Barrons on Berkshire

[ValueMaven]

Hi Friends,

 

Barron's will be running a cover story on Berkshire this weekend...

 

Sincerely,

ValueMaven

[karthikpm]

can't seem to get past the paywall .. old tricks are not working . Anyone have a pdf of the article?

[longlake95]

Me too! Friggen pay wall. Lol.

[rb]

Me too! Friggen pay wall. Lol.

LOL Capitalist bastards  ;)

[netnet]

Here it is, enjoy:

 

 

 

Berkshire Hathaway’s annual meeting and love fest in Omaha, Neb., earlier this month drew fawning attention to the wisdom of Chairman and CEO Warren Buffett and his sidekick, Vice Chairman Charlie Munger. But the big question for investors is where this formidable conglomerate, with almost $20 billion of annual earnings, goes from here.

 

Berkshire’s Class A shares (ticker: BRK.A), now trading around $245,000, look reasonably priced and could have 15% to 20% upside through the end of 2018, based on likely growth in the company’s book value.

 

That’s a decent return potential, considering the Standard & Poor’s 500 index is at a near-record 2381 and trades for 18 times projected 2017 operating profits, its highest valuation since the tech bubble of 1999 and early 2000. Berkshire’s advantages, notably its diversified earnings stream, long-term focus, and a balance sheet laden with $96 billion in cash and marketable securities, make it a good bet to beat the S&P 500 over the coming years, with or without Buffett, who turns 87 in August. Berkshire, now valued at $400 billion, is the market’s sixth-largest stock.

 

 

 

“Berkshire should benefit meaningfully from a recovering U.S. economy,” says Barclays analyst Jay Gelb. “It generates substantial free cash flow that can be deployed in its operating businesses, acquisitions, or investments, and it offers an attractive valuation at 1.4 times book value” of about $178,000 a share.

 

Gelb sees book value rising at a 9% or 10% annual rate in the next two years. The stock historically has appreciated in line with book value. Gelb carries an Overweight rating and a price target of $286,500. Berkshire’s B shares (BRK.B), now $163, carry a corresponding price target of $191.

 

Buffett’s genius for capital allocation has driven the 884,000% rise in the stock—19% a year—during his 52-year tenure at Berkshire’s helm. His successor, however, should get some relief from that reinvestment challenge because the company is likely to pay a dividend in the post-Buffett era and be more aggressive in repurchasing stock. The company doesn’t pay a dividend and has bought little stock in recent years.

 

Buffett hasn’t revealed a successor, but our best guess is Greg Abel, the 54-year-old head of Berkshire Hathaway Energy, the company’s big energy-transportation and utility business. Abel has overseen Berkshire Energy’s growth for most of the past 19 years and is an experienced manager and deal maker—two important qualities for the next Berkshire CEO. Buffett singled him out at the company’s recent annual meeting for his “extraordinary” accomplishments.

 

BERKSHIRE STOCK is flat this year after gaining 23% in 2016. Berkshire surged in the postelection Donald Trump rally—ironic, given Buffett’s support of Hillary Clinton—because of its economic exposure and its status as a major beneficiary of a lower corporate-tax rate. Berkshire is down 8% from its early March peak, reflecting the waning prospects for President Trump’s legislative agenda.

 

Book value is the easiest way to value Berkshire. Indeed, Buffett for years used it as a favorite yardstick. Berkshire’s price/earnings ratio, now 21 based on estimated 2017 net income, makes the company appear richer than it is. Berkshire’s earnings capture only the dividends, as opposed to the underlying earnings, of the companies in Berkshire’s $134 billion equity portfolio. Adjust for this factor, and Berkshire’s P/E is closer to 15.

 

Book value admittedly had more relevance two or three decades ago, when the bulk of Berkshire’s value was lodged in its equity portfolio. The current holdings are dominated by six stocks: American Express (AXP), Apple (AAPL), Coca-Cola (KO), IBM (IBM), Kraft Heinz (KHC), and Wells Fargo (WFC).

 

 

 

The company’s wholly owned businesses now loom larger, and many—including the Burlington Northern railroad, Berkshire Energy, auto insurer Geico, and Lubrizol (chemicals)—are more valuable than their carrying value on Berkshire’s balance sheet. Its dozens of other operating businesses include Shaw Industries (carpeting), Benjamin Moore (paints), Dairy Queen (ice cream), and NetJets (fractional jet ownership).

