Category Archives: Warren Buffett

Commentary: Will Berkshire Ever Seal the Deal on USG?

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If ever there was a company that looks like the perfect fit for Berkshire Hathaway it would have to be USG–the leading manufacturer of gypsum wallboard. After all, Berkshire already owns insulation manufacturer Johns Manville, Acme Brick, and presently has a 41.91% stake in USG.

USG and Berkshire

Berkshire has a minority stake in USG that goes back to 2000, when it purchased 6.5 million shares, and later increased its holding during the nadir of the Great Recession.

In 2008, with the housing market imploding and lending all but frozen, Berkshire came to USG’s rescue with $300 million of convertible notes that paid Berkshire 10-percent interest. At the time, the boost in confidence that USG received from Warren Buffett’s financing helped the company avoid bankruptcy. Boost investor confidence it certainly did, and the day of the transaction USG’s stock soared 22-percent to $6.89 a share.

Five years later, in December 2013, Berkshire exchanged $243.8 million of the convertible notes for common stock, and with additional purchases, its stake in USG now makes it the company’s single largest shareholder.

USG is a solid earner with a Price/Book of 2.16, a P/E of only 3.73, and EPS of $6.72. The stock currently pays no dividend and USG has stated they have no plans to do so. USG does carry a substantial amount of debt, which as of December 31, 2014, totaled $2.209 billion.

Wallboard Numbers Are Up

So, is now the time for Berkshire to fully bring USG into the Berkshire family of companies? Demand for gypsum wallboard is up. According to the Gypsum Association, a not-for-profit trade association, roughly 21.8 billion square feet of gypsum board were shipped in 2014. This was an increase of approximately 4% from 20.9 billion square feet in 2013. USG’s share of the gypsum board market in the U.S was approximately 26% in 2014, basically unchanged from 2013.

The Chinese Drywall Scandal

As an American manufacturer, USG has been a beneficiary of the Chinese drywall scandal that came to a head in 2009. Imported wallboard from China that had high sulfur content brought reports of fumes that created upper respiratory problems, and the market for wallboard from China was hit hard. Thousands of homes in Florida and other states needed to have their wallboard ripped out and replaced.

About USG

In 1902, 30 independent gypsum rock and plaster manufacturing companies merged to form the United States Gypsum Company. Over more than a century, USG has been issued 1,100 patents for its products. In addition to wallboard, the company is a leading manufacturer of acoustical panel and specialty ceiling systems. The company has 34 manufacturing plants in the U.S., and has roughly 9,000 employees in more than 30 countries.

USG’s a true market leader with a 26% market share of the U.S. gypsum wallboard market. It is followed by National Gypsum at 21%, and Georgia-Pacific at 16%. It has an even more commanding 50% share of the joint compounds market.

Time to Pull the Trigger?

The Chicago-based company has seen its ups and downs, including three bankruptcies. The last bankruptcy was in July 25, 2001 under Chapter 11 in order to deal with a mountain of asbestos litigation costs related to asbestos containing joint compounds. The establishment of the The United States Gypsum Asbestos Personal Injury Settlement Trust put the company’s asbestos woes in the rear-view mirror, and its stock price reflects it.

Also on the upside is the extensive cost cutting the company has done over the past decade. USG has closed high-cost manufacturing plants, and used salaried workforce reductions and other cost reductions to trim an additional $22 million to $28 million annually. In all, its cost reductions have totaled $500 million.

With a market cap of just over $3.66 billion ($1.46 billion of which is already owned by Berkshire), USG is a great fit for Berkshire if it wants to gobble up the whole thing. USG would fit nicely into the Marmon Group of companies, which include a host of companies that supply the construction industry.

So, will Berkshire pull the trigger? A two billion dollar deal is not a big one for Berkshire these days, and with new housing starts hitting a nine-year high, and slowly heading back towards the historical levels of 1.5 million starts a year, USG looks like a solid company worth adding to the Berkshire portfolio.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Warren Buffett Vigorously Defends Clayton Homes in Annual Shareholder Letter

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“The Best defense is a good offense,” is the old saying, that is exactly the approach Warren Buffett continues to take in defending Berkshire Hathaway’s mobile-home manufacturer Clayton Homes from those who say it preys on low-income home buyers.

