Dec 182014
 

After outperforming the S&P 500 and Warren Buffett in both 2012 and 2013, Todd Combs and Ted Weschler may have underperformed  the S&P 500 in 2014.

Combs and Weschler are each managing about $7.5 billion of the $120 billion equity portfolio of Berkshire Hathaway (BRK.A) (BRK.B).  Their largest investments, DirecTV (DTV) and DaVita (DVA), performed very well, with each outperforming the S&P 500 by about 10 percentage points.  DTV (Combs and Weschler) and DVA  (Weschler) are each currently valued at more than $2.5 billion.

However, their investments in General Motors ($1.3 billion) (Weschler) is down 20% this year, and Chicago Bridge & Iron ($500 million) (Combs) has lost about 50% of its value.  By contrast, the S&P 500 has risen over 10% in 2014.  Other declines in the Combs and Weschler portfolios include National Oilwell Varco (NOV), Suncor Energy (SU), Viacom (VIAB), and Liberty Media (LMCA).  However, the following Combs/Weschler investments rose in 2014: Charter Communications (CHTR), Liberty Global (LBTYA), Mastercard (MA), Visa (V), Precision Castparts (PCP), and Wabco (WBC).

Calculating the returns to the Combs and Weschler portfolios from outside the company is a combination of art and science since Berkshire does not reveal who is responsible for each pick in its Form 13F filings to the U.S. Securities and Exchange Commission. Nor does it list when shares were acquired or when they were sold and at what prices. 

With respect to Warren Buffett’s performance in 2014, his largest equity investment, Wells Fargo (WFC), rose about 25% in 2014 and is currently valued at about $27 billion.  His next three largest investments are Coca-Cola (KO) ($17 billion) (+5%), American Express ($14 billion) (+8%), and IBM (IBM) ($11 billion) (- 13%).

I am quoted in a Bloomberg article on this topic:

“It appears, on first glance, that Todd and Ted have underperformed the S&P 500 this year,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business who has studied Berkshire’s portfolio.

The entire article is available at:

http://www.bloomberg.com/news/2014-12-18/buffett-s-backup-stock-pickers-stumble-as-gm-declines.html?cmpid=yhoo

 

 Posted by at 11:07 pm
Dec 142014
 

In a Berkshire Hathaway (BRK.A, BRK.B) news release dated December 12, 2014, “Berkshire Hathaway Completes Investment in Restaurant Brands International Inc.”, Berkshire revealed that it currently owns 4.18% of the common shares of Restaurant Brands International (QSR), and it controls 14.37% of the total number of votes attached to all outstanding voting shares of the Corporation.

Upon the closing of the Burger King (BKW) acquisition of Tim Horton’s (THI) on December 12, 2014, Berkshire purchased, for a total of $3 billion, a 9% perpetual voting preferred stock and exercised a warrant to purchase 8,438,225 common shares at the exercise price of $0.01 per share (at a cost of $84,382.25).  The exercise of this warrant represented 1.75% of the common shares of the merged firm.

This is discussed in a Bloomberg article on this topic:

http://www.bloomberg.com/news/2014-12-15/berkshire-to-hold-larger-stake-in-burger-king-tim-hortons-parent.html?cmpid=yhoo

 

 Posted by at 1:52 pm
Dec 102014
 

When Burger King’s (BKW)  acquisition of Tim Horton’s (THI) closes on December 12, Berkshire Hathaway (BRK.A, BRK.B) will purchase $3 billion of 9% preferred shares and receive a warrant to purchase 1.75% of the common shares of the combined company at an exercise price of $0.01 per common share.  Berkshire has informed Burger King that it intends to exercise the warrant promptly following the closing of the transaction.  Berkshire will then own 8.4 million shares with a current market value of about $275 million.

Although the preferred shares will result in Berkshire receiving annual dividends of $270 million, approximating the current value of its common shares of the merged company, Berkshire’s “penny” warrants are atypical compared to its financing in recent years of Goldman Sachs (GS), General Electric (GE), Dow Chemical (DOW), and Bank of America (BAC).  In each of the latter deals, Berkshire either waited several years (GS and GE) to convert its warrants or has not yet converted (DOW and BAC).  The conversion of Berkshire’s penny warrants requires a relatively small investment of only $84,000 for the 8.4 million shares of the merged company’s common shares.  The new company will be named Restaurant Brands International, have a ticker symbol of QSR, and trade on the New York Stock Exchange.

I am quoted in an Omaha World-Herald article (December 10) on this topic:

“The common shares will be highly marketable securities, but I don’t see Buffett selling them anytime soon,” said David Kass, a University of Maryland business professor and Berkshire shareholder. “Some people may say the shares are topped out, but next time Berkshire reports its holdings, I think we will see that Buffett does not think that.”

The entire article is available at:

http://www.omaha.com/money/burger-king-deal-to-bring-berkshire-quick-gain/article_10693b8a-d0c6-5d00-8277-89026a8570ec.html

 Posted by at 8:32 am
Dec 092014
 

I am quoted in an Omaha World-Herald article on Berkshire Hathaway Insurance entering Singapore (December 9, 2014):

“It is one of the best economies in the world, certainly in Southeast Asia,” said David Kass, a business professor at the University of Maryland and a Berkshire shareholder. “It is a great financial and economic environment and it makes great sense to expand there.”