 

The company’s property and casualty insurance operations include Geico, reinsurer Gen Re, and a specialized reinsurance business focused on big-ticket policies that cover events like hurricanes and earthquakes. The catastrophe-insurance business is headed by Ajit Jain, one of the best underwriters in the world. In all, Berkshire had $223 billion in revenue last year.

 

Buffett’s preferred valuation measure is what he calls “intrinsic value,” which is based on the projected discounted cash flows that will be generated by the company. He has said intrinsic value “far exceeds” book value, but won’t reveal his estimate of the figure. Longtime Berkshire holder David Rolfe of Wedgewood Partners estimates it at about $300,000 per share.

 

At the meeting in Omaha, Buffett estimated that intrinsic value has risen at a 10% annual clip for the past 10 years. And he’s hopeful for a similar result in the coming decade. If Berkshire can achieve something close to that growth, the stock could double in the next 10 years.

 

Barron’s has written favorably on Berkshire several times in recent years, including a cover story (“Berkshire Hathaway’s Bright Future,” July 25, 2015), when the stock traded at around $214,000 a share. Since then, the stock is up 15%, trailing the S&P 500’s total return of 19%.

 

An engaged Buffett shows no desire to retire and seems intent on finding what he has called an “elephant”-size acquisition to put a dent in Berkshire’s cash hoard and boost the company’s earnings power. Munger, his longtime Berkshire partner, said at the annual meeting—perhaps jokingly—that Buffett has seven good years left. Buffett has said his longevity model is the biblical Methuselah.

 

BUFFETT’S ALWAYS ASTUTE OBSERVATIONS on business and investments were on display at the annual meeting, where he and Munger, 93, answered shareholder questions for five hours.

 

Among the high points was Buffett’s comment that he may re-evaluate Berkshire’s refusal to pay a dividend or lift the current cap on stock buybacks from the current 1.2 times book, if Berkshire’s cash continues to grow. Buffett said it would be hard to come back to the shareholder meeting in three years with Berkshire sitting on potentially $150 billion in cash and say that the company should not return some of it to shareholders.

 

Rolfe considers this a “first-class problem” and thinks the company should lift its buyback threshold now, which would still allow it to repurchase stock at a discount to his estimate of intrinsic value.

 

The current buyback threshold of 1.2 times book, now about $214,000 per Class A share, has effectively put a floor under the stock, since investors figure that Berkshire stands ready to aggressively buy stock at that level. Looking out toward the end of 2018, book could hit $200,000 a share, putting a potential floor on the shares around current levels if book-value growth pans out. Barclays’ Gelb projects year-end 2018 book at about $204,000 a share.

 

Munger said Berkshire could do a $150 billion deal. Buffett responded that he’s a “little more conservative,” but allowed that Berkshire is capable of a “very, very big deal.” Finding a big deal won’t be easy, given Buffett’s valuation discipline, an elevated stock market, and the company’s refusal to participate in auctions. Munger said Berkshire probably needs to look on “higher branches” because there isn’t much low-hanging fruit.

 

Risks with Berkshire include a sharp stock market selloff that would depress its equity portfolio and book value, although Berkshire probably would hold up better than the market in a downturn, due to its financial strength and ability to invest when others are fearful, as was the case in 2008.

 

Buffett also addressed a longstanding investor fear: that the stock will plunge immediately after his death. “I think the stock is more likely to go up if I die tonight,” he said, explaining that Wall Street might start speculating about a breakup of the vast, decentralized company based on the view that the sum of the parts would be worth more than the whole. Buffett has resisted unloading businesses.

 

The unwritten compact that Buffett has made with business sellers is that Berkshire would treat their operations like the Mona Lisa, in contrast to what he and Munger see as the more rapacious, buy-and-flip approach of private equity. The likelihood is that a post-Buffett Berkshire won’t break up, given a Buffett-friendly board that includes Microsoft co-founder Bill Gates.

 

BUFFETT ALSO COULD CROW about Berkshire’s big, new successful investment in Apple, now worth $20 billion. That’s a nice change, given that Berkshire’s longstanding major equity investments, including American Express, Coca-Cola, IBM, and Wells Fargo, all trail the S&P 500 in the past five years. Berkshire has cut its IBM stake by a third. The company’s $28 billion investment in Kraft Heinz has been a big winner and now is worth almost three times Berkshire’s cost.

