The Berkshire Beat #59: Annual Report Wrap-Up
All of the latest Berkshire Hathaway news and my must-reads of the week!
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The latest news and notes out of Omaha…
I don’t think anyone managed to sum up Warren Buffett’s new annual letter — and the impact it will have on both today’s market and future generations of investors — better than Charles Payne of Fox Business Network. “My takeaway with the letter is that Buffett has made the notion of attaining prosperity through the stock market, through long-term investing, actually feel wholesome,” he said. “In a world that says getting or being rich is selfish, that it’s actually harmful — think about what he said about his sister [Bertie]. His sister has done so many wonderful things in her life for so many other people.”
“I read it on Saturday and I had chills,” Payne added. “It felt part Americana. It felt part hopeful. It was a wonderful journey through a wonderful life.”
A couple of noted Berkshire Hathaway followers released new intrinsic value estimates for the conglomerate this week. In his annual letter to Semper Augustus clients, Christopher Bloomstran pegged Berkshire’s intrinsic value at $718,579 for Class A shares and $479 for Class B shares. (This estimate puts Berkshire’s total value at over $1 trillion for the first time.)
Whitney Tilson comes in a bit lower with $651,000 for Class A shares and $434 for Class B shares. “I would say Berkshire is more of a ‘comfortable hold’ than a ‘strong buy’ today,” he writes. “But I still like [the stock] because it remains somewhat undervalued, is incredibly safe, and its intrinsic value is growing nicely.”
Over the weekend, Occidental Petroleum — and CEO Vicki Hollub — earned special praise from Buffett in his annual letter to shareholders. Then, on Tuesday, she hopped on CNBC to discuss her company’s $12 billion acquisition of CrownRock and the O&G industry as a whole.
Why CrownRock? “The CrownRock assets [in the Permian Basin] actually are such high quality that they come into our Tier 1 inventory. They are assets that deliver lower-than-$40-breakeven production and cash flow. So it not only improves our inventory, but [also] provides us a chance to bring more immediate value to the shareholders.”
How will you pay for it? “Some are concerned about the debt that we will raise to close the deal, but the reality is that we have divestitures that can help — along with cash flow from operations — to pay that debt back down.”
Will the FTC approve this deal? “Absolutely. There’s nothing that would create a trade issue here … It doesn’t create any antitrust issues in the Permian [and] it doesn’t create any antitrust issues for the United States. It’s a process, clearly, that the FTC wants to go through. I have no doubt, though, that we’ll get the deal approved.”
When pressed on just how far Oxy is willing to go to close this deal if the FTC objects or sues, Hollub replied: “As far as we need to go.”
Does Exxon Mobil or Chevron’s recent M&A affect Oxy? “It has no repercussions for us. For those deals to happen, it really doesn’t impact us in a negative way or a positive way … There are a lot of operators in the Permian Basin, so I don’t think any of these deals that are being proposed today create any antitrust issues.”
What about lower-than-expected oil and natural gas prices? “For us, natural gas is less an impact than oil. Actually, our chemicals business is a hedge against low [natural] gas prices for us — because our chemicals business uses gas. We can make more money in chemicals when gas is low.”
“Oil is important to us, clearly, because we’re mainly an oil producer. The current [oil] prices, though, are not out of line for us to be able to make substantial free cash flow.”
According to Berkshire Hathaway Energy’s annual report, the U.S. Department of Justice has notified the utility of its intention to sue PacifiCorp over costs related to wildfires in California and Oregon. The government will reportedly seek to recover up to $1 billion from the beleaguered subsidiary.
🤑 This week’s dividends: $14.5 million from Kroger, $4.3 million from Visa, and $130,067 from Jefferies Financial Group.
At Apple’s annual meeting on Wednesday, CEO Tim Cook promised that the iPhone maker will “break new ground” in generative AI as soon as this year. “We believe it will unlock transformative opportunities for our users when it comes to productivity, problem-solving, and more.” All aboard the AI train.
Apple’s AI division will soon be adding some reinforcements, too. The company canceled its autonomous electric car project this week — with most of those employees set to be reassigned to work on artificial intelligence.
Odds & Ends from Berkshire Hathaway’s Annual Report
The slow read of Poor Charlie’s Almanack is on vacation this week so as to allow me to devote a little bit more time and attention to Berkshire Hathaway’s annual report. Don’t worry: It will be back next week with a full analysis of Charlie Munger’s 1996 talk at Stanford Law School.
On Monday, I wrote about the key points and takeaways from Warren Buffett’s annual letter (and Berkshire’s 10-K). But there are always some interesting facts and figures that slip through the cracks when dealing with such a broad topic.
So, today, I’ve gathered together as many of these little factoids as I could find — all in hopes of giving us the most accurate accounting of Berkshire’s report as possible.
Greg Abel: “In all respects, [he] is ready to be CEO of Berkshire tomorrow,” Buffett wrote. And for those of us hoping to hear more from Abel at the annual meeting in May, here’s some more good news. The vice-chairman will field questions at both the morning and afternoon sessions this year.
