Nov 162015

Berkshire Hathaway (BRK.A, BRK.B) released its SEC 13F filing for the third quarter ending September 30, 2015 prior to the market opening today.  There were several major changes from the second quarter that were not previously reported.

The following stakes were increased:

(1) $340 million in Charter Communications  (CHTR)  (Ted Weschler or Todd Combs)

(2) $330 million in Liberty Media (LMCK)  (Ted Weschler)

(3) $300 million in General Motors (GM)  (Ted Weschler)

(4) $230 million in Suncor Energy (SU) (Ted Weschler)

(5) $200 million in IBM (IBM) (Warren Buffett)

There was a decrease in the following:

(1) $300 million in Goldman Sachs (GS) (Warren Buffett)

(2) $250 million in Wal-Mart (WMT) (Warren Buffett)

(3) $250 million in Viacom (VIAB) (Todd Combs) (Stake eliminated)

There were also smaller increases in Axalta (AXTA), Liberty Media Cl. A (LMCA), Liberty Global (LBTYA, LBTYK), and Twenty First Century Fox (FOXA).

Smaller decreases occurred in Bank of New York Mellon (BK), Chicago Bridge & Iron (CBI), Deere (DE),  Media General (MEG), and Wabco (WBC).

In addition, during the third quarter Berkshire acquired a $2 billion stake in AT&T (T) resulting from its acquisition of DirecTV (DTV), and a $23 billion position in Kraft Heinz (KHC) resulting from the Heinz acquisition of Kraft with 3G Capital.  (KHC is now Berkshire ‘s second largest stock holding behind only Wells Fargo (WFC), which is currently valued at $26 billion.)

I am quoted in a Bloomberg article on this topic:

“I’m surprised he had to sell anything to fund the Precision Castparts purchase, with over $60 billion of cash on his balance sheet,” David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business who has taken students to meet Buffett in Omaha, Nebraska, wrote in an e-mail.”



 Posted by at 11:46 pm
Nov 062015

After the market closed today, Berkshire Hathaway released its earnings for the quarter ending September 30, 2015 (Form 10-Q).

The highlights were:

(1) Net earnings increased by 104% compared to the third quarter of 2014, primarily as a result of a large one-time gain resulting from its stake in Kraft Heinz.

(2) Operating earnings declined by 3.7%.

(3) Income from its insurance operations declined by 34%, in large part  due to a sharp decline in premiums and earnings at the Berkshire Hathaway Reinsurance Group.

(4) Operating earnings from non-insurance businesses increased by 5%.  This included gains of 12% from BNSF railroad, and 13% from its energy operations, but a 4% decline in manufacturing, services, and retailing.

(5) Book value per Class A share equaled $151,083, an increase of 0.9% from June 30, 2014.

(6) At Berkshire’s closing price of $203,100 on November 6, it is currently trading at 1.34 times book value.  Warren Buffett has stated that he would buy back shares when Berkshire traded below 1.2 times book value.

(7) Berkshire had $66 billion of cash on its balance sheet as of September 30.  Warren Buffett has mentioned that he intends to have at least $20 billion of cash as a margin for safety.  Part of the remaining $46 billion has been earmarked for Berkshire’s planned acquisition of Precision Castparts which should close in early 2016.

(8) Berkshire has “no intention of disposing of our investment in IBM common stock”, even though it has unrealized losses in its investment of approximately $2 billion.

(9) There was an additional investment of about $3 billion in equity securities (“Commercial, industrial and other”) during the third quarter.  (Approximately $500 million was invested in Phillips 66 during the quarter.)

(10) Berkshire’s Class B shares traded lower by 0.7% in after hours trading.

I am quoted in TheStreet about Berkshire’s forthcoming earnings (November 5, 2015) as follows:

“The bottom line may look very good, but this is a one-time event,” said David Kass, a professor of finance at the Robert H. Smith School of Business at the University of Maryland and author of a blog dedicated to Berkshire Hathaway. “It’s certainly a real number, a real profit that’s being earned by Berkshire, and so it will make their earnings report look good. But I think the concern that many analysts might have, they will be focusing on continuing earnings, the operating earnings, what has occurred in the last quarter, and what’s likely to occur in subsequent quarters in the near future.”…

“He always puts a lot of weight on book value, which will depend heavily on the value of the stocks in his portfolio,” said Kass.