 

“Berkshire exemplifies, better than any company I know, a willingness to make investments that involve short-term pain in return for long-term gain,” says Thomas Russo, a partner at Gardner Russo Gardner. Russo, a longtime Berkshire holder, says that approach is illustrated by Berkshire’s recent move, in Buffett’s words, to “put our foot to the floor” and rapidly expand Geico’s customer base this year.

 

Geico expanded its policyholders by 700,000 in the first four months of this year—compared with roughly 300,000 in all of last year—to a total of more than 15 million because of favorable conditions in the auto insurance market. Premiums are rising to reflect higher claims, in part the result of texting drivers. Berkshire is willing to accept losses in the first year of the policies, reflecting acquisition costs, including advertising, to get customers who should be profitable over the long term. Russo estimates the loss on a new policy at $250 annually, but the subsequent payback could be $2,000 per policy.

 

“Nothing in life distracts him from building Berkshire’s intrinsic value on a per share basis,” Russo says. The per-share emphasis is critical to Berkshire’s success.

 

Barron’s tips Greg Abel to step into Warren Buffett’s legendary shoes as CEO. Daniel Acker/Bloomberg

 

BUFFETT IS LOATH to issue stock for acquisitions, preferring cash. In his latest annual letter, Buffett highlighted an impressive statistic: Since the company began redirecting its cash flow to buying businesses in 1999, its net income from operations has risen to almost $18 billion from under $1 billion, with just an 8.3% rise in the share count.

 

Berkshire remains underrepresented in institutional portfolios. Many big investors want direct access to management, and Buffett rarely obliges. The company holds no earnings conference calls or investor days, aside from the annual meeting, and has little analyst coverage, a reflection in part of the company’s complexity.

 

Buffett has said Berkshire’s ample and diversified earnings and financial strength ought to make it an ideal choice for pension funds and endowments, but there’s scant interest. And Berkshire is a bargain compared with hedge funds, with Buffett still earning a salary of just $100,000 annually. His net worth is over $70 billion in Berkshire stock, despite his having given away 40% of his shares, mostly to the Bill and Melinda Gates Foundation, since 2006.

 

There’s understandable concern about the post-Buffett Berkshire, given his incomparable record. The likely leadership structure will involve an as-yet-unnamed CEO, with Buffett’s son Howard as nonexecutive chairman. Two current investment managers, Ted Weschler and Todd Combs, who oversee more than $20 billion of equities, will probably take control of the entire investment portfolio while playing an advisory role with the new CEO.

 

 

Buffett, who has been highly critical of professional money managers, particularly those who run hedge funds, for their fees, favorably noted at the meeting that Combs and Weschler earn a relatively modest $1 million annually, getting a bonus only if they beat the S&P 500.

 

WE HANDICAP GREG ABEL, the head of Berkshire Energy, as noted above, as the favorite to take over for Buffett. Berkshire Energy had net income of $2.5 billion last year, making it one of the largest utilities in the country. The other oft-mentioned candidate is Ajit Jain, who is 65 and lacks experience running a large organization. Buffett indicated at the meeting that his successor could be named while he’s still alive. The longer he stays CEO, the higher those chances.

 

While prospects for corporate tax reduction have dimmed with Trump’s fortunes, Berkshire would be a big winner if it happens. At a 20% corporate tax rate, Berkshire’s book value could see a 9% boost from a reduction in its deferred tax liabilities, and its earnings could rise about 15%, estimates Barclays’ Gelb. Those tax liabilities stem largely from unrealized gains in the company’s equity portfolio. A lower tax rate would reduce the liability, boosting shareholder equity.

 

With a combination of offensive and defensive qualities, Berkshire is a good bet to top the S&P 500 in the coming years—although the gap is apt to be closer to one or two percentage points, which has been the experience over the past 10 and 20 years, than the staggering 11-point advantage over Buffett’s 52-year tenure. Berkshire doesn’t need Buffett to remain a good investment.

[karthikpm]

netnet,  Thank you :)

[longlake95]

Thanks Netnet

[LongTermView]

Good article. I agree that Greg Abel is a logical bet as the successor.

[Guest longinvestor]

Thanks for posting. Jay Gelb got a close up  opportunity having been on the analyst panel at the meeting. He asked some good questions. Surely he's going over the notes. Like some of us are. This year gave us plenty to chew on.