It was less than a year ago that the company first came under attack, when with the force of a volcano, a Seattle Times and the Center for Public Integrity investigative report titled “The Mobile Home Trap” accused Clayton Homes of relying on “predatory sales practices, exorbitant fees, and interest rates…trapping many buyers in loans they can’t afford and in homes that are almost impossible to sell or refinance…”

Buffett’s immediately addressed the accusations head on at the 2015 Berkshire Hathaway annual meeting, when he said, “I make no apologies whatsoever about Clayton’s lending terms.”

Now, in his 2015 annual letter to shareholders, Buffett has a devoted one and a half pages to defending Clayton Homes from its detractors.

In a vigorous defense, Buffett wrote:

“Our retail outlets, employing simple language and large type, consistently inform home buyers of alternative sources for financing – most of it coming from local banks – and always secure acknowledgments from customers that this information has been received and read.”

In an unusual move, Buffett went so far as to include the actual form on page 119 of the 2015 annual report.

In the Same Boat as the Home Buyer

In defending Berkshire’s practices as a home seller and mortgage lender, Buffett points to Berkshire’s holding on to the mortgages it originates rather than selling them off in the broader market. Buffett notes that this adds risk to Berkshire, and that by holding on to the mortgages it is in the same boat as the home buyer. If a home buyer defaults on their mortgage it leaves Berkshire not only with a bad loan, but it also has to eat the costs associated with repossessing a used mobile home.

“At Clayton, our risk retention was, and is, 100%. When we originate a mortgage we keep it (leaving aside the few that qualify for a government guarantee). When we make mistakes in granting credit, we therefore pay a price – a hefty price that dwarfs any profit we realized upon the original sale of the home. Last year we had to foreclose on 8,444 manufactured-housing mortgages at a cost to us of $157 million. The average loan we made in 2015 was only $59,942, small potatoes for traditional mortgage lenders, but a daunting commitment for our many lower-income borrowers. Our buyer acquires a decent home – take a look at the home we will have on display at our annual meeting – requiring monthly principal-and-interest payments that average $522.

Some borrowers, of course, will lose their jobs, and there will be divorces and deaths. Others will get overextended on credit cards and mishandle their finances. We will lose money then, and our borrower will lose his down payment (though his mortgage payments during his time of occupancy may have been well under rental rates for comparable quarters). Nevertheless, despite the low FICO scores and income of our borrowers, their payment behavior during the Great Recession was far better than that prevailing in many mortgage pools populated by people earning multiples of our typical borrower’s income.”

Congress Weighs In

The Seattle Times report did not fall on deaf ears in the halls of Congress. In January, Representatives Maxine Waters, Michael Capuano, Emanuel Cleaver and Keith Ellison wrote a letter to the Justice Department and the Consumer Financial Protection Bureau calling for a probe of the company’s lending practices.

So far, there has been no action by the Justice Department or the Consumer Financial Protection Bureau, and in his annual letter Buffett forcefully touts what he feels is Berkshire’s outstanding record in regards to adhering to the regulations that govern mortgage lending.

“Let me talk about one subject of which I am particularly proud, that having to do with regulation. The Great Recession caused mortgage originators, servicers and packagers to come under intense scrutiny and to be assessed many billions of dollars in fines and penalties.

The scrutiny has certainly extended to Clayton, whose mortgage practices have been continuously reviewed and examined in respect to such items as originations, servicing, collections, advertising, compliance, and internal controls. At the federal level, we answer to the Federal Trade Commission, the Department of Housing and Urban Development and the Consumer Financial Protection Bureau. Dozens of states regulate us as well. During the past two years, indeed, various federal and state authorities (from 25 states) examined and reviewed Clayton and its mortgages on 65 occasions. The result? Our total fines during this period were $38,200 and our refunds to customers $704,678. Furthermore, though we had to foreclose on 2.64% of our manufactured-home mortgages last year, 95.4% of our borrowers were current on their payments at yearend, as they moved toward owning a debt-free home.”

