very powerful and the strategy put forth by Applied seems to be counter-productive and is becoming more and more distanced from Berkshire's etiquette.

 

These guys are slimy. Every fight with the regulator tends to be a lost one. Good riddance.

[CassiusKing1]

Restoration Hardware and Occidental Petroleum bought during 3Q.

 

https://www.cnbc.com/2019/11/14/warren-buffetts-berkshire-hathaway-reveals-new-stake-in-furniture-retailer-rh-shares-surge.html

[jschembs]

Restoration Hardware and Occidental Petroleum bought during 3Q.

 

https://www.cnbc.com/2019/11/14/warren-buffetts-berkshire-hathaway-reveals-new-stake-in-furniture-retailer-rh-shares-surge.html

 

Can't say I understand the RH purchase. CEO touting a new business model with magical 50+% ROIC for a furniture retailer, while borrowing heavily to repurchase shares and battling short sellers.

[Dynamic]

I know nothing of RH, but would be interested to hear any opinions about why they might have purchased.

 

Apple was trimmed very slightly, quite possibly by Ted or maybe Todd to buy something else. I'd imagine Warren's share is unchanged

 

As per the other thread, CNBC is slightly off on the Wells Fargo holding and the percentage sale because they omit the Gen Re holding via New England Asset Management's 13F-HR which is about 23 million shares.

WFC: Wells Fargo & Co New: -7.27% change 400,949,218 shares held, keeping it safely below 10% which they presumably dare not cross.

[sleepydragon]

I know nothing of RH, but would be interested to hear any opinions about why they might have purchased.

 

Apple was trimmed very slightly, quite possibly by Ted or maybe Todd to buy something else. I'd imagine Warren's share is unchanged

 

As per the other thread, CNBC is slightly off on the Wells Fargo holding and the percentage sale because they omit the Gen Re holding via New England Asset Management's 13F-HR which is about 23 million shares.

WFC: Wells Fargo & Co New: -7.27% change 400,949,218 shares held, keeping it safely below 10% which they presumably dare not cross.

 

My wife has spent about 20k on just 3 pieces of RH furnitures since we bought our house.

It’s about the time I become a partial owner of this company. Lol.

 

Their accounting is a mess. Once my wife bought a sofa and exchanged portion of the sofa like 5 times (there was a small mis-match of colors) Each time they bill and credit a different amount. In the end, we found we spent 3000 less.

 

But they do have very beautiful furnitures. Like Apple and Dyson. Attacking a low profit industry with premium products.

 

 

 

 

[John Hjorth]

RH Homepage.

 

From ""About Us" :

 

RH is a curator of design, taste and style in the luxury lifestyle market, offering furniture, lighting, textiles, rugs, bathware, décor and outdoor, as well as baby & child and teen products.

 

Our collections of timeless, updated classics and authentic reproductions provide a unique point of view and an unmatched combination of inspired design and unparalleled quality. Each season brings a wealth of new ideas culled from our partnerships with the world's most renowned artisans, allowing us to showcase their unique products, passion and vision.

 

RH has galleries and outlets throughout the US and Canada, while our source books and websites serve as virtual extensions and compelling tours of the brand. We publish RH Interiors, RH Modern, RH Outdoor, RH Lighting, RH Rugs, RH Baby & Child and RH TEEN source books.

 

From "Corporate Profile" :

 

We believe RH is one of the most innovative and fastest growing luxury brands in the home furnishings marketplace. We believe our brand stands alone and is redefining this highly fragmented and growing market, contributing to our superior sales growth and market share gains over the past several years as compared to industry growth rates. Our ability to innovate, curate and integrate products, categories, services and businesses with a completely authentic and distinctive point of view, then rapidly scale them across our fully integrated multi-channel infrastructure is a powerful platform for continued long-term growth. We evolved our brand to become RH, positioning our Company to curate a lifestyle beyond the four walls of the home. Our unique product development, go-to-market and supply chain capabilities, together with our significant scale, enable us to offer a compelling combination of design, quality and value that we believe is unparalleled in the marketplace.

- - - o 0 o - - -

 

Price differentiation based on membership, and even a special RH credit card. As sleepydragon already said, an "Eco-system", based on taste and choice of lifestyle.

[Dynamic]

OK, thanks, that's interesting and potentially a reasonable moat of loyalty and lock in and a certain cachet among the less price sensitive clientele. Also potential for riding a growth wave to higher valuations, at first sight.