 

Regarding the successor question, I'd handicap Jain over Abel. The significance of the float to Berkshire cannot be understated. I'm reading the book 50 years of Berkshire and  the role played by Nico in saving the blushes of all 3  BH, Blue Chip stamps and Diversified Retailing is a historic lesson not to be forgotten. Berkshire's future is inextricably tied to the growth of profitable float. In fact, float looks on pace to double from the80 billion just a few years ago. When Buffett said that it would stay flat or decline slightly. Jain and the insurance folks are doing magic. It's not a stretch to imagine Jain working with Weschler and Combs to do some of the things that Buffett does. Can one person do all that Buffett does? Not much chance. To make things easier,  it would be greatly helpful to the next guy if the stock trades well below IV. Buying back Berkshire would be much easier than anything else they may have to do.

[Jurgis]

Me too! Friggen pay wall. Lol.

LOL Capitalist bastards  ;)

 

The capitalist bastards don't give me online access even though I have the sub via miles. They should but they don't. (Might be possible if I jump through the hoops of phone capitalism...)  :'(

 

8)

[Mephistopheles]

Thanks for posting. Jay Gelb got a close up  opportunity having been on the analyst panel at the meeting. He asked some good questions. Surely he's going over the notes. Like some of us are. This year gave us plenty to chew on.

 

Regarding the successor question, I'd handicap Jain over Abel. The significance of the float to Berkshire cannot be understated. I'm reading the book 50 years of Berkshire and  the role played by Nico in saving the blushes of all 3  BH, Blue Chip stamps and Diversified Retailing is a historic lesson not to be forgotten. Berkshire's future is inextricably tied to the growth of profitable float. In fact, float looks on pace to double from the80 billion just a few years ago. When Buffett said that it would stay flat or decline slightly. Jain and the insurance folks are doing magic. It's not a stretch to imagine Jain working with Weschler and Combs to do some of the things that Buffett does. Can one person do all that Buffett does? Not much chance. To make things easier,  it would be greatly helpful to the next guy if the stock trades well below IV. Buying back Berkshire would be much easier than anything else they may have to do.

 

I don't think the successor will be Jain. His job is very specialized and specific and would be good for him to focus 100% of his time on it. He's not an expert in a wide variety of industries. He generates float, but doesn't allocate it. He's also 65 and Buffett has said he wants the successor to have the job for a long time.

 

My bet is that Weschler or Combs, or some combination of the two will get the job. They are the capital allocators, and will be responsible for investing all the float that Ajit generates. As opposed to Jain or Abel, they are familiar with multiple industries, naturally, as they are investors and not operators in a single industry. You can see Buffett giving them larger roles by making them each chairmen of a couple of Berkshire businesses. You can see their influence in acquisitions - for example PCP last year or ResCap beforehand. They're also based out of Omaha - Buffett has said the new CEO will have to relocate. Finally they're both young with a long road ahead of them.

 

What I imagine happening is that both Jain and Abel will take a greater role in their respective areas. Maybe if Tony Nicely retires first, his successor will report to Jain, making Jain head of all insurance at Berkshire...rather than reporting to the new CEO/capital allocater. Maybe CEO of BNSF reports to Abel?

 

But overall I think it's important to have the capital allocator and the investment officers be the same person or team as the job is two sides of the same coin. You can't have them fighting for capital. I bet Combs-Weschler duo will be the new Buffett-Munger, just not sure which one will be the Buffett.

[Guest longinvestor]

Thanks for posting. Jay Gelb got a close up  opportunity having been on the analyst panel at the meeting. He asked some good questions. Surely he's going over the notes. Like some of us are. This year gave us plenty to chew on.

 

Regarding the successor question, I'd handicap Jain over Abel. The significance of the float to Berkshire cannot be understated. I'm reading the book 50 years of Berkshire and  the role played by Nico in saving the blushes of all 3  BH, Blue Chip stamps and Diversified Retailing is a historic lesson not to be forgotten. Berkshire's future is inextricably tied to the growth of profitable float. In fact, float looks on pace to double from the80 billion just a few years ago. When Buffett said that it would stay flat or decline slightly. Jain and the insurance folks are doing magic. It's not a stretch to imagine Jain working with Weschler and Combs to do some of the things that Buffett does. Can one person do all that Buffett does? Not much chance. To make things easier,  it would be greatly helpful to the next guy if the stock trades well below IV. Buying back Berkshire would be much easier than anything else they may have to do.