While all has been quiet recently in regards to Clayton Homes, the fact that Buffett has devoted so much space in his annual letter to defending the company may mean that more tremors are coming, and issues related to Clayton Homes could erupt again in the future.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Berkshire to Live-Stream 2016 Annual Meeting

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Until now, if you wanted to hear Warren Buffett and Charlie Munger answer questions at the Berkshire Hathaway annual meeting you had to make the pilgrimage to Omaha, Nebraska.

Over 40,000 people from all over the world did just that last year and when they got there they heard Buffett and Munger take 5 hours of shareholder and financial reporter questions. Their answers, which contain insight, humor and wisdom, have never been allowed to be audio or video recorded.

Now, Berkshire Hathaway is letting the rest of the world in on the action. The 2016 Berkshire Hathaway annual meeting, which will be held at the CenturyLink Center on April 30, 2016, will be live-streamed over the internet.

Will the move keep people from travelling to Omaha for Berkshire’s event-filled weekend? Unlikely, as hearing Warren Buffett and Charlie Munger in person is always a treat.

And, besides, you can always get your year’s supply of See’s Candies.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Commentary: A Christmas Wish List for Under Warren Buffett’s Tree

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Here’s a Christmas wish list for presents under Warren Buffett’s tree. The items are big, so we’ll fit them under Charlie Munger’s tree as well.

1. Precision Castparts: There’s nothing like getting the present you bought for yourself. The pending acquisition the aerospace manufacturer looks like the gift that will keep on giving.  Demand for new airplanes will double over the next 15 years, as aging fleets are retired and millions more people start to fly regularly in India and China.

2. Duracell: Because everyone likes to get cash for Christmas! With the Duracell acquisition set to close in February 2016, Berkshire will gain not only the leading alkaline battery manufacturer, but will also get a company recapitalized by P&G with $1.7 billion in cash, and will get huge tax savings as it trades in its appreciated P&G stock for the battery maker.

3. More German Companies: Warren Buffett’s admiration for the German economy was on full display at the Berkshire Hathaway annual meeting in May 2015. This past February, Berkshire Hathaway struck a deal to acquire Devlet Louis Motorradvertriebs, a mail-order and retail chain selling motorbike clothing and accessories. The move, according to Buffett, was just the first small acquisition in a country with a strong economy and work ethic. And, with a rising dollar and a shaky euro, will more German companies fit under Berkshire’s tree?

4. Lots of Natural Gas: As the world dumps coal and moves to cheaper and cleaner forms of energy, Berkshire’s on the verge of striking it rich in Australia’s gas fields. Natural gas prices may be cratering now, but it never hurts to have a majority share of four trillion cubic feet of gas-in-place (yes, trillion) in Australia’s Whicher Range and Wonnerup gas fields. A new test well hopefully will bring good news in the new year.

5. More Auto Dealers: When Berkshire Hathaway jumped into the auto retailing business in March 2015, with its acquisition of the Van Tuyl Group, it added a whole new line of business to the mega-conglomerate. The Van Tuyl Group was the largest privately owned auto dealership group in the U.S., and Buffett promised that this was just the start of building a major auto-retailing empire. So, will Herb Chambers Companies, a privately-held, Boston-based dealership group with 55 total dealerships, be the perfect fit for Berkshire Hathaway Automotive? Its owner looks ready to sell. Time to wrap this one up and put a bow on it.

6. Happy Pilots at NetJets: Forget your crazy uncle, there’s nothing like having a happy family at Christmas. This holiday, NetJets’ pilots and its flight attendants will be celebrating their new contracts that bring substantial raises. Hopefully, they’ll use it to buy some of Berkshire’s fine products. How about some jewelry from Borsheims? It’s been a good year. Go for it!

