The Berkshire Beat: October 11, 2024

All of the latest Warren Buffett and Berkshire Hathaway news! Including updates on BNSF Railway, Duracell, Bank of America, Apple, Jazwares, NetJets, Chevron, and more...

Happy Friday and welcome to our new subscribers!

Special thanks, too, to those who recently became paid supporters! ❤️

Speaking of which… This quarter’s AGM At-A-Glance (a concise but thorough review of Berkshire Hathaway’s annual shareholders meeting in 1995) will go out to all paid subscribers early next week. So, if you’ve been on the fence about upgrading, there’s no time like the present.

Here’s a sneak peek at one of my favorite moments from the ‘95 meeting: “We tend to judge [investment opportunities] by the past record,” said Charlie Munger. “By and large, if the thing has a lousy past record and a bright future, we’re going to miss that opportunity.” I love his matter-of-fact acceptance that Berkshire will miss out on these kinds of turnaround stories. The man had absolutely no FOMO at all.

Now, with that bit of housekeeping out of the way, let’s turn our attention to the latest news and notes out of Omaha…

BNSF RAILWAY — WHICH HAS STRUGGLED OF LATE — RECENTLY BROUGHT ABOARD A RENOWNED PRECISION SCHEDULED RAILROADING EXPERT TO CONSULT. BNSF is famously the only major North American railroad that has not yet adopted the “precision scheduled railroading” system that promises lower costs and increased efficiency. (It’s also not without its fair share of controversy, which we’ll discuss down below.) With BNSF’s operating ratio ballooning up to 68.2% — much higher than its Class I competitors — that reluctance to hop on the PSR train has drawn quite a bit of criticism. Last week, the Wall Street Journal reported that the Berkshire-owned railroad hired Ed Harris, a disciple of PSR pioneer Hunter Harrison, to consult on its operations. “Harris has told people that [Greg] Abel recruited him,” says the Journal — though it also quotes BNSF chief operating officer Matt Igoe as denying that the railroad will implement PSR. Time will tell, I suppose.

WE DON’T TALK ENOUGH ABOUT DURACELL. At Advertising Week New York, the company’s chief marketing officer Ramon Velutini explained how difficult it can be to stand out in a low-interest category like batteries. “An inconvenient truth for us [is] the part of the brain reserved for thinking about batteries is very small,” he said. “The thing that keeps [me] up at night … is becoming like the banana category. If you get lost in consumers’ minds, they start deeming you less important — and, then, you’re at risk of commoditization.”

• Velutini highlighted one particular triumph that differentiated Duracell from the pack. The #BitterIsBetter campaign — in which Duracell applied a non-toxic bitter coating to small batteries to prevent choking and swallowing — was a hit. “Our share grew globally with this innovation,” he said, “and, in the U.S., it grew 50% in the last five years.”

• I like the cut of Velutini’s jib. “It feels warm and fuzzy when you win an award,” he said, “but I think it feels even better when the profit goes up … because that, at the end of the day, is what we’re here to do.”

BERKSHIRE RAISED ¥281.8 BILLION ($1.9 BILLION) IN THIS WEEK’S YEN-DENOMINATED BOND SALE. This is Berkshire’s largest yen debt issuance in five years — and could mean Warren Buffett plans to increase his investments in the sogo shosha in the near future. Or not. Stay tuned.

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BERKSHIRE NOW OWNS LESS THAN 10% OF BANK OF AMERICA. After more sales over the past three days, Berkshire’s position clocks in at exactly 775 million shares — which is good for 9.9% of the bank. It’s rather interesting to see another Berkshire holding reduced to a round number. Maybe this is going to be Buffett’s new thing. Since July 17, Berkshire has sold 257.9 million shares of BAC 0.00%↑ for $10.5 billion. Now, with this holding under 10%, we will no longer get regular updates on any further sales. So, for the time being, my Form 4 watch is at its end.

APPLE REMAINS ON TOP WITH THE NEXT GENERATION. Piper Sandler’s recent Fall 2024 survey of 13,500+ U.S. teenagers brings mostly good news for the fine folks out in Cupertino (and big investors like Berkshire). 88% of teenagers expect their next smartphone to be an iPhone — with 87% already a part of the iPhone family.

• 30% of teenagers plan to upgrade to a new device because of Apple Intelligence — with 22% intending to go for an iPhone 16 in the coming months. (That 22% number is slightly lower than in 2022 and 2023, but still in the same ballpark.)

• Another Berkshire investee did not fare as well in the Piper Sandler survey. Ulta Beauty’s market share among teens dropped by five points to 27%.

JUDD AND LAURA ZEBERSKY OF JAZWARES RECALL “PINCH ME” MOMENT WHEN THEY JOINED BERKSHIRE. The husband-and-wife team were initially skeptical about being acquired by the massive conglomerate — but a few meetings with Berkshire allayed any fears. “They are long-term thinkers,” Judd told the University of Miami School of Law. “They care about leaders. They care about companies. We have always been the same. In the toy business, things don’t happen right away, so we have always cared about longevity.” And no one does longevity better than Berkshire.

