Tag Archives: Warren Buffett

Commentary: Is the Time at Hand for Berkshire to Cash Out of USG?

(BRK.A), (BRK.B)

Gypsum rock and plaster manufacturer United States Gypsum Company soared today as news that Warren Buffett had offered Berkshire Hathaway’s 30% stake in the company to USG’s other major minority stakeholder, Knauf Entities.

Knauf has long been a potential suitor of USG, and was interested in acquiring the company as far back as 2000, when Berkshire first took a 14% stake.

Berkshire reportedly offered its shares to Knauf at $42 per share, which was roughly 19% above the stock’s closing price on Friday, March 23.

USG’s Board of Directors’ weighed in with their own statement, as they moved to squash the deal.

“The board carefully evaluated it and determined that it substantially undervalues the company and is not in the best interests of all of USG’s shareholders.”

Instead, they suggested that its own plans would be the best way to boost shareholder value.

One thing seems clear, after 17 years riding this stock up and down, Buffett is finally ready to move on.

If it does complete the deal with Knauf, not only would Berkshire make money on its investment, but it’s already made a lot of money even though the stock does not pay a dividend.

The Great Recession, USG and Berkshire

Berkshire played a key role in saving USG 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 the company received from Warren Buffett’s financing helped the company avoid another bankruptcy. The day of transaction the stock soared 22% to $6.89 a share.

Today, the stock is hovering around $40 per share.

Berkshire has not only profited from the healthy interest payments, but the stock’s appreciation as well.

In December 2013, Berkshire exchanged $243.8 million of the convertible notes for common stock, and with additional purchases its stake in USG now sits at roughly 30.8%.

Back in 2015 and again in 2016, I wrote that perhaps it was time for Berkshire to buy the rest of USG, as the housing market had revived from its Great Recession doldrums.

However, at Berkshire’s 2017 Annual Shareholders’ Meeting, Buffett was less than enthusiastic about USG.

Buffett commented in answer to a shareholder’s question that buying into USG wasn’t one of his “brilliant ideas,” stating:

“On USG we owned a very significant percentage like 30%. USG overall has been disappointing because the gypsum business has been disappointing. I think they went bankrupt twice because they had too much debt. It has not been a brilliant investment. If gypsum went up to what it was some years on the past, we would have done a lot better. Gypsum has taken a real dive several times and there has been too much gypsum capacity, and when it comes back the management have been not only of use but have gotten more optimistic than they should have. It’s a business where the supply has been significantly greater than the demand in a lot of years. You’ve seen housing starts since 2008-9 not come back anywhere near where people anticipated, so gypsum prices have not moved up dramatically. So just put that one down as not one of our brilliant ideas. Not a disaster.”

Perhaps with USG again in play, it just got brilliant again.

© 2018 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: Bolt-On Acquisitions Continue to Power Berkshire’s Growth

(BRK.A), (BRK.B)

With the price of acquiring large businesses high, Berkshire Hathaway has been hard-pressed to spend down its $116 billion cash hoard on a major acquisition or two. Its proposed $143 billion Unilever bid, made in conjunction with 3G Capital Partners, fell on deaf ears, and other than an agreement to acquire Pilot and Flying J travel centers, the big fish have remained elusive.

However, Berkshire’s bolt-on acquisitions, which add capability and value to its existing businesses, have continued unabated, and were highlighted by Warren Buffett in his annual letter to shareholders.

In the letter, Buffett noted some of the larger acquisitions.

“Clayton Homes acquired two builders of conventional homes during 2017, a move that more than doubled our presence in a field we entered only three years ago. With these additions – Oakwood Homes in Colorado and Harris Doyle in Birmingham – I expect our 2018 site built volume will exceed $1 billion.

Clayton’s emphasis, nonetheless, remains manufactured homes, both their construction and their financing. In 2017 Clayton sold 19,168 units through its own retail operation and wholesaled another 26,706 units to independent retailers.

All told, Clayton accounted for 49% of the manufactured-home market last year. That industry-leading share – about three times what our nearest competitor did – is a far cry from the 13% Clayton achieved in 2003, the year it joined Berkshire.

