The Berkshire Beat: October 4, 2024
All of the latest Warren Buffett and Berkshire Hathaway news! Including more yen-denominated debt, Bank of America, Borsheims, Squishmallows, Berkshire Hathaway Energy, and much more...
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Q3 2024 IS NOW IN THE BOOKS — AND, HEADING INTO THE HOME STRETCH, BERKSHIRE HATHAWAY CONTINUES TO LEAD THE S&P 500. Both the Class A (+27.4%) and Class B (+29.0%) shares are out in front of the benchmark index’s total return of 22.1%. Making that feat all the more impressive is the fact that the S&P 500 is having its best year-to-date performance through three quarters since 1997. It’s also a bit of a reversal from where things stood at the end of the second quarter. At that point, Berkshire stock trailed the benchmark by 1 or 2%.
BERKSHIRE HATHAWAY NOW OWNS 100% OF BERKSHIRE HATHAWAY ENERGY. On September 30, BHE agreed to repurchase the 8% ownership interest still held by the estate of former Berkshire director Walter Scott Jr. for $2.37 billion in cash, a $600 million promissory note, and $1 billion in Class B stock. It’s not every day that Warren Buffett agrees to issue shares as part of an acquisition. In this case, his personal relationship with the Scott family likely led the Oracle to make a rare exception to his all-cash policy. (Not to mention, with Berkshire stock trading at a high price, it’s not exactly a bad time to pay with shares.)
With BHE pricing its shares at $650 a piece, that puts the company’s implied valuation at approximately $49 billion. Quite a bit less than when Greg Abel sold his 1% ownership interest back in 2022 at an implied valuation in the $87 billion range. This 40+% reduction in value — in just two years! — is likely the result of ongoing wildfire-related litigation and the many “ominous” regulatory concerns that Buffett wrote about in his annual letter this year.
BHE says that it used “cash on hand, including proceeds received from the sale of certain investments” to pay the $2.37 billion cash portion of the deal. Might some (or all) of that total come from Berkshire’s recent-ish sales of BYD stock?
For more on this week’s big BHE news, I recommend reading the latest from
(Link) and (Link).
SINCE LAST WE SPOKE, BERKSHIRE HAS SOLD ANOTHER 20.2 MILLION SHARES OF BANK OF AMERICA. At an average price right around $39.50 a piece, Berkshire collected $798.5 million from this recent spate of sales. Berkshire’s stake in BAC 0.00%↑ now drops to 10.2%. Getting closer and closer to that 10% threshold.
It also appears that Buffett’s minimum selling price for these shares is $39.25 on the dot. Digging into this latest filing’s footnotes, that is the lowest price that he sold shares at on each of the three trading days.
BERKSHIRE PLANS TO SELL MORE YEN-DENOMINATED BONDS IN THE NEAR FUTURE. Bloomberg says this is “raising speculation [Berkshire] is looking to boost investments in Japan”. Certainly a strong possibility, but far from certain. Berkshire issued this same type of cheap debt back in April and that did not lead to further investment in the leading Japanese trading houses (at least so far as we know).
BORSHEIMS CEO KAREN GORACKE ON WORKING WITH BUFFETT: “The first time I had a one-on-one with Warren Buffett,” she told Business Insider, “I was probably terrified. But he’s so charming, funny, and informative — I’m never nervous with him now. He visits the store several times a year and usually tells me ahead of time, but not always. Once, I was helping a customer pick out some jewelry and he walked into the store and started asking questions about inventory. I had to ask the customer to excuse me. She had no idea Warren Buffett was standing next to her.”
“I’m a very curious person,” continued Goracke. “He teases me about asking lots of questions, but I think: ‘I’m sitting with probably the smartest person in the world. Why wouldn’t I ask him about everything from the business to our local community to sports?’”
I HAVEN’T GIVEN UP HOPE OF TRACKING DOWN A SET OF WARREN BUFFETT AND CHARLIE MUNGER SQUISHMALLOWS — BUT, IN THE MEANTIME, I’M ENJOYING LEARNING MORE ABOUT HOW BERKSHIRE SUBSIDIARY JAZWARES TURNED THIS BRAND INTO A VIRAL SENSATION. According to Fast Company, “Analysts follow the latest animal trends across social media, and Squishmallows proving less popular will quickly be put on ice for new ones. Copyeditors fill in a name and backstory for each new character in the 3,000 and counting Squishmallow lineup. What the company will attest is that Squishmallows are unique, because they have strong collectibility among both children and people ages 18 to 24. Characters may follow trends, but they aren’t developed for demographics. For Squishmallow, cute is cute.”
DIVIDENDS: This week, Berkshire received $194 million in quarterly dividends from Coca-Cola and $24.6 million from Chubb.
WHENEVER I READ ABOUT CHARLIE MUNGER AND HIS PENCHANT FOR INVERSION, I THINK ABOUT THE TV SHOW SEINFELD. And, in particular, the Season 5 episode “The Opposite” in which George Costanza improves his life by doing the reverse of his flawed first instincts. (Charlie was a big fan of Seinfeld, too.) So I was very glad to see Mark Tobak make the same connection in his latest article over at Hedge Fund Alpha.
