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2019 Annual Letter Out


vinod1
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Guest longinvestor

Hmmm..

 

Shareholders having at least $20 million in value of A or B shares and an inclination to sell shares to Berkshire may wish to have their broker contact Berkshire’s Mark Millard at 402-346-1400. We request that you phone Mark between 8:00-8:30 a.m. or 3:00-3:30 p.m. Central Time, calling only if you are ready to sell.

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Our total net income in 2019 from the non-insurance businesses we control amounted to $17.7 billion, an

increase of 3% from the $17.2 billion this group earned in 2018. Acquisitions and dispositions had almost no net effect

on these results.

 

Don't look for earnings growth in wholly owned business segment...

 

 

Nothing said about Kraft Heinz in letter. In AR, there's this:

 

As of December 31, 2019, the carrying value of our investment in Kraft Heinz exceeded the fair value based on the quoted market

price by $3.3 billion (24%). In light of that fact, we evaluated our investment in Kraft Heinz for impairment. We utilize no bright-line

tests in such evaluations. Based on the available facts and information regarding the operating results of Kraft Heinz, our ability and

intent to hold the investment until recovery, the relative amount of the decline, and the length of time that fair value was less than

carrying value, we concluded that recognition of an impairment loss in earnings was not required. However, we will continue to

monitor this investment and it is possible that an impairment loss will be recorded in earnings in a future period based on changes in

facts and circumstances or intentions.

 

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Our total net income in 2019 from the non-insurance businesses we control amounted to $17.7 billion, an

increase of 3% from the $17.2 billion this group earned in 2018. Acquisitions and dispositions had almost no net effect

on these results.

 

Don't look for earnings growth in wholly owned business segment...

 

 

Hard to square this with the enthusiasm for spending much more on capex than the depreciation charge. Maybe there is a lag on those investments, but it seems at least superficially concerning to have minimal organic growth during a strong economic expansion when spending significant capex in excess of d&a.

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Capex outpaces depreciation mostly at BNSF and BE (in dollars, not %). Combined these had ~$5.2 billion of depreciation and $11 billion of capex. Both of these companies had okay to pretty good years. I don't think there's anything too worrying in the reports. In the context of other companies results, Berkshire's earnings are consistent. Anything having to do with China was down, other stuff did okay, and there was a fire at Lubrizol which had a down 50% 4Q and down 14% year.

 

Page K-110 breaks out the capex and depreciation. Not a banner operating year, but a good one consistent with my overall understanding of the subsidiaries quality and earnings power.

 

After-tax earnings of our railroad business increased 5.0% in 2019

 

After-tax earnings of our utilities and energy business increased 8.4% in 2019

 

Earnings from our manufacturing, service and retailing businesses were relatively unchanged from 2018. Operating results of our manufacturing, service and retailing businesses in 2019 were mixed, with several of these businesses experiencing lower earnings in 2019 from a variety of factors. Revenues and pre-tax earnings in 2019 of certain of these businesses were negatively affected by the unfavorable effects of foreign currency translation attributable to a stronger U.S. Dollar, international trade tensions and U.S. trade tariffs.

 

PCC’s pre-tax earnings increased 5.1% in 2019 compared to 2018

 

Lubrizol’s pre-tax earnings in 2019 for the fourth quarter and year decreased 50.5% and 14.6%, respectively, compared to the same periods in 2018. Earnings in 2019 were significantly impacted by costs and lost business associated with the Rouen fire. Lubrizol’s operating results in 2019 were also negatively affected by lower sales volumes, higher manufacturing expenses and unfavorable foreign currency translation effects, partly offset by improved material margins.

 

Marmon’s pre-tax earnings in 2019 increased $12 million (1.0%) as compared to 2018. The earnings increase reflected the effects of business acquisitions, partly offset by lower gains from business divestitures

 

IMC’s pre-tax earnings declined 12.8% in 2019 versus 2018, attributable to unfavorable foreign currency translation effects, changes in business mix to lower margin items and the effects of the U.S./China trade disputes.

 

Pre-tax earnings of Clayton Homes were $1.1 billion in 2019, an increase of $182 million (20.0%) compared to 2018. The earnings increase in 2019 was attributable to home building activities, which reflected the increases in home sales, and manufactured housing lending activities.