7. More Solar & Wind! Berkshire’s quickly becoming the leading energy producer and distributor of solar and wind energy. This year saw major wind farm projects, including a new wind farm site in Adams County, Iowa, which will produce 162 megawatts of additional wind generation capacity in Iowa. Berkshire’s aggressive expansion of it solar power farms saw its Topaz Solar Farm in San Luis Obispo County, California, become one of the largest photovoltaic solar farms in the world. And, there’s plenty of room under the tree for more such projects, which not only bring cheap energy, but also lower environmental costs as they are emissions free. With the cost of solar energy dropping fast, Berkshire’s been signing amazing deals that are a Christmas present now and for decades to come. In Nevada, it has contracted to buy electricity from First Solar’s soon to be built Playa Solar 2 at the astoundingly low rate of only 3.87 cents a kilowatt-hour, and the deal is a fixed rate contract for twenty years.

8. More Deals with 3G Capital: Because everyone likes surprises. 3G’s aggressive acquisition strategy has been the perfect partner for Berkshire’s cash. 3G brings not only the aggressive cost-cutting (aggressive is an understatement) that is bringing legacy companies such as Kraft-Heinz into the 21st century, but also gives excellent financing and equity opportunities. 3G’s merger of Burger King with Tim Hortons brought Berkshire fat interest payments and made Berkshire a minority owner of the newly formed Restaurant Brands International. Surely, there are more deals to be done.

Hard to fit this all under the Christmas tree? Berkshire’s a big company. There’s room for all this and more.

Merry Christmas everybody!

–David Mazor

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Kraft Heinz Slashing Ad Agency Dollars as Part of Cost Cutting

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Newly formed Kraft Heinz is looking to change the way it produces its advertising, as part of its goal in wringing $1.5 billion in annual savings out of the combined company.

After merging on July 2, 2015, Kraft Heinz is now third-largest food and beverage company in North America and ranked number five world-wide. The company has eight $1 billion+ brands.

The merger left Heinz’s ad agency out in the cold. In late August, management shifted the Heinz accounts that had been handled by Interpublic’s UM to Kraft’s agency Starcom MediaVest Group’s Starcom. In addition, Kraft Heinz is now reviewing all of its creative accounts, according to Ad Age.

Ad Age reports that all the creative agencies have been asked to provide information and those chosen will be responsible for creative ideas, but will no longer provide the actual production of the ads, which will go directly to production houses.

Cost-Cutting Across the Board

Kraft Heinz’s chief executive Bernardo Hees is a partner in 3G Capital, which teamed with Berkshire Hathaway take over both companies and merge them together. He came to the helm of the combined company after a stint as the chief executive at A.J. Heinz where he slashed 7,000 jobs and brought a tight-fisted approach that made no expenditure too small to be examined.

At Heinz, Hees imposed cost controls big and small that include cuts to travel expenses, limits on the number of printer copies that can be made each month, the elimination of snacks in break rooms, and new mandates on cutting electricity usage. After assuming the helm of Kraft Heinz he immediately cut 2,500 jobs in his first week.

Among the management changes Hees has made was the appointment of Nina Barton to Senior VP of Marketing Innovation, Research and Development. Ms. Barton first joined Kraft in 2011 and was most recently the VP of Marketing for Coffee. She reports directly to George Zoghbi who was appointed Chief Operating Officer of U.S. commercial business.

Gone were Tom Bick, who was Heinz’s senior director-integrated marketing communications and advertising for the Oscar Mayer business, and Kara Henry, who was Heinz’s senior marketing director, communications and agency relations.

Warren and Charlie Agree

Warren Buffett and Charlie Munger’s have both supported Hees’s approach, believing that these legacy food companies, which both date back to the 1800s, need cost-cutting to be competitive in the 21 century.

“3G has been buying businesses that have too many people,” Buffett explained at the 2015 Berkshire Hathaway annual meeting. “You will have never found a statement from Charlie or me saying that a business should have more people than needed.”

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Commentary: Is there Money for Berkshire in an A-B InBev Merger with SABMiller?

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As soon as the news hit that a megamerger was in discussion between Anheuser-Busch InBev and SABMiller, my first thought was “Is there money to be made for Berkshire?”