NETJETS WIDENS ITS MOAT. The company has now added 50 factory-new aircraft to its fleet so far this year — with these deliveries valued at approximately $1.3 billion. “With each new addition,” said president Pat Gallagher, “we’re increasing Owner access to top-of-the-line Jets and widening our moat.” Over 40% of the NetJets fleet is under five years old. According to ARGUS TraqPak, flight hours increased by 8.8% in the first half of 2024.

CHEVRON HAS AGREED TO SELL $6.5 BILLION WORTH OF ASSETS TO CANADIAN NATURAL RESOURCES. These assets — a 20% interest in Athabasca Oil Sands and a 70% interest in Duvernay Shale — contributed about 84,000 barrels of oil equivalent per day in 2023. The all-cash transaction is expected to close this year. All part of Chevron’s plan to divest $10-15 billion in assets by 2028 to “optimize its global energy portfolio”.

• Chevron also sold some of its North Slope (Alaska) assets to ConocoPhillips for $300 million. Plus, the oil major is still talking with Tokyo Gas about unloading its Haynesville shale holdings in Texas for up to $1 billion.

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More on BNSF and Precision Scheduled Railroading

As mentioned above, BNSF Railway stands alone among major Class I railroads as the only holdout still resisting “precision scheduled railroading”. Ever since Hunter Harrison pioneered the system at Illinois Central, it has taken the industry by storm with its strict adherence to schedules and cost-cutting.

Today, let’s take a closer look at the precision scheduled railroading phenomenon — and what the hiring of Ed Harris might mean for the future of BNSF.

What is precision scheduled railroading?

In the old days, train cars would wait in the yard until a train of the right type and/or size came along to pick it up. If the right train did not arrive or if there were not enough cars of one type to make the trip worthwhile, that particular car just sat waiting — sometimes for days on end. That obviously led to a lot of cancellations, delays, and other interruptions in service. And made it all but impossible for railroads to win back business from the more reliable trucking industry.

Precision scheduled railroading, on the other hand, prioritizes movement above all else. (Even safety, some might say.) Instead of waiting for exactly the right train, cars will be picked up and added to whatever trains roll into town. This leads to much longer trains than under the old system, but dramatically more reliable service. PSR keeps all of those previously idle cars on the move.

Union Pacific includes this handy little explainer on its website:

Imagine you’re going on a much-needed vacation to the Bahamas. You get to the airport and are so excited that you can already smell the salty ocean air. But then, while waiting at the gate, an announcement comes on saying your flight has been canceled because there weren’t enough passengers booked on the flight. What?!

You’re told you’ll have to wait until tomorrow to catch the next flight when more passengers will be on board. So now you’ve wasted a vacation day from work and have one less day to spend on the beach. That’s frustrating, and it’s a waste of your time and money.

With PSR, this doesn’t happen. Instead of sitting in the yard waiting for a long train to be built, the car will simply be added to the next scheduled train. This approach eliminates variability, allows for more precise supply chain management, and results in more consistent transit times.

Critics contend that PSR leads to trains that are too long with far too little time allotted for safety inspections. When speed is the watchword, it’s easy to see how employees might feel pressured to rush through inspections and other precautions in order to keep the trains moving.

For a minute there, it seemed like PSR might find itself in the crosshairs after the East Palestine derailment in Ohio last year. But the backlash was much less than I expected.

Will Ed Harris bring PSR to BNSF?

The man has a well-earned reputation as “arguably the best operator in the business” — with a lifetime of experience at CSX, Canadian Pacific, and Canadian National — and seems to already be paying dividends for BNSF.

Trains.com reports that Harris came aboard in July with a mandate to get the railroad’s merchandise operations up to snuff. Early returns are very promising.

Merchandise train velocity is currently at its highest level since 2020. Average hump yard dwell last month, at 25.2 hours, was the best in a decade. Four of the railway’s eight hump yards — at Kansas City, Kan.; Galesburg, Ill.; Lincoln, Neb.; and Barstow, Calif. — set new record low dwell figures in September. Six humps have set record train on-time departure levels for the past two months, while flat switching yards in Laurel, Mont.; Denver; and Amarillo, Texas, also set records.

And, while it doesn’t sound like Harris is implementing PSR per se, he’s still all about getting trains to run — and depart — on time. (Harris is also renowned for his work with younger officers and will hopefully impart plenty of this know-how to BNSF’s next gen while on the job.)

At BNSF, Harris hit the ground running in July and got into the operational weeds by making phone calls to chief dispatchers, superintendents, yardmasters, and train masters. Some of the operating officials were not yet aware that Harris was on the property and were caught off guard by his detailed line of probing questions. “Who the hell was that guy?” one operating official asked after hanging up the phone.

BNSF, meanwhile, insists that PSR is still off the table. “BNSF never was a PSR railroad,” COO Matt Igoe told the Wall Street Journal, “and isn’t becoming one now. Many of the practices now broadly described as PSR were best practices that BNSF utilized long before the PSR moniker existed.”

✨ The wider world didn’t learn about Ed Harris joining BNSF until last week, but it seems to have been an open secret in the railroad community for months. I stumbled upon a Reddit post from July that mentioned not only Harris consulting for BNSF, but also Mike Farrell, another PSR expert formerly of Norfolk Southern. One way or another, BNSF looks like it’s getting serious about improving its lagging performance.