“As of the end of the second quarter, Berkshire Hathaway’s book value was $149,735. Kass said he doubts it would be moving very far from that number in the third quarter.”…

“As Berkshire has acquired large companies rather than pieces of companies as stocks in their portfolio, book value has become a smaller percentage of intrinsic value and therefore a less accurate estimate of the value of the firm,” Kass said.”…

“That doesn’t mean book value can be discounted completely, especially as it has also been established as a basis for determining repurchases. Berkshire’s board has approved a plan in place since 2012 to buy back its shares when they trade at a less than 20% premium to book value. “It sends a message to investors,” Kass said. “It results in basically creating a floor for the stock.”

(This blog post has been published by ValueWalk and





 Posted by at 10:19 pm
Nov 012015

In a Bloomberg article “Charlie Munger Isn’t Done Bashing Valeant” (November 1, 2015), Berkshire Hathaway Vice Chairman Charlie Munger describes Valeant as “deeply immoral” but is not Enron:

“Munger elaborated on Saturday: Valeant relied on “gamesmanship” to run up its value. Its strategy, using acquisitions and price increases, is different from ITT, but it still created a “phony growth record,” he said. Unlike Enron, Valeant’s stock isn’t a house of cards because it has some valuable properties, including its portfolio of treatments, he said.”

These comments are similar to my own in a Smith Brain Trust article (October 21, 2015):

“And unlike Enron, Valeant has real products through brands like Bausch & Lomb and popular pharmaceuticals.”

 Posted by at 9:24 pm
Oct 192015

On August 10, 2015, Berkshire Hathaway and Precision Castparts issued a joint press release announcing  that the boards of directors of Berkshire Hathaway Inc. (NYSE: BRK.A; BRK.B) and Precision Castparts Corp. (NYSE: PCP) have unanimously approved a definitive agreement for Berkshire Hathaway to acquire, for $235 per share in cash, all outstanding PCP shares. The transaction is valued at approximately $37.2 billion, including outstanding PCP net debt.

In a notice (dated October 13, 2015) of a special meeting to PCP shareholders to be held on November 19, 2015 to vote on this proposal, PCP’s financial advisor, Credit Suisse, provides a valuation of the company by performing (1) a comparable multiples analysis, (2) a comparable transactions analysis, and (3) a discounted cash flow analysis.

(1) Comparable Multiples Analysis – Taking into account the results of the selected companies analysis, Credit Suisse applied enterprise value multiple ranges of 10.0x to 11.0x to PCP’s CY 2015E EBITDA and 9.0x to 10.0 x to PCC’s CY 2016E EBITDA.  The selected companies analysis indicated an implied valuation reference range of $180 to $203 per share of PCP as compared to the proposed merger agreement of $235 per share.

(2) Comparable Transactions Analysis – Taking into account the results of the selected transactions analysis, Credit Suisse applied an enterprise value multiple range of 11.5x to 13.5x to PCP’s last 12 months EBITDA as of June 28, 2015.  The selected transactions analysis indicated an implied valuation reference range of $218 to $260 per share of PCP as compared to the proposed merger agreement of $235 per share.

(3) Discounted Cash Flow Analysis – Credit Suisse performed a discounted cash flow analysis of PCP by calculating the estimated net present value of the projected after-tax, unlevered free cash flow of PCP based on company forecasts.  Credit Suisse applied a range of terminal value multiples of 9.5x to 10.5x to PCP’s estimated FY 2021E EBITDA of $4.21 billion and discount rates ranging from 7.0% to 9.0%.  This analysis indicated an implied valuation reference range of $215 to $256 per share of PCP as compared to the proposed merger agreement of $235 per share.

ValueWalk and published this blog post on October 20, 2015.



 Posted by at 11:50 pm
Oct 132015

From the Omaha World-Herald (October 4, 2015):

What do Warren Buffett and Ndamukong Suh have in common?

A love of investing, for sure. The two have become friends in recent years, with Suh, the former Nebraska football star and now NFL player, conferring with Buffett, CEO of Berkshire Hathaway Inc., about financial matters.