Insurance is the lifeblood of Berkshire, whose businesses run from boxed confections at See’s Candies to industrial chemicals at Lubrizol. Insurance businesses provided Buffett with $77 billion as of December 2013, money that had been paid in by customers as premiums but not yet paid out to settle claims. That money, called float in the insurance industry, can be used to invest in other ventures.

“It is the fuel for Warren Buffett’s investments,” Kass said.

The entire article is available at:

 

 Posted by at 7:51 am
Dec 052014
 

When Burger King’s (BKW)  acquisition of Tim Horton’s (THI) closes on December 12, Berkshire Hathaway (BRK.A, BRK.B) will purchase $3 billion of 9% preferred shares and receive a warrant to purchase 1.75% of the common shares of the combined company at an exercise price of $0.01 per common share.  Berkshire has informed Burger King that it intends to exercise the warrant promptly following the closing of the transaction.  Berkshire will then own 8.4 million shares with a current market value of about $300 million.

 

From the Burger King/Tim Horton’s prospectus:

“In connection with the transactions,
Berkshire Hathaway Inc. (“Berkshire”) will purchase for an aggregate purchase price of $3,000,000,000 (USD),
(a) Class A 9% cumulative compounding perpetual voting preferred shares of Holdings (the “preferred shares”) and
(b) a warrant to purchase Holdings common shares (the “warrant”), which shares issuable pursuant to the warrant
will represent 1.75% of the fully diluted common shares of Holdings as of the completion of the transactions, at an
exercise price per Holdings common share of $0.01. The warrant may be exercised until the fifth anniversary of the
closing of the transactions. Berkshire has informed Holdings that it intends to exercise the warrant promptly
following the closing of the transactions.”

 

http://www.omaha.com/money/berkshire-hathaway-gets-percent-interest-stock-in-burger-king-tim/article_410c071e-3db5-11e4-93f8-0017a43b2370.html

http://online.wsj.com/articles/burger-king-nears-closing-tim-hortons-acquisition-1417785495?

 Posted by at 11:43 pm
Dec 012014
 
I am quoted in a Omaha World-Herald article (November 30, 2014) on Berkshire Hathaway and clean energy:

“Omaha’s Berkshire Hathaway appears set to gain from the energy changes. The company owns two major U.S. pipelines, including Omaha-based Northern Natural Gas, the nation’s largest. Berkshire’s MidAmerican Energy, based in Iowa, is the utility industry’s biggest generator of wind energy.

The company also has invested billions in solar projects, including one in California described as the largest solar farm in the world. It’s under construction, scheduled for completion next year.”

“Berkshire’s energy investments show a certain amount of foresight in reading the tea leaves,” said David Kass, a University of Maryland business professor who follows Berkshire and is a shareholder. “Seeing what direction the country is going with green technology has allowed Berkshire to get there faster than others.”
 
The entire article is available at:
 Posted by at 7:35 am
Nov 162014
 

In its SEC 13F filing after the market closed on Friday, November 14, Berkshire Hathaway (BRK.A, BRK.B) revealed several major changes to its portfolio during the third quarter of 2014.

Berkshire’s four largest transactions involved increasing its previous stakes in three companies, and divesting its prior investment in a fourth as follows:

(1) DirecTV (DTV) – Holding increased by over $500 million, or 28%, to 30,000,000 shares currently valued at $2.6 billion.  This is an investment of both Ted Weschler and Todd Combs.

(2) Charter Communications (CHTR) – Stake increased by over $400 million, or 114%,  to 4.95 million shares currently valued at about $750 million.  This is likely an investment of Ted Weschler or Todd Combs.

(3) General Motors (GM) – Holding increased by over $200 million, or 21%, to 40 million shares currently valued at $1.2 billion.  Warren Buffett has previously attributed this investment to Ted Weschler.

(4) Deere & Co. (DE) – Sold entire holding of 4 million shares currently valued at over $300 million.  This investment was made by Todd Combs (Fortune Magazine, October 27, 2014).

 

 

 

 

 

 Posted by at 10:04 pm
Nov 132014
 

Berkshire Hathaway (BRK.A, BRK.B) has announced that it will acquire the Duracell battery business from Procter & Gamble (PG) plus $1.7 billion in cash in exchange for its PG shares valued at $4.7 billion.  This is very similar to its recent deals for subsidiaries of Phillips 66 (PSX) and Graham Holdings (GHC) which were tax efficient transactions.

Warren Buffett  has stated: “I have always been impressed by Duracell, as a consumer and as a long-term investor in P&G and Gillette.  Duracell is a leading global brand with top quality products, and it will fit well within Berkshire Hathaway.”

PG had previously said that it was looking to exit its Duracell battery business as part of a larger plan to divest up to half its brands to simplify and speed sales growth.  Duracell has the largest market share in the battery market with $2.2 billion in annual sales.