There sure is.

A merger of Anheuser-Busch InBev and SABMiller would create a $275 billion company, and would need somewhere around $100 billion in financing to complete the deal.

With Anheuser-Busch InBev controlled by Brazilian private equity firm 3G Capital Management, it would be logical that such a mammoth deal could use at least some financing from Berkshire Hathaway.

The companies previously collaborated on 3G’s Burger King takeover of Tim Hortons, and 3G and Berkshire’s worked jointly to takeover A. J. Heinz, and later to merge it with Kraft Foods Group.

Berkshire and 3G clearly like working together because each provides half of a winning formula. Berkshire produces a lot of cash that needs to be put to work, and 3G is an acquirer of large-scale, high quality assets for which it provides management that aggressively wrings out savings that flow back to shareholders.

Any takeover by Anheuser-Busch InBev of SABMiller is sure to face antitrust issues, as the combined company would own 30% of the global beer market, but if it could get by regulators, here’s what to expect.

Preferred Stock Financing

For the past decade, Warren Buffett has especially used the issuance of preferred shares that pay Berkshire a fixed dividend in exchange for billions in financing.

Buffett’s love of preferred stock financing provided much needed cash to Goldman Sachs, Wrigley, and Bank of America during the Great Recession, and more recently helped 3G finance its Burger King/Tim Hortons merger and the A. J. Heinz and subsequent Kraft Heinz deals. In each deal, Berkshire ended up receiving juicy dividends that ranged from 6% in the case of Bank of America to 9% with Burger King/Tim Hortons.

Common Stock for Berkshire

An Anheuser-Busch InBev/SABMiller merger would likely give Berkshire a sizeable common stock position as well. For example, in providing financing for 3G’s Burger King takeover of Tim Hortons, Berkshire received warrants for 8,438,225 shares of the new combined company, Restaurant Brands International Inc., for a penny a share. The warrants came attached to 68,530,939 Class A 9.00% Cumulative Compounding Perpetual Preferred Shares, and gave Berkshire 4.18% of the outstanding Common Shares and 14.37% of the total number of votes attached to all outstanding voting shares of the Corporation.

Berkshire as the Linchpin

With 3G’s Burger King merger, Berkshire provided roughly 25% of the financing and was the linchpin that quickly brought other financing to the deal. When Warren Buffett wants in, others surely follow.

Look for Berkshire to take a portion of any Anheuser-Busch InBev and SABMiller deal if regulators ever allow it to happen.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Pilots’ Union Set to Resume Picket of NetJets

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Sometimes a familiar face is not enough to bridge a labor contract dispute.

The NetJets Association of Shared Aircraft Pilots (NJASAP) has set September 10 as the date to resume picketing NetJets at seven airports. The resumption of picketing reflects the union’s frustration with its lack of progress in getting a new contract.

NetJets pilots have been working without a contract since the prior agreement expired in 2013.

A Familiar Face Returns

On June 1, Berkshire Hathaway, the owner of NetJets, fired NetJets’s chief executive and chairman Jordan Hansell. Hansell was replaced with Adam Johnson, who had spent 22 years at NetJets.

At the time, NJASAP was positive in the change in NetJets’s leadership.

“Newly appointed CEO Adam Johnson and COO Bill Noe bring much needed experience in both operational and labor relations to their respective positions. Union Leadership looks forward to engaging the new team: We hope they share our goal of rebuilding a once progressive labor management relationship. Similarly, Union Negotiators remain ready and willing to work with senior management to bring contract negotiations to a successful conclusion on behalf of our pilots.”

Unfortunately, after a 90-day summer ceasefire, the union is ready to resume its picketing, noting that the union and management are still far apart.

Johnson has pointed to the “remarkable” progress the two parties have made, but notes, “due to the parties’ views about the economics of this business — and thus how much additional cost we can take on over the next decade — as well as different expectations concerning the demand for the services we provide.”

NJASAP is seeking a 35% pay increase over three to five years. Currently, its captains with 10 years of experience earn $131,179 a year.