Both are wealthy, although Buffett’s billions are on a higher scale than Suh’s $144 million playing contract with the Miami Dolphins.

Both have a philanthropic sense, with Buffett giving away billions each year and Suh contributing to the Nebraska football program.

Both are NU graduates.

Both were on the Dolphins sidelines for last week’s home opener, which Miami lost 41-14. Both wore shoulder pads and turquoise-colored jerseys bearing No. 93.


Buffett in Miami

 Posted by at 2:15 am
Sep 102015

I am quoted in an Omaha World-Herald article: “Could a deal for ConAgra be on Buffett’s Plate?” (September 10, 2015).

“This is a logical acquisition candidate because of ConAgra’s brands and leadership positions in its markets,” said David Kass, a finance professor at the University of Maryland and a shareholder of Berkshire Hathaway.

With ConAgra shares trading at about $41.50, the acquisition of 432 million shares would cost about $21 billion with a 20 percent premium included.

“This equals the amount Buffett describes as an ‘elephant’ that he is seeking,” said Maryland professor Kass.


 Posted by at 2:19 am
Sep 072015


Berkshire Hathaway is undervalued on a price/book value basis.

Berkshire’s price/book value is compared over the past 30 years.

Berkshire’s current price/book value of 1.31 is 17% below its 30-year average of 1.58.

This article is an update to my 2011 Seeking Alpha article, “Berkshire Hathaway Is Undervalued on a Price/Book Value Basis.”

In Warren Buffett’s 2014 Letter to Shareholders released on February 27, 2015, Buffett states that his measure of performance for Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), book value, is an understated proxy for intrinsic value. Furthermore, he states that in earlier decades, the relationship between book value and intrinsic value was much closer than it is now. That was true because Berkshire’s assets were then largely securities whose value was marked to market.

However, in recent years, Berkshire has focused on owning and operating large businesses that are worth far more than their book value. “Consequently, the gap between Berkshire’s intrinsic value and its book value has materially widened.” This would imply that Berkshire’s price/book value should be increasing in recent years if it is approximating its intrinsic value.

In the table below, I show for each year from 1985 through 2015, Berkshire’s book value per share and market price per share of its class A shares (year-end values except for 2015), as well as its annual price to book value ratio. From this table, it can be seen that Berkshire’s current (September 4, 2015) price to book value ratio of 1.31 is 17% below its 30-year average of 1.58. Indeed, in only five of the past 30 years has this ratio been lower than its current value. (In 2009, 2010, 2011 and 2012, the ratio was lower as the economy was recovering from the 2007-9 Financial Crisis, and in 1987, it was lower after the Stock Market Crash of 1987.)

Warren Buffett has previously stated that he would buy back shares when Berkshire’s price to book value is below 1.20. With the current price to book value of 1.31, Berkshire is only 9% above its effective “floor.” Since Berkshire’s price to book value ratio is also substantially below its historical average of 1.58, and with the gap between its intrinsic value and book value widening over time, Berkshire Hathaway is undervalued.

YearBook ValuePricePrice/Book Value
2015149,735 (June 30)196,501 (Sept. 4)1.31
2014146,188 (Dec. 31)226,000 (Dec. 31)1.55
 Posted by at 9:02 am
Aug 302015

Today is Warren Buffett’s 85th birthday.  It is also the 5th anniversary of the launching of this blog on August 30, 2010, on the occasion of Warren Buffett’s 80th birthday.  I hope the 170 posts on this blog over the past five years have been of interest to those who have taken the time to read them.

 Posted by at 8:19 am
Aug 292015

In an SEC Form 4 filing after the market closed on Friday, August 28, 2015, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) disclosed a $4.5 billion stake in Phillips 66 (NYSE:PSX).  Berkshire now holds 58 million shares of PSX, representing almost 11% of its outstanding shares.  Approximately 3 million of these shares were purchased during August 26 – 28, 2015 at prices ranging from $71 to $77 per share.  PSX closed Friday at $77.23.  Berkshire held a 7.5 million share position in PSX as of March 31, 2015, but apparently received confidential treatment on its investment in PSX as of June 30, 2015.  Previously, Warren Buffett, Ted Weschler and/or Todd Combs, had invested in PSX.  Since Berkshire’s additional investment in PSX this week resulted in an ownership stake of 10%, it was required by the SEC to disclose its stake.