 

Pre-tax earnings of the service group were $1.7 billion in 2019, a decrease of $155 million (8.4%) compared to 2018. Pre-tax earnings of the group as a percentage of revenues were 12.5% in 2019 compared to 13.8% in 2018. The comparative declines in earnings in 2019 were primarily due to lower earnings from TTI and FlightSafety, partly offset by higher earnings from NetJets. TTI’s earnings decline was attributable to lower gross margin, unfavorable foreign currency translation effects and higher operating expenses, partly offset by earnings from businesses acquired. FlightSafety’s earnings decline was attributable to significant losses related to an existing government contract that were recorded in the fourth quarter, partly offset by lower training equipment impairment charges.

 

Retail group pre-tax earnings were $874 million in 2019, an increase of 1.6% over 2018. BHA’s pre-tax earnings increased 22.7%, primarily due to the increases in earnings from finance and service contract activities, partly offset by higher floorplan interest expense.

 

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So Buffett does not believe shares are currently selling for less than they are worth. And with shares increasing 10% in Q4 (and intrinsic value increasing closer to 3 or 4%) one could argue shares today are overvalued. So the cash hoard will continue to grow. At the start of the letter he made the case for retained earnings to be reinvested. Bottom line is more of the status quo. Not a surprise.

 

Might be a hard pill to swallow for those who feel the shares are significantly undervalued. Hard to see the catalyst to drive the share price higher in the short term.

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Short comment on the opening section titled: The power of retained earnings.

 

The reference to Mr. Edgar Lawrence Smith’s Stocks as Long-Term Investments (1924) is, at least to my humble eyes, incredibly fascinating, given what Mr. Benjamin Graham had written about it in a relatively contemporaneous way.

Mr. Graham agreed on the principle but not necessarily on the application. In a way, the points of contention were that the price paid was an issue to consider and if the past always meant the future. Mr. Graham found out that sometimes prices are not justified and had the moral fortitude to remain graceful after he got hammered. But who reads Security Analysis these days?

If anybody is interested, the relevant section is found in chapter XXVII titled: The Theory of Common-Stock Investment with the subtitle: A Sound Premise Used to Support an Unsound Conclusion

In the 1934 edition: pp 312-6

In the sixth edition (2009): pp 361-5 with some comments by Mr. James Grant in the introduction (page 17)

 

-As far as buyback activity, it may happen and perhaps in a big and opportunistic way but I wouldn’t hold my breath against Mr. Buffett’s rationality.

 

-For KHC’s potential impairment, the power of compounding may work in the opposite direction and it may become cumulatively more and more difficult to disregard the discrepancy with market value, based on judgement and a long-term intent.

 

-An excerpt:

“Here, a pause is due: I’d like you to know that almost all of the directors I have met over the years have been decent, likable and intelligent. They dressed well, made good neighbors and were fine citizens. I’ve enjoyed their company. Among the group are some men and women that I would not have met except for our mutual board service and who have become close friends. Nevertheless, many of these good souls are people whom I would never have chosen to handle money or business matters. It simply was not their game.”

 

Loose translation without the Dale Carnegie veneer:

“Over the years, I’ve had to work with a lot of bozos.”

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So Buffett does not believe shares are currently selling for less than they are worth. And with shares increasing 10% in Q4 (and intrinsic value increasing closer to 3 or 4%) one could argue shares today are overvalued. So the cash hoard will continue to grow. At the start of the letter he made the case for retained earnings to be reinvested. Bottom line is more of the status quo. Not a surprise.

 

Might be a hard pill to swallow for those who feel the shares are significantly undervalued. Hard to see the catalyst to drive the share price higher in the short term.

 

Catalyst, unfortunately, may be the death of either Munger or Buffett. I think there will a lot more pressure on the successors to do something with this hoard of cash

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All we need is a recession, bear market or so. He can probably spend $50 billion in one move and it will alleviate a lot of the concerns with the cash. We've had like 10 years without a recession and 11 in a bull market, it's quite unprecedented. Combine that with free easy money which the LBO guys use for acquisitions and you can see why there hasn't been any M&A at BRK in a few years. Additionally I think Buffett is more of a market timer than he says. Do what he does not what he says. Holding all this cash makes him look stupid now but when we see a prolonged bear market, recession and/or some financial crisis he will pull out the bazooka. Look out for a KHC or other highly indebted, suffering company takeover in this moment. He's just waiting for the ideal timing.