Words of Wisdom from Warren

“It’s human nature to sometimes have differences about how people get paid,” Berkshire chairman Warren Buffett said, when questioned about the dispute at the 2015 Berkshire Hathaway annual meeting.

Unfortunately, those differences don’t look any closer to being resolved.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

No More Elephants For Buffett’s Famed “Elephant Gun,” For Now

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Warren Buffett likes to refer to his hunting for big companies, such as his acquisition of BNSF Railway, and the recently announced Precision Castparts Corp., as hunting for elephants with his “elephant gun.”

While each year Berkshire does on average $3 billion of bolt-on acquisitions for its various companies, it takes something really elephant-sized to move the needle on a conglomerate with a market value of a third of a trillion dollars.

Those kinds of deals, be they BNSF, Kraft Heinz, or Precision Castparts, also mean that the Buffett’s elephant gun will be quiet while he refills the cash coffers. Berkshire is spending down its $66 billion in cash by $20 billion, and Buffet likes to maintain at least $20 billion in cash as a reserve in the case of economic downturns.

Buffett Reloads the Cash

“This takes us out of the market for an elephant but we will probably be buying a few small things in the next 6 months,” Buffett recently remarked, explaining the deal for Precision Castparts. “We are in negotiations on a couple but in terms of a deal of similar size it pretty much takes us out. What we will probably do on this one, we will probably borrow about $10 billion and use about $23 billion of our own cash on that order. We’ll be left with over $40 billion probably in cash when we get all through. But I like to have a lot of cash at all times, so this means we have to reload over the next 12 months or so, but it doesn’t preclude doing smaller deals, but we will be doing a few probably.”

That’s The Way The Cookie Crumbles

So, despite the recent excitement around activist investor Bill Ackman of Pershing Square having taken a $5.5 billion stake in snack food company Mondelez, perhaps with the goal of seeing it sold to a buyer like Berkshire, don’t look for it to merge into either Berkshire or Kraft Heinz any time soon.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Is Berkshire Getting Precision Castparts Too Cheap?

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Did Berkshire Hathaway pay too much when they agreed to pay $37.2 billion for aerospace parts manufacturer Precision Castparts?

That seems to be the Wall Street consensus based on the way the stock price has sagged a bit. Analysts slammed the deal, proclaiming that unlike the 2009 takeover of BNSF Railway this is a case of buying at the top of the market, not the bottom.

Buffett Agrees

While Warren Buffett doesn’t believe he is paying too much, after all, he’s buying a company Berkshire plans to still own in a hundred years, he has acknowledged, “This is a very high multiple for us to pay.”

Not So Fast

While almost everyone thinks the price is too high, Georg H. Krijgh of the G.H. Krijgh Guardian Fund, a private partnership based in the Netherlands, thinks it is way too low, and that Buffett has pulled a fast one again.

In a letter to Precision Castparts’ Board of Directors he states:

“Precision Castparts is the largest investment of our fund. We believe that the true value of the company is far in excess of the USD 235 per share offer by Berkshire Hathaway. In our view:
1. An independent Precision Castparts is worth at least USD 40 billion.
2. Berkshire Hathaway is not paying an appropriate premium.
3. Accepting the USD 235 per share offer is not in line with the fiduciary duty of the Board of Directors.
4. We will vote against the proposed sale.

We believe that the PCC Board of Directors is leaving significant value on the table.

We expect earnings of USD 2 billion

First, Mr. Buffett is telling the media that the multiple is high. This might be true based on 2015 earnings but it is incorrect when using future expected earnings and free cash flow. Current earnings are temporarily under pressure due to lower volumes in energy markets. PCC’s aerospace business is much less cyclical than widely believed and the ramp-up of several programs such as the Boeing 737 MAX, A320neo and the H-class turbines is likely to significantly increase earnings per share in the next few years even when energy markets remain weak. Mr. Donegan confirmed this in several recent earnings calls. We believe that free cash flow will grow to USD 2 billion annually.