PSX is the largest U.S. oil refiner.  Since the price of oil fell by half last year, gasoline demand in the U.S. has surged to an 8-year high as the price per gallon has fallen below $3.  Many non-refining businesses within PSX, such as its midstream unit, are substantial and stand to benefit if currently beaten-down oil and natural-gas prices rebound.



 Posted by at 12:49 am
Aug 242015


Aug 24, 2015

World Class Faculty & Research


SMITH BRAIN TRUST — This week’s market selloff has made a lot of people itchy to trade stocks. They want to sell before things get worse or, alternatively, maybe pick up some bargains. David Kass, professor of the practice at the University of Maryland’s Robert H. Smith School of Business, explains why you should resist the impulse to guess where the market is headed.

Q. People who own stocks are watching the markets tumble and want to do something. Should they resist that urge?

A. The natural desire to follow the crowd — herd instinct — can be very detrimental to investment performance over the long run. For example, during the panic selling that occurred at the market open Monday, shares of many of the finest companies in the world were marked down substantially. The supply of shares being sold overwhelmed the demand from buyers. Shares of Apple (AAPL) traded as low as $92.00 soon after the market opened, a discount of 17 percent from Friday’s close of $105.76. The shares subsequently recovered a few hours later, with its price exceeding its previous close. Similarly, J.P. Morgan Chase (JPM), which closed at $63.60 on Friday, traded as low as $50.07 on Monday morning, a discount of 22 percent, before recovering virtually all of its decline. Finally, Kraft Heinz (KHZ) traded as low as $61.42 Monday morning, a 15 percent decline below its previous day’s close of $72.27, before fully recovering.

Short-term traders and market timers are more likely to have their investment decisions dictated by their emotions of fear or greed than sound judgment and analysis performed over time with long-run goals in mind. A buy-and-hold strategy is less likely to be influenced by the behavior of others.

Q. More generally — apart from unusual episodes like the ones that ended last week and began this one — is it possible to monitor the market carefully to buy low and sell high? 

A. It is extremely difficult to outperform the market over the long run by employing market-timing strategies. Predicting the movement of individual stocks or sectors over the short run is subject to risks resulting from both internal and external shocks. Unexpected events having either a positive or negative impact on an individual company, industry or sector are virtually impossible to anticipate. Major economic or political news, along with natural or man-made disasters, either domestic or international, can create substantial movements in equity prices across the entire market.

By contrast, the antithesis of market timing, which is a buy-and-hold strategy, is likely to succeed. Several academic studies have shown that equities have appreciated by about 9 percent to 10 percent (including dividends) annually over many decades. A well-diversified portfolio of stocks, or a low-cost S&P 500 index fund, such as that offered by Vanguard, should enable an investor to achieve similar returns in the future.

Q. Do market-timing strategies have any other disadvantages?

A. In addition to the challenges of forecasting short-term price movements, frequent trading will result in considerable transaction costs as well as tax liabilities.

Q. Are there any circumstances under which a market timing strategy can succeed?

A. Short-term trading strategies might depend on luck at least as much as skill. Over short periods of time, active traders might be able to outperform the market by correctly anticipating price movements. However, the randomness of events — both internal and external to individual companies — and/or sectors make it very unlikely that outperformance can be achieved over any extended time period. For example, correctly predicting the price of oil over the next few days or weeks might be possible for some, but how many traders will also be able to accurately forecast the level and direction of oil prices beyond this short-time horizon?

Q. How supportive is the academic finance literature of your views on this topic?

A. I am not aware of any academic study indicating that a short-term trading strategy results in long-term outperformance relative to a buy-and-hold strategy such as that offered by a low-cost S&P 500 index fund. The most successful investors, such as Warren Buffett of Berkshire Hathaway, have accumulated their fortunes by primarily being long-term investors. Most investors, individuals and institutions tend to invest at market tops and sell at market bottoms. This “buy high and sell low” behavior, heavily influenced by short-term market psychology, clearly results in underperformance relative to a steady buy-and-hold strategy.

 Posted by at 10:36 pm