 

Some of the middle market furniture companies like DFS Furniture in the UK (which has been public then private more than once) also have some attractive working capital characteristics like low inventory, making products to be delivered only after receiving payment or setting up finance, so there could even be interesting angles on that side, enabling them to finance rapid expansion and extensive advertising. I owned some DFS shares for about a year or two since Oct 2001 at about 9% FCF yield and the proceeds went towards my original Berkshire Hathaway stake in July 2003. I got the impression it was a little risky in the event of a recession, especially being somewhat debt levered, so I'd rather hold Berkshire long term but I think private equity took it private since then and I haven't looked at it since except when trying to look up historical prices to reconstruct my past investment ledger. But there's certainly scope for quality compounding in home furnishings in many sections of the market.

[Cigarbutt]

... Also potential for riding a growth wave to higher valuations, at first sight...

...

Read this AM in an unrelated (?) article: "To us, this entire expansion highlights the fact stocks in general don’t need rapid productivity or GDP growth to rise."

To me, this eco-system doesn't make any sense and maybe I have some wework to do. :)

[Spekulatius]

Restoration Hardware and Occidental Petroleum bought during 3Q.

 

https://www.cnbc.com/2019/11/14/warren-buffetts-berkshire-hathaway-reveals-new-stake-in-furniture-retailer-rh-shares-surge.html

 

Can't say I understand the RH purchase. CEO touting a new business model with magical 50+% ROIC for a furniture retailer, while borrowing heavily to repurchase shares and battling short sellers.

 

I guess that RH is a Weschler or Combs purchase, based on the size. One thing to consider is that the Berkshire folks should know a thing or two about furniture retail, since BRK owns a few furniture retailer (Nebraska furniture Mart, Jordan etc). So I am guessing Weschler/Combs and Buffet know the lay of the land in furniture retailing fairly well.

[Cigarbutt]

Restoration Hardware and Occidental Petroleum bought during 3Q.

https://www.cnbc.com/2019/11/14/warren-buffetts-berkshire-hathaway-reveals-new-stake-in-furniture-retailer-rh-shares-surge.html

Can't say I understand the RH purchase. CEO touting a new business model with magical 50+% ROIC for a furniture retailer, while borrowing heavily to repurchase shares and battling short sellers.

I guess that RH is. Weschler or Combs purchase, based on the size. One thing to consider is that the Berkshire folks should know a thing or two about furniture retail, since BRK owns a few furniture retailer (Nebraska furniture Mart, Jordan etc). So I am guessing Weschler/Combs and Buffet know the lay of the land in furniture retailing fairly well.

Someboby I’ve learned to respect said the following, last May:

 

“I really don’t care whether Buffet buys are sells WFC stock. He has bought and sold many stocks, some of which performed well or poorly after he bought and sold.

Buffets buying a stock just means that there is something special about the company , that it’s cheap and that it’s not a fraud. Other than that it’s my opinion that piggy-packing on other investors never works, not even with Buffet.”

and

“Buffet buying is a much stronger factor than Buffet selling. For once, it indicates his assessment they it’s is a quality company within its industry. He is usually correct about this, especially about industries he knows a lot about and banking is one of them.

Anyways, I typically use buys from other investors as a starting point for research, not as a decision factor.”

 

Given the Restoration Hardware investment now called “RH”, let’s focus on the starting point for a minute.

 

-Investing in an investment that makes investments requires joint approval but also sometimes a level of confidence or even trust. I would say this luxury investment marks a certain departure from classic Buffett. This may eventually have an impact on BRK’s prospects and now is not a bad time to think about it, even if the position is considered ‘small’.

 

-Looking specifically at RH, furniture retailing investments can be profitable although it would seem that one has to start with a high burden of proof against it. Some retailers have done very well by capturing specific customer segments or sensing enduring trends (Costco, TJX, ULTA etc) and it is possible to make money in smaller players with regional advantages or special situations but retail is tough business and the moat can be elusive. Wal Mart has its own 'story' but I can't see how a parallel could be made with RH. The thesis (which obviously may be right) here implies that you believe (or understand?) that the “transformation” of the business by a “visionary” leader will translate in significant profitable growth going forward. The capital structure of RH also lives on this premise. At a basic micro level, the stores are unique and seem to offer a “special” environment (conducive to spending and high spenders) but one can find similar or equivalent products elsewhere for much lower prices. The discounting strategy (which is evolving) is a bet in a way that the high end consumer will continue to see RH items as Veblen goods (items for which demand will increase if the price increases, irrespective of the underlying value), which is a risky bet IMO, especially through a long-term lens. Moving higher in the industry analysis, one has to question the enduring essence of the size of their customer segment. Things have been roaring lately. Luxury items can be real winners but trying to grow in a period of temporary adjustments can have significant effects on liquidity for a retailer and I find RH not particularly well prepared for such a scenario. How they fared during the mortgage crisis is instructive in that regard. The next step would be to assess the funding story behind the customer purchases. I start with the assumption that it’s not all paid cash and some of the customers may be relatively extended as they may well belong to another class. Home Hardware also offers interesting stuff. I don't understand the RH purchase but so far I don't like it as a capital allocation decision.