Multiple of at least 20 times

Second, PCC deserves a high multiple because it has a tremendously strong market position, which is clearly visible by the continuously high return on equity. It is the low-cost and often sole-source provider of mission critical components in a secular growth market, a leader in metallurgical technology, owner of intellectual property and strategic assets such as TIMET and has a strong balance sheet. Especially in these times of low interest rates, PCC deserves a multiple above 20 times earnings. PCC is worth at least USD 40 billion.”

More From Krigh

“Berkshire Hathaway is offering a normal multiple on depressed earnings. Mr. Buffett, whom we greatly respect, and his team have a reputation of finding companies that are not aware of their true fair value. A case in point is Berkshire Hathaway’s takeover of Burlington Northern in 2009. He bought the railroad just before the economy and earnings rebounded. In 2009, shareholders may have been distracted by the credit crisis. Currently, there is no reason to sell for a low price in a hurry. The quoted 21% premium is based on a short-term dip in the share price. For many days during the past year the share price was trading above USD 220, a 6% discount to the offer price.”

Is There Really A Premium?

Krigh cites Precision Castparts’ own stock repurchases to question whether Berkshire is even paying a premium for the stock at all in light of the stock’s 52-week high of $249.12 being above Berkshire’s offer of $235 per share.

“During the past two years, the Board of Directors approved and executed share repurchases at prices around Berkshire Hathaway’s offer price. A significant part of the buybacks seems to have occurred at an average price above USD 230. It is puzzling why you are willing to buy Precision Castparts shares at this price and at the same time sell full control of the business at the same price. In addition, in 2014 and 2015, Berkshire Hathaway bought additional shares of PCC for a price between USD 200 and USD 240. You are aware that they are intelligent investors and only buy when the intrinsic value is significantly higher than the price. This confirms the fact that the USD 235 per share offer is too low.”

So, is Berkshire paying too much or too little? Only time will tell, but when you plan to own something a hundred years or two, it will probably look like quite a bargain at some point.

For Berkshire shareholders alive today, here’s hoping that the bargain is now.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Berkshire’s 13F Filing Hints at Surprise in the Wings

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Berkshire Hathaway’s Form 13F filing, which is required to be filed quarterly with the Securities and Exchange Commission, always give plenty to chew on for Berkshire watchers.

On the surface it has been a relatively quiet 2nd quarter 2015 for much of its minority-share stock holdings, with its purchase of a large number of shares in Charter Communications one of the few major increases.

Steady as She Goes

Berkshire’s four biggest holdings all remained unchanged, with Wells Fargo making up 24.68% of the total portfolio, Coca-Cola 14.64%, IBM 12.07%, and American Express 10.99%.

In the case of Coca-Cola, the $518 million in dividends it received in 2014, on a very low cost basis, meant an effective yield of 40%, so no wonder Warren Buffett calls Coca-Cola one of his “forever stocks.” You would drink five Cokes a day too if it got you a 40% return.

A Surprise Coming Soon?

The company did note that “confidential information has been omitted from the public Form 13F report and filed separately with the U.S. Securities and Exchange Commission,” which likely implies that the company is amassing shares in a company, and in such a case it is not required to reveal the company publicly. Berkshire used the same strategy when it took a position in IBM that made it the company’s largest minority-owner with just over 8% of the company. We will have to wait and see if there is another surprise minority-ownership company bombshell, however we do know that the purchase was in the $3 billion range.

Stocks on the Increase

Berkshire bought 2,535,542 shares of the cable TV operator Charter Communications, increasing its position by 42% to 8,514,678 shares. The position is 7.6009% of Berkshire’s total portfolio.

Berkshire first took a position in Charter Communications during the 2nd quarter of 2014. The company has been on the rise since emerging from bankruptcy in 2009, and is in the process of merging with Time Warner Cable Inc. and acquiring Bright House Networks, a video service provider and cable internet provider. The merger is the work of Chairman John Malone whose Liberty Broadband is the largest Charter Communications shareholder. Berkshire has long been a buyer of shares in Malone’s companies, although in 2014 it sold its entire stake in premium cable channel Starz.