BNSF & BHE: In 2022, Berkshire’s railroad and power utility accounted for 31.9% of the conglomerate’s operating earnings. In 2023, that figure dropped to just 19.9%. That’s partly the result of the insurance segment’s resurgence, but — as Buffett pointed out in his letter — it was not a great year for either BNSF or BHE.
Insurance: Berkshire has achieved an underwriting profit in 18 of the last 20 years. The only years in the red were 2017 and 2022. Once again proving that Ajit Jain is worth his weight in gold. “Disciplined risk evaluation is the daily focus of our insurance managers, who know that the rewards of float can be drowned by poor underwriting results,” Buffett wrote. “All insurers give that message lip service. At Berkshire, it is a religion — Old Testament style.”
GEICO: The auto insurer’s current plan is simple — trade growth for profitability. (And it’s working.) In 2023, GEICO slashed advertising expenses and, as a result, saw policies-in-force decline by 9.8%. But, over that same period, average premiums per auto policy are up 16.8%. This strategy probably won’t work forever, but it seems to have put GEICO back on the right track after a brutal couple of years.
Sogo Shosha: Berkshire “now owns about 9% of each of the five” leading Japanese trading houses. It’s not clear — at least to me — whether this means that Buffett bought more shares in the second half of 2023 or that the ownership percentage increased due to share repurchases. Or maybe it’s just the result of the different method that Japanese companies use to calculate outstanding shares.
Buffett also reiterated that he will not “take our holdings beyond 9.9%”.
Mystery Stock: In Q3 and Q4 2023, the cost basis for “Banks, Insurance, & Finance” in Berkshire’s investment portfolio grew by $3.6 billion — despite no corresponding purchases appearing in 13F filings. In all likelihood, that’s the much-discussed mystery stock. One must also assume — based on Berkshire’s request for confidential treatment — that the buying has continued into the new year.
What’s taking Berkshire so long to purchase its fill of this unknown company? Buffett may have slyly provided an answer in his letter. “Given Berkshire’s present size,” he wrote, “building positions through open-market purchases takes a lot of patience and an extended period of ‘friendly’ prices. The process is like turning a battleship. That is an important disadvantage which we did not face in our early days at Berkshire.”
MSR: As a whole, “Manufacturing, Service, & Retailing” grew net earnings by 2%. We’re always sort of at Berkshire’s mercy as to what earnings information we get about the specific companies that make up this vast segment of the conglomerate. After scouring through the report, here’s what I managed to turn up…
Precision Castparts up 30% to $1.5 billion in pre-tax earnings
Lubrizol “relatively unchanged”
Marmon’s pre-tax earnings increased 13.1%
IMC (International Metalworking Companies) up 6.9%
Clayton Homes dropped 13.8% to approximately $2 billion in pre-tax earnings
TTI’s earnings decreased by 17.3%.
Berkshire Hathaway Automotive’s pre-tax earnings jumped 17.7%
McLane’s pre-tax earnings rocketed up 67.9%
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The Must List
Other awesome things that I read, watched, and listened to this week…
Tom Gayner’s 2023 Annual Letter to Markel Shareholders
“We believe low use of debt also creates a competitive advantage. Operating without a sword of Damocles (debt) hanging over our heads — and intending to hold businesses forever without ever re-auctioning them off to a ‘highest bidder’ — helps to create a rare and wonderful culture.”
Buffett and Three Hedge Funds Roger Lowenstein
“Berkshire is different. Despite its 59-year record of success — the fruits of which have been distributed in equal proportion among all investors, including the CEO — the Buffett model remains more the exception than the rule.”
5 Highlights From Warren Buffett’s 2023 Annual Letter Gary Mishuris, CFA
“You can’t incentivize a dishonest manager to do the right thing. They will always have the advantage of being able to pick the time and the manner of transferring shareholders’ wealth to their own pockets. Once any evidence of dishonesty or self-dealing is discovered, it’s important to move on right away, regardless of other factors.”
Too Clever by Half! The Rational Walk
“Warren Buffett has released Berkshire’s results on Saturday morning for decades precisely because he wants shareholders and the media to have the entire weekend to soberly review the report and understand the contents before trading resumes on Monday morning. But I doubt he was surprised about [Monday’s] strange price action. It is human nature to act on headlines and most people are emotional and greedy.”
The Pleasure of Strolling Alejandro Lopez
“Steve Jobs and Jony Ive were close friends. One of their favorite activities was strolling together. They agreed on the design of the iMac G4 while walking around a flower garden. Walking together was their preferred setting to dream up new ideas … Jobs believed his most creative ideas came when he was walking. And he was right.”
GEICO has certainly ceded market share to Progressive which has been growing and posting underwriting profits. I think GEICO is still behind on telematics and Progressive seems to have a better handle on pricing. I’m sure Ajit will be asked about GEICO at the annual meeting.
Thoughts on the mystery stock being J.P. Morgan? Dimon sells off $125 million of his own holdings...