Edit:

BTW, I'm told that RH furniture was popular at WeWork and we think that there may be excess inventory there. Perhaps unrelated but perhaps a sign of the times.

"It's a sign of the times

Welcome to the final show

Hope you're wearing your best clothes

You can't bribe the door on your way to the sky

You look pretty good down here

But you ain't really good"

[sleepydragon]

One big differentiator of RH is customers will pre-order and wait for 3 months for the good to arrive (from China). The only inventory they have are those in the stores.

 

[Cigarbutt]

One big differentiator of RH is customers will pre-order and wait for 3 months for the good to arrive (from China). The only inventory they have are those in the stores.

Excellent point.

 

Maybe this deserves a separate thread but here’s an additional and perhaps final comment.

 

On the above supply chain management and working capital comment, RH has done well since fiscal 2016 with a plan to improve sourcing and inventory management that worked. See numbers below. Characteristically, they’ve called this: the new architected, redesigned and reconceptualized operating platform but it basically means getting it right in terms of alignment between their inventory, what the customers want and the efficiency to deliver the product so that the client does not regret that a deposit has been made.

 

                                fiscal 2014            2015            2016            2017            2018            Q1Q2 2019

GPM (% of R)              37.0                  35.7            31.8            34.8            39.9                  40.4

OP (%)                        8.9                    8.8              2.5              5.4              11.5                13.2

NPM (%)                      4.9                    4.3              0.3              0,1              6.0                  7.6

interest expense (%)      0.9                    1.7              2.1              2.6              3.0                  3.4

 

From 2014 to 2018, revenues have grown at a 7.6% rate. Q1Q2 numbers show a similar continuing trend. Shares outstanding have decreased very significantly but once dilution is taken into account, the cannibal is not as vociferous as it first appears.

 

For comparison between periods, using the gross measure of inventory over sales for WC management (careful: direct sales were important in the former period).

                           

                        fiscal 2006            2007              2016            2017            2018            Q1Q2 2019

inv/sales              27%                  28%                35%            22%            21%                18%

 

The positives: new market position with a brand formula meeting a relatively unmet need, as mentioned above an improved operating platform since 2016 which was matched by a period of market incredulity that allowed a massive share buyback, a loyalty program that reinforces the brand and a marketing strategy that involves (directly and indirectly) designers (quite brilliant in fact). However, the cash obtained from improved working capital needs and inventory was combined with a massive amount of debt to complete the share buybacks. So, after some review, there are clearly some positives in this ‘story’ but the thesis remains basically a (risky) bet on the jockey. Let’s take a look.

 

The early 2000’s is an interesting period and the CEO was the same person. This was a time of transformation and Restoration Hardware (was selling hardware then) reported 5 years of losses. The turnaround was partially a success with growing sales and, eventually, hope for potential enduring profitability but 2007 caused a significant decrease in customer traffic and in-store sales (then negative cashflows etc etc). The CEO scored positively with improved merchandise selection, effective store remodeling, appropriate store closures and debt decrease. The strategy included an increase in imports, a strategy (which has continued to this day, in fact even higher now, with more than 70% coming from Asia and about 41% sourced in China) which IMO is, in a way, hard to reconcile with the ‘classic’, ‘traditional’ and ‘authentic’ America brand but high spenders may not be really bothered by the apparent discrepancy perhaps the same way that wearers of certain caps may not appreciate that the manufacture of the symbol is, in fact, out-sourced. The strategy also focused on catalog and on-line sales dubbed direct-to-consumer sales which grew ++ up until the company disappeared from the public screen and, obviously, this part of the strategy has radically changed (I think for the better in this specific niche) with the on-line connection being defined not as a direct sales channel but as a “virtual extension of the stores”. Of note, however, is that the gross margin in the early 2000’s improved only temporarily from lowish 30% levels under the helm of the CEO, at least in part due to an inability to improve the supply chain management, an area where the CEO succeeded with changes implemented after things started to turn south in 2015-6.