 

I don't think the successor will be Jain. His job is very specialized and specific and would be good for him to focus 100% of his time on it. He's not an expert in a wide variety of industries. He generates float, but doesn't allocate it. He's also 65 and Buffett has said he wants the successor to have the job for a long time.

 

My bet is that Weschler or Combs, or some combination of the two will get the job. They are the capital allocators, and will be responsible for investing all the float that Ajit generates. As opposed to Jain or Abel, they are familiar with multiple industries, naturally, as they are investors and not operators in a single industry. You can see Buffett giving them larger roles by making them each chairmen of a couple of Berkshire businesses. You can see their influence in acquisitions - for example PCP last year or ResCap beforehand. They're also based out of Omaha - Buffett has said the new CEO will have to relocate. Finally they're both young with a long road ahead of them.

 

What I imagine happening is that both Jain and Abel will take a greater role in their respective areas. Maybe if Tony Nicely retires first, his successor will report to Jain, making Jain head of all insurance at Berkshire...rather than reporting to the new CEO/capital allocater. Maybe CEO of BNSF reports to Abel?

 

But overall I think it's important to have the capital allocator and the investment officers be the same person or team as the job is two sides of the same coin. You can't have them fighting for capital. I bet Combs-Weschler duo will be the new Buffett-Munger, just not sure which one will be the Buffett.

Agree, makes sense. Capital allocation is the job. The only consideration is that Berkshire will be even more of an operating company. But abdication has worked well so far. Can continue for a longer time.

[Mephistopheles]

Agree, makes sense. Capital allocation is the job. The only consideration is that Berkshire will be even more of an operating company. But abdication has worked well so far. Can continue for a longer time.

 

Right, I imagine Abel and Jain will have an even greater role not only within Berkshire but with Berkshire's relation with the rest of the world. It would be fitting for them to be up on the panel with the new CEO at the annual meeting for instance. And they'd be in control of acquisitions within their industries.

 

I think we can all agree that it's impossible for one person to fill Buffett's shoes, but there can only be one CEO, shall be interesting to see. I hope we don't find out for a long long time though :)

[Guest longinvestor]

Agree, makes sense. Capital allocation is the job. The only consideration is that Berkshire will be even more of an operating company. But abdication has worked well so far. Can continue for a longer time.

 

Right, I imagine Abel and Jain will have an even greater role not only within Berkshire but with Berkshire's relation with the rest of the world. It would be fitting for them to be up on the panel with the new CEO at the annual meeting for instance. And they'd be in control of acquisitions within their industries.

 

I think we can all agree that it's impossible for one person to fill Buffett's shoes, but there can only be one CEO, shall be interesting to see. I hope we don't find out for a long long time though :)

Something tells me that we'll hear about a CEO sooner rather than later because for the first time ever Buffett said that it was likely to happen while he's around. Gelb also mentioned that in the report.

[villainx]

What is the point of stating the threshold for Berkshire share repurchase?  Has it ever been stated?  And has other companies done so?

 

Part of my point is that ... wouldn't it be better to say repurchases would be done at % discount from their intrinsic value instead?  Whoever is the next CEO, they likely will institute buybacks and dividends in a big way, so ... it seems Buffett is making it tough for eventual management to operate freely.  I know Buffett has forecasted that changes will occur, but there's something to be said about the CEO continuing a Buffett policy versus deciding when to abandon the no div/buyback policy.

[gfp]

"What is the point of stating the threshold for Berkshire share repurchase?  Has it ever been stated?  And has other companies done so?"

 

Yes it has been stated.  It was first announced at 1.1x book value and later raised to 1.2x book value.  Buffett wants a policy that is clear to all shareholders, even though it makes it much more difficult for the company to make meaningful repurchases when the market knows the threshold.  At 1.2x book value, he believes the shares are undervalued enough so that repurchases at that level are clearly and instantly beneficial to continuing shareholders.  His big point he is trying to institutionalize is that "what makes a lot of sense at one price does not make sense at another."  Other companies don't make the distinction.

[John Hjorth]

villainx,

 

Here and here.

[villainx]

Thanks.  I meant more as being so specific about 1.2 book value.  Wouldn't it make more sense to say something along the lines of "Berkshire will repurchase when shares are significant discount to intrinsic value."

 

I think a lot of companies have policies where they repurchase when shares are at extreme discount to value (I assume), but they never set the repurchase threshold.  If it's to make it clear to shareholders, then setting the discount % from intrinsic value that triggers repurchase makes much more sense than 1.2x book, no?  From 2011 to 2012, the threshold went from 1.1 to 1.2, yet since 2012 there's no increase?  Especially with the view that intrinsic value has increased at a greater rate than book value increase? 