A Stock That’s Paying Dividends

Berkshire also increased its position in U.S. Bancorp by 1,289,777 shares, an increase of 1%, bringing its total to 85,063,167 shares. The position is 4.7538% of Berkshire’s total portfolio.

While Berkshire is famous for being the stock that doesn’t pay a dividend, it certainly loves to receive them, and U.S. Bancorp has been one of the stronger stocks in the banking sector for dividends. The company announced a 4.1% dividend increase in June, the 5th consecutive dividend increase since 2011.

A Potential Lubrizol Acquisition?

Also reported were the 20,000,000 shares of Axalta Coating Systems that it bought from the Carlyle Group for $28 per share. Berkshire first announced plans for the purchase in April, and the big question is whether the former DuPont unit is an acquisition target for Berkshire Hathaway’s Lubrizol Corporation. The $28 price was below the $31.30 share price that Axalta was trading at after the announcement. It now sits at $30.38 as of Friday’s closing bell.

Another Potential Takeover Candidate

DaVita Healthcare Partners, which also looks like a good fit with Berkshire, considering that an aging population and increased health care coverage under the Affordable Care Act benefits its kidney dialysis business, was unchanged at 38,565,570 shares.

Berkshire entered into a standstill agreement with Davita in May 2014, pledging not purchase more than 25% of the company. Its ownership stake currently sits at just under 17.95%.

And One That’s Not So Likely, Yet

The 13F filing does not yet reflect Berkshire’s 26% ownership of Kraft Heinz, which closed after the quarter ended. The filing does show that Berkshire owned 578,000 shares in snack maker Mondelēz International, Inc., which has recently been rumored as a possible merger candidate with Kraft Heinz. Warren Buffett just last week downplayed the possibility, noting that there was still much worked to be done in integrating Kraft and Heinz.

Stocks on the Decrease

Major decreases in holdings, included bailing on energy sector stocks Phillips 66 and National Oilwell Varco. Berkshire sold its entire 7,499,450 position in Phillips 66, and its entire 1,978,895 position in National Oilwell Varco. Both have been hit hard by low oil prices.

Berkshire had already liquidated most its Phillips 66 position in 2014 when it swapped it for ownership of Phillips Specialty Products Inc. and approximately $450 million in cash. The move brought tax saving to Berkshire and a new unit to Lubrizol.

Whither Viacom

Also going down were Berkshire’s shares in Viacom, Chicago Bridge & Iron Company, and WABCO Holdings Inc.

Its Viacom position decreased a whopping 31% as Berkshire sold 2,618,358 shares. Berkshire looks to be wise to get out of Viacom as fast as it can. The mass media company has seen its stock value plummet 42% year to date, as it struggles to hold on to viewers and carriers of its channels. Among its troubles, Viacom is in a battle with satellite TV provider Dish TV, which has dropped the company’s channels from its service.

Berkshire’s holdings in Chicago Bridge & Iron Company decreased 12% as it sold 1,374,189 shares. Berkshire first took a position in the engineering, procurement and construction company during the 1st quarter of 2013 only to watch the share price peak at $86.50 in April 2014 before crashing all the way down to $34.51 a year later. Year to date the stock has risen $23.25% but it appears that Berkshire has now cooled on it as an investment.

Buffett, Combs or Weschler

Berkshire does not normally announce which transactions are the work of Warren Buffett, and which transactions are the work of his two portfolio managers Todd Combs and Ted Weschler. However, Buffett recently revealed that Berkshire’s 2.9% position in aerospace manufacturer Precision Castparts was originally purchased by Todd Combs. It was Buffett that decided to make the bid to purchase the entire company for $37 billion.

While Warren Buffett has acquired most of Berkshire’s portfolio, Todd Combs and Ted Weschler each manage a portfolio that is roughly $9 billion in assets. The two investment managers are widely assumed to be the future managers of the entire portfolio.

The total portfolio slipped to a market value of $107.182 Billion from $110.776 billion at the end of the 1st quarter 2015.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.