 

Mr. Friedman is potentially an outstanding owner-operator and one has to include character assessment. Mr. Buffett has been unusually clever in this regard and this may represent an opportunity to judge the flair of the next generation. After much reading and thought, I find that Mr. Friedman stands somewhere between Mr. Steve Jobs, Mr. Bernard Arnault and Mr. Adam Neumann. He has the salesman DNA and it all comes down to instinct (more on that later). I think the fundamental weakness lies in the fact that the experiential gallery stores (style, hospitality part etc) may be a well executed idea that may work for a while and hold some iconic value but the essence of luxury is only partially related to the place where you buy the product. IMHO, it’s THE product that really counts. In their specific market, RH will continue to be exposed to the risk related to the anticipation of customer preferences and I think that they may have a hard time with the high fixed cost business during volatility periods that will come from anticipation variance and from the fact that the top 5% may not be bailed out by the top 1% in times of discretionary lifestyle stress.

Here’s a link that helps to size the jockey:

https://images.restorationhardware.com/media/press/2019/Winter2019-BusinessofHome_PressPage.pdf

 

When reading the article, the underlying act of selling furniture is barely mentioned, the same way prices are not listed in certain restaurants. Speaking of restaurants, the last time I was in Chicago, we went to Bavette’s for a steak and did not particularly like it or at least thought that it wasn’t worth the price, not even the peer value potentially recognized by people reading my nonsense. That night, I enjoyed myself more at The House of Blues which, perhaps, tells more about the person writing than the investment itself.

 

So, all in all, there are positives and potential for some value that I’m missing but there are negatives. I would also say that the entry point is associated with a high price tag to find out but this is the territory. In the end, I conclude that this is likely to be a poor investment (and perhaps a very poor one given the capital posture and certain risks mentioned above) and what helped with the final assessment, the “this is it” moment, was the following excerpt, when choosing the real estate spot for the Chicago Gallery/Showroom, from the jockey himself:

“As a man in a long cashmere coat and an Hermès scarf walked by with a well-coiffed poodle, Friedman turned to RH’s president and chief creative officer Eri Chaya and said, “This is it.” As reported by the reporter who worked as a barista throughout high school and college.

 

Apologies for the long post but it was an exercise that was useful for me as I presently consider an investment in a furniture retailer that, somehow, shares many similarities with RH even if it sells to the mid and lower segments of the market, for instance, in the need to reinvent the brick and mortar model in order to better serve certain segments (through an on-line bridge and through a better on-site shopping experience). The target I'm looking at now though is more conservatively financed, has taken a more conservative take on the 'transformation', would actually benefit from a downturn as it has historically shown better inventory turnover management which will help to opportunistically gain market share and would relatively benefit from a general downturn as decreasing traffic from existing customers would be compensated by higher traffic from downgraded people lying higher in the class structure.

The end.

[John Hjorth]

This is an awesome post, Cigarbutt,

 

I hope you'll take the initiative to make it a starting post for a separate topic in the Investment Ideas forum, so that it does not "drown" here in Berkshire forum. It may be of great value at a later point in time for CoBF members interested in RH.

[gfp]

Bolt on acquisition at Johns Manville - deal to purchase the Insulation systems business of Illinois Tool Works (ITW)  Not huge, only 100 employees -

https://business.financialpost.com/pmn/press-releases-pmn/business-wire-news-releases-pmn/johns-manville-announces-acquisition-of-itw-insulation-systems

[gfp]

A look behind the scenes-

 

https://www.cnbc.com/2019/11/29/warren-buffetts-latest-attempt-to-put-his-cash-to-work-is-thwarted.html

[Dynamic]

It makes me wonder if Buffett chose to tell Becky Quick and reveal the timeline of events in order to remind investment bankers that Berkshire is in the market for cash acquisition opportunities but not for auctions and can give a very quick decision and make a deal very fast with little due diligence if a company has a brief shop around window.

 

It makes me wonder, as always, how many substantial potential deals come across the desk of Buffett and his deputies.

 

We know of one failed acquisition in Q4 2018 and this one in Q4 2019 plus the successful OXY funding deal secured in Q2 and closed in Q3 this year. I doubt it's anywhere near as low as three, and if one includes speculative approaches that don't remotely meet the acquisition criteria there could be 50+.

[Gamecock-YT]

Trying to reverse engineer what made them attractive to BRK. ~15% ROIC on average sticks out with lots of FCF.