 

On a side note if Bloomberg becomes President I bet the company goes to Berkshire.

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Guest longinvestor

So Buffett does not believe shares are currently selling for less than they are worth. And with shares increasing 10% in Q4 (and intrinsic value increasing closer to 3 or 4%) one could argue shares today are overvalued. So the cash hoard will continue to grow. At the start of the letter he made the case for retained earnings to be reinvested. Bottom line is more of the status quo. Not a surprise.

 

Might be a hard pill to swallow for those who feel the shares are significantly undervalued. Hard to see the catalyst to drive the share price higher in the short term.

 

Catalyst, unfortunately, may be the death of either Munger or Buffett. I think there will a lot more pressure on the successors to do something with this hoard of cash

 

It’s rather likely that it’s for the successor. Borne out by the unrestricted buyback mechanism and the minuscule amount to date.

 

Buffett again says that propping the stock price is not on the agenda. Most of us want them, badly, to do so.

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I love the discussion thread.  Thanks for all the opinion and variety of opinion.  None of us is as smart as ALL OF US.

I can see some progress from the old Geezers [Geezers who I admire].

 

Repurchase of some treasury stock, $5B and 1%.

Bring Jain and Able in for prime time Q&A, no longer stuck at the Thanks Giving "Kids Table"

Note about repurchasing large blocks of shares in the letter, with a Phone number no less :o.  [Who knows the intent, but he wrote it in black and white.  Thats gotta mean something.]

Sold the Newspaper business.

 

 

From a Wall Street perception perspective, things are a little difference and some change is happening.  I peg the IV at least at $270 after the math.

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The annual letter is shorter and less imaginative than former ones. No doubt, both Charlie and Warren are slowing down a bit.

 

While the economy is performing well, manufacturing and railroads are not exactly performing that great right now and all things considered, the performance of their operating business is decent, but it’s clear that both Lubrizol and PCP weren’t great buys. Their Insurance business is performing well.  Buying back 1% of their shares is better than nothing. Things could be a whole lot worse.

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Upturns create just as many opportunities as downturns. Maybe I'm missing something.

 

LOL, maybe even more opportunities in the upturn considering you can make money even in poo-poo that goes bust in a downturn. But thats a language most Berkshire investors dont understand.

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After a few reads I actually thought the letter helpful in addressing, or at least, maybe being a little more transparent on the future. We can all do the run down on the financials, but I think thats a waste of time here in the same sense it was a waste of time getting too granular on Apple a year or so ago(and no one was more guilty of this than I). Berkshire will make lots of money regardless of where the economy or the world go. I think addressing the future gives clarity, and the buybacks, while minimal, are creeping up and setting a floor that should continue to shift supply/demand skews and thus risk/reward profile. Performance wise, who the heck knows but at worst this is kind of an index fund proxy with a world class active manager(s) overseeing it. If $226 was a price they were willing to pay, you can only imagine that turret starts firing more rapidly at 21X, 20X, and definitely 1XX. Again, stacking the deck in the favor of outperformance.

 

Regardless IMO this was somewhat better/more than I had hoped for, with the operating results, good enough. I'll probably add a bit to my position in the coming weeks if its still under 230.

 

Oh yea, and anyone who thinks this has any shot and going down 50% from here is crazy. No way this ever trades at 50% cash. If it even gets remotely close, I'll eat my foot. Mortgage my house. Open up, and take cash advances on Synchrony cards at 26% interest rates, etc. Because as its heading towards those decline levels, I take it they'll be taking action in ways that is substantially increasing the IV. Whereas many fund managers have underperformed and blamed it on lack of opportunity, Ive seen enough here(especially note the "any holder of $20m who wants to sell" quip), that the team here will hit that opportunity out of the park if they get it. They've been waiting waaayyyy tooo long not to.

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He's talked in past meetings about the potential for very large investments in the utility.  He reiterated in the letter that they could take on projects requiring investments for as much as $100b.  In 2019, they invested $4.5b in excess of depreciation charges in the utility.

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