 

Unless there are extreme crisis, there's going to be no repurchase, right?  So ... that also ties the hand of future management, no?  I think future management can fend for themselves, but it just seems so unnecessary.  If buyback or dividends are rationale, sensible decisions why leave it to the successor to initiate it.

[Txvestor]

I think this goes back to WEBs stated objective that he wants to make investments for his shareholders rather than off of his shareholders. He has taken this principle quite seriously all through his career and I think by stating this quite openly he considers

everyone forewarned. Historically pretty much anyone selling to WEB has come out the loser. In my opinion it also serves to provide us less able practitioners of the valuation art a public service on entry level from the master of the art valuing his own work.

 

[rb]

Thanks.  I meant more as being so specific about 1.2 book value.  Wouldn't it make more sense to say something along the lines of "Berkshire will repurchase when shares are significant discount to intrinsic value."

 

I think a lot of companies have policies where they repurchase when shares are at extreme discount to value (I assume), but they never set the repurchase threshold.  If it's to make it clear to shareholders, then setting the discount % from intrinsic value that triggers repurchase makes much more sense than 1.2x book, no?  From 2011 to 2012, the threshold went from 1.1 to 1.2, yet since 2012 there's no increase?  Especially with the view that intrinsic value has increased at a greater rate than book value increase? 

 

Unless there are extreme crisis, there's going to be no repurchase, right?  So ... that also ties the hand of future management, no?  I think future management can fend for themselves, but it just seems so unnecessary.  If buyback or dividends are rationale, sensible decisions why leave it to the successor to initiate it.

As far as I can recall there was no crisis whatsoever in 2012 when I was buying buckets of the stuff at 1.15 book. Markets do what markets do. Stocks get expensive and stocks get cheap. No pronouncement from Omaha is going to change that. Btw, I have zero doubts that the stock will go below the 1.2 threshold in the not too distant future.

 

Pro tip: Periodically there are big and easy money making opportunities in the options market if you apply a little valuation and value investing logic.

[Guest longinvestor]

Thanks.  I meant more as being so specific about 1.2 book value.  Wouldn't it make more sense to say something along the lines of "Berkshire will repurchase when shares are significant discount to intrinsic value."

 

I think a lot of companies have policies where they repurchase when shares are at extreme discount to value (I assume), but they never set the repurchase threshold.  If it's to make it clear to shareholders, then setting the discount % from intrinsic value that triggers repurchase makes much more sense than 1.2x book, no?  From 2011 to 2012, the threshold went from 1.1 to 1.2, yet since 2012 there's no increase?  Especially with the view that intrinsic value has increased at a greater rate than book value increase? 

 

Unless there are extreme crisis, there's going to be no repurchase, right?  So ... that also ties the hand of future management, no?  I think future management can fend for themselves, but it just seems so unnecessary.  If buyback or dividends are rationale, sensible decisions why leave it to the successor to initiate it.

If anything, Buffett 's trying to make it easier for the next guy to pull off a buyback. He talked about the fact that in the coming decade or so, something like $400B will likely have to be allocated. With the buyback left at 1.2x not only will the stock buyback make it easier, one will notice that Buffett is happy to see delayed earnings realization into the future. Just PCP alone has some$400-500 million in  intangibles that would have been reported had it continued to be a standalone company.

 

If everyone's muscles are twitching now for a return of capital, it will turn into convulsions when the poor bastard steps into Buffett's shoes. The board will have to deal with it.

[Ballinvarosig Investors]

Thanks.  I meant more as being so specific about 1.2 book value.  Wouldn't it make more sense to say something along the lines of "Berkshire will repurchase when shares are significant discount to intrinsic value."

 

I think a lot of companies have policies where they repurchase when shares are at extreme discount to value (I assume), but they never set the repurchase threshold.  If it's to make it clear to shareholders, then setting the discount % from intrinsic value that triggers repurchase makes much more sense than 1.2x book, no?  From 2011 to 2012, the threshold went from 1.1 to 1.2, yet since 2012 there's no increase?  Especially with the view that intrinsic value has increased at a greater rate than book value increase? 

 

Unless there are extreme crisis, there's going to be no repurchase, right?  So ... that also ties the hand of future management, no?  I think future management can fend for themselves, but it just seems so unnecessary.  If buyback or dividends are rationale, sensible decisions why leave it to the successor to initiate it.