Berkshire Hathaway Automotive CEO Jeff Rachor: “We Want To Sell What Consumers Want To Drive”
Berkshire Hathaway Automotive is one of the largest automotive retailers in the United States — and doesn’t always get the attention that it deserves as an important pillar of Berkshire’s MSR segment.
Back in May, CNBC’s Becky Quick caught up with Berkshire Hathaway Automotive CEO Jeff Rachor and got his thoughts on the price pressures hampering his industry today — and its (presumed) inevitable EV future.
“Believe it or not, the sticker price is up almost 25% over the last five years,” said Rachor, “and the average transaction price for a new car is now about $45,000.” And, while an increasing supply of new vehicles (and a proliferation of discounts and incentives to move inventory) have provided some relief to consumers, both inflation and the popularity of high-tech cars has kept the overall price marching upwards.
The sales mix plays a part, too. “Over many years,” said Rachor, “there’s been a shift from almost a balance of 50% cars and trucks/SUVs. Now, it’s more like 80% trucks and SUVs — and they carry a higher price than a sedan.”
And, of course, there’s the not-so-small matter of interest rates. Since 85% of car owners have a payment to make each month, this affects nearly the entire market. “Since early 2020, the average new car payment is up about 30%,” said Rachor. “In fact, the average is about $735 a month. The average used car payment is up a little over 30% to about $546 a month. That’s significant.”
As such, the car industry is still struggling to sputter back up to speed. “We still haven’t got back to pre-Covid levels even though there’s now pretty healthy inventories of new cars available,” he said. “Affordability is top of the mind with all consumers right now — but they’re more resilient than we would have predicted.”
“Sales are up year over year for our industry — but they’re up single digits and not back to pre-Covid levels.”
✨ Rachor also admitted that, while probably inevitable, EVs still aren’t exactly setting the market on fire. “There’s no question we’re going to have an EV future,” he said. “However, the pace of adoption and the magnitude of adoption was clearly overestimated by so many people in and around the industry.”
He noted that EV sales have “stalled” with true battery electric vehicles “really flat year over year in sales”.
Rachor pointed to three main concerns that customers say are holding them back from making the plunge into the EV future: Price, the availability (and reliability) of charging infrastructure while out and about, and battery life.
“At Berkshire Hathaway Automotive — and, really, the smarter manufacturers — we want to sell what consumers want to drive. Whether they choose a traditional internal combustion engine, a full battery electric vehicle, [or] a plug-in hybrid, we just want to sell what are going to meet [our] consumers’ needs.”
BERKSHIRE HATHAWAY
Two very interesting aspects to Berkshire at the moment that flow from this post that are worth throwing into the mix:
1/ Buffett is a huge fan of the methods of Henry Singleton, once having described him as the best capital allocator of all time. At the centre of Singleton's modus operandi was his use of stock as currency to acquire other businesses. He only did this when he viewed his stock as over valued because he was crystallizing the imaginary value created by the sentiment of the market, into tangible value by swapping the over valued stock for real assets. This is genius. Buffett has emulated this model over the course of his career, most notably with the acquisition of GenRe a couple of decades ago. So what does it tell us when Berkshire is sitting on a mountain of cash, approximately $250 billion, which could be used for acquisitions, but instead Buffett decides to use $1 billion in Class B stock to purchase the BHE shares owned by Walter Scott Jr? If nothing else, it certainly suggests that BHE is trading at a discount relative to the remainder of the Berkshire group. What else might it imply?
2/ Japanese companies have been stuck in a rut for years (see https://rockandturner.substack.com/p/japanese-equities-special-situation?utm_source=publication-search). Generally speaking, Japanese corporate management is mediocre at best, they hoard cash rather than reinvesting and so returns on capital decline steadily over time as earnings growth is slow while equity values climb rapidly. Some of these companies have a negative EV because their net cash position exceeds market cap. These are Benjamin Graham net/net businesses, but there's a catch - there has been no catalyst to unlock this trapped value, so why invest? This explains the depressed share prices and very low valuation multiples in Japan. To tackle this problem the Tokyo Stock Exchange in concert with the Japanese Government have introduced a raft of measures to unlock this trapped value - but I am not convinced that it will work. Mediocre management will remain in post and when a good business has mediocre management, it is the reputation of the management that prevails. The answer is for these companies to be acquired and for new owners to unlock that value. Berkshire would be ideal as an acquirer except that it has no presence in Japan and has no Japanese speakers in its senior management. So it has taken the next best approach. It owns about 9% of the five large Japanese trading houses (Mitsubishi Corp, Itochu Corp, Mitsui & Co, Sumitomo and Maurubeni Corp). These businesses, serial acquirers, are best placed to exploit this situation and as a major shareholder, Berkshire reaps the rewards. Better still, it has hedge the FX risk by issuing bonds in Japanese Yen to acquire the stakes - remember Japanese rates are almost zero, so why tie up capital? This means that its positions are leveraged to the point that returns are significantly magnified. This will be a huge catalyst for growth for Berkshire in the years ahead (just look at the annual rate of growth of these trading houses over the last 3, 5 or even 10 years - and that was before the raft of measures introduced by the Japanese government to boost corporate valuations. The fact that Berkshire is issuing more yen denominated debt reinforces this thesis. They are scaling into a long-term winning position with a huge tail wind.
Declaration: I am long Berkshire Hathaway