 Posted by at 7:52 am
Nov 082014
 

Berkshire Hathaway reported a 29% increase in third quarter operating profits as compared to the corresponding quarter in 2013.  Including a $678 million impairment charge relating to its investment in U.K. retailer Tesco, and accounting for investment sales and derivatives, net income declined 8.6%.  Warren Buffett has said on numerous occasions that Berkshire’s performance should be judged by its operating earnings and not by the timing of its investment sales or its accounting for its derivatives.  Berkshire’s operating profit of $2,876 per Class A share exceeded by 11% the $2,594 expected by analysts polled by Thomson Reuters.  Revenues rose by 10%.

Approximately 70% of Berkshire’s operating earnings were derived from its non-insurance businesses, primarily Burlington Northern Santa Fe Railroad,  Berkshire Hathaway Energy, and its various manufacturing, service, and retailing units.

As of September 30, 2014, Berkshire’s stock portfolio was valued at $118.9 billion.  Its cash position was at a record level of $62.4 billion versus $48.2 billion a year earlier.  Since Mr. Buffett has stated that he would like to have $20 billion in cash at all times, he now has over $40 billion available for one or more major acquisitions.

At Friday’s closing price of $214,970, each Class A share currently is valued at 1.5 times Berkshire’s book value of $144,542.  This is very close to Berkshire’s historical average ratio of  market value to book value.

I was quoted in a Bloomberg Businessweek article on this topic:

The $678 million impairment on Berkshire’s Tesco holding was a rare blunder for Buffett, who has amassed a superlative investing record during his five decades leading Berkshire. The grocer’s shares fell about 34 percent in the third quarter after the company disclosed its profit estimate was overstated.

“It’s certainly an anomaly,” said 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. “He’s not perfect, but his batting average is still high.”

The entire article is available at:

 http://www.businessweek.com/news/2014-11-07/berkshire-profit-falls-8-dot-6-percent-on-investments-to-4-dot-62-billion

 

 Posted by at 10:29 am
Nov 052014
 

Last evening at a book talk in Washington, DC by Lawrence Cunningham (Berkshire Beyond Buffett, Columbia University Press, 2014), Don Graham (Chairman of Graham Holdings and former Chairman of the Washington Post Company) provided numerous insights into Warren Buffett and Berkshire Hathaway.  Mr. Graham noted that not only is Warren Buffett the world’s greatest investor, but he is also one of the top 3 or 4 CEO’s.  Yesterday’s closing price of Berkshire Hathaway Class A at $213,000 per share was an all-time high.   Berkshire is now valued at over $330 billion and is the fifth largest company by market capitalization.  He noted that Berkshire’s shares have the lowest turnover of any stock on the New York Stock Exchange.  Berkshire’s shareholders follow Warren Buffett’s lead and typically plan to hold their shares forever.

Don Graham also reminisced about the role Warren Buffett played in saving Salomon Brothers in 1991.  Previously, in 1987, Berkshire had invested $700 million in Salomon.  As a result of a Treasury bond trading scandal, its CEO was forced to resign and was replaced by Warren Buffett.  At that time, Mr. Buffett had mentioned to Mr. Graham, that if Salomon had been allowed to fail it would have triggered “a world-wide financial catastrophe” as a result of its numerous transactions with many counter-parties around the world.   Warren Buffett was primarily concerned about preventing a major financial crisis rather than saving his company’s investment.  In frequently cited Congressional hearings on Salomon in 1991, Mr. Buffett said he told Salomon employees: “Lose money for the firm and I will be understanding, lose a shred of reputation for the firm and I will be ruthless” .

Each member of Berkshire’s board of directors receives only $1,000 per meeting and is not insured.  However, the board is comprised of “huge shareholders” of Berkshire.  Warren Buffett’s annual compensation is only $100,000, but he also owns 40% of Berkshire.  Don Graham, however, expects the next CEO to be paid substantially more.

Don Graham also mentioned that it was Meg Greenfield at the Washington Post who introduced Bill Gates and Warren Buffett to each other at a party she hosted.

Currently, Warren Buffett has 80 people (80 companies owned by Berkshire) reporting to him at Berkshire.  (Tracy Britt Cool also has a few Berkshire company CEO’s reporting to her.)  However, the next CEO of Berkshire will reorganize the firm with fewer managers reporting directly to him.

With respect to the Berkshire annual meeting which currently attracts 40,000 shareholders, Don Graham believes that under the next Berkshire CEO, there “will not be 30,000 people” in attendance.  There is no other company annual meeting that approaches that of Berkshire.

Finally, Don Graham mentioned that if someone had invested $10,000 in 1965 in a good stock such as Procter & Gamble or General Electric, that investment would be worth hundreds of thousands today.  But, $10,000 invested in Berkshire would today be worth millions.

(Note 1:  I was an outside reviewer of the author’s book proposal and manuscript for Columbia University Press.)

(Note 2:  I am quoted twice in this book — on p. 15 (footnote 17) and p.123 (footnote 12) with respect to See’s Candies.)

 

 Posted by at 7:46 am