If anything, Buffett 's trying to make it easier for the next guy to pull off a buyback. He talked about the fact that in the coming decade or so, something like $400B will likely have to be allocated. With the buyback left at 1.2x not only will the stock buyback make it easier, one will notice that Buffett is happy to delay earnings realization into the future. Just PCP alone has some$400-500 million in  intangibles that would have been reported had it continued to be a standalone company.

 

If everyone's muscles are twitching now for a return of capital, it will turn into convulsions when the poor bastard steps into Buffett's shoes. The board will have to deal with it.

"When the time comes—and it could come reasonably soon, even while I’m around—and we really don't think we can get the money out in a reasonable period of time into things we like, we have to reexamine, then, what we do with those funds," Buffett said. "And at that time that we make a decision, it might include both, but it could be repurchases, it could be dividends."

With $30B coming though the door on a yearly basis (and likely to grow), Berkshire will have to start paying a dividend.  I think it'd be impossible to deploy that much capital into the market and expect to beat the averages.

[boilermaker75]

Thanks.  I meant more as being so specific about 1.2 book value.  Wouldn't it make more sense to say something along the lines of "Berkshire will repurchase when shares are significant discount to intrinsic value."

 

I think a lot of companies have policies where they repurchase when shares are at extreme discount to value (I assume), but they never set the repurchase threshold.  If it's to make it clear to shareholders, then setting the discount % from intrinsic value that triggers repurchase makes much more sense than 1.2x book, no?  From 2011 to 2012, the threshold went from 1.1 to 1.2, yet since 2012 there's no increase?  Especially with the view that intrinsic value has increased at a greater rate than book value increase? 

 

Unless there are extreme crisis, there's going to be no repurchase, right?  So ... that also ties the hand of future management, no?  I think future management can fend for themselves, but it just seems so unnecessary.  If buyback or dividends are rationale, sensible decisions why leave it to the successor to initiate it.

 

I think often just the opposite happens, companies buy back shares when they are trading well-above intrinsic value. Maybe this is also a message to whoever takes over what the right price is to do buybacks.

[gfp]

Pro tip: Periodically there are big and easy money making opportunities in the options market if you apply a little valuation and value investing logic.

 

This has been a huge gift the few times BRK has traded right around the buyback threshold, both 1.1x and 1.2x.  I tend to gravitate towards in-the-money, extremely low premium, longer dated call options - but practically all the calls on BRK.B were so damn cheap because of whatever malaise led to BRK.B trading at the buyback threshold in the first place.  Options are still relatively new on BRK - I guess since the BNSF deal/split? - I've seen people get into trouble thinking they should sell covered calls against low basis BRK.  They end up causing a sort of short squeeze in the stock as it passes strike prices and they have to scramble to repurchase the calls because they can't stomach the tax bill.

 

I forget which year, but I remember getting a lot of ribbing from my Wife's parents around Christmas one year because I couldn't stop buying call options on BRK.  "why do you constantly have to be on that laptop"  Wife's parents were more than reimbursed for their daughter's college education in the months that followed (on their piece of the position).

[boilermaker75]

Pro tip: Periodically there are big and easy money making opportunities in the options market if you apply a little valuation and value investing logic.

 

This has been a huge gift the few times BRK has traded right around the buyback threshold, both 1.1x and 1.2x.  I tend to gravitate towards in-the-money, extremely low premium, longer dated call options - but practically all the calls on BRK.B were so damn cheap because of whatever malaise led to BRK.B trading at the buyback threshold in the first place.  Options are still relatively new on BRK - I guess since the BNSF deal/split? - I've seen people get into trouble thinking they should sell covered calls against low basis BRK.  They end up causing a sort of short squeeze in the stock as it passes strike prices and they have to scramble to repurchase the calls because they can't stomach the tax bill.

 

I forget which year, but I remember getting a lot of ribbing from my Wife's parents around Christmas one year because I couldn't stop buying call options on BRK.  "why do you constantly have to be on that laptop"  Wife's parents were more than reimbursed for their daughter's college education in the months that followed (on their piece of the position).

 

There were options before the BNSF deal, but the volume was pretty much non-existent because one contract of BRK shares involved such a large monetary sum. I also have taken advantage of BRKB options since their creation with the BNSF deal. My only complaint is I did not do enough volume!