Both Clayton Homes and PFJ are based in Knoxville, where the Clayton and Haslam families have long been friends. Kevin Clayton’s comments to the Haslams about the advantages of a Berkshire affiliation, and his admiring comments about the Haslam family to me, helped cement the PFJ deal.

Near the end of 2016, Shaw Industries, our floor coverings business, acquired U.S. Floors (“USF”), a rapidly growing distributor of luxury vinyl tile. USF’s managers, Piet Dossche and Philippe Erramuzpe, came out of the gate fast, delivering a 40% increase in sales in 2017, during which their operation was integrated with Shaw’s. It’s clear that we acquired both great human assets and business assets in making the USF purchase.

Vance Bell, Shaw’s CEO, originated, negotiated and completed this acquisition, which increased Shaw’s sales to $5.7 billion in 2017 and its employment to 22,000. With the purchase of USF, Shaw has substantially strengthened its position as an important and durable source of earnings for Berkshire.

I have told you several times about HomeServices, our growing real estate brokerage operation. Berkshire backed into this business in 2000 when we acquired a majority interest in MidAmerican Energy (now named Berkshire Hathaway Energy). MidAmerican’s activities were then largely in the electric utility field, and I originally paid little attention to HomeServices.

But, year-by-year, the company added brokers and, by the end of 2016, HomeServices was the second-largest brokerage operation in the country – still ranking, though, far behind the leader, Realogy. In 2017, however, HomeServices’ growth exploded. We acquired the industry’s third-largest operator, Long and Foster; number 12, Houlihan Lawrence; and Gloria Nilson.

With those purchases we added 12,300 agents, raising our total to 40,950. HomeServices is now close to leading the country in home sales, having participated (including our three acquisitions pro-forma) in $127 billion of “sides” during 2017. To explain that term, there are two “sides” to every transaction; if we represent both buyer and seller, the dollar value of the transaction is counted twice.

Despite its recent acquisitions, HomeServices is on track to do only about 3% of the country’s home-brokerage business in 2018. That leaves 97% to go. Given sensible prices, we will keep adding brokers in this most fundamental of businesses.

Finally, Precision Castparts, a company built through acquisitions, bought Wilhelm Schulz GmbH, a German maker of corrosion resistant fittings, piping systems and components.”

But Wait, There’s More!

Sometimes Berkshire’s bolt-on acquisitions get little attention. Such was the case in the summer of 2017, when Berkshire acquired Warren, Michigan-based MRO distributor Production Tool Supply, and created a new wholesale division, Berkshire eSupply.

At the time, the company was ranked 34th on Industrial Distribution’s 2017 Big 50 List.

And the Bolt-On Acquisitions Continue in 2018

QS Partners, the aircraft brokerage subsidiary of Berkshire Hathaway’s NetJets, acquired aircraft brokers Cerretani Aviation Group of Boulder, Colorado.

Berkshire’s Vanderbilt Mortgage and Finance, a financier of manufactured and modular homes, acquired Silverton Mortgage. Silverton Mortgage has 22 locations and is licensed in Alabama, Colorado, District of Columbia, Florida, Georgia, Louisiana, Maryland, North Carolina, Pennsylvania, South Carolina, Tennessee and Virginia.

And, Berkshire’s Marmon Holdings acquired Sonnax Industries, Inc. and formed a newly-created subsidiary called Sonnax Transmission Company. Sonnax is an industry leader in the cutting edge design, manufacture and distribution of the highest quality products to the automotive aftermarket, commercial vehicle industries, and industrial sectors utilizing drivetrain technology.

So, if you think that Berkshire Hathaway is sitting still, think again.

© 2018 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.

“Don’t ask the barber whether you need a haircut,” Says Buffett

(BRK.A), (BRK.B)

With 2017 a quiet year for Berkshire Hathaway’s acquisition activity, save for acquiring a 38.6% partnership interest in travel-center operator Pilot Flying J, Warren Buffett used his 2017 annual letter to shareholders to reassure that Berkshire would continue to make large acquisitions only when the price is right.

Buffett pronounced the Pilot Flying J acquisition as “sensible,” and noted that he would not join other CEOs in paying outlandish prices for companies.

“The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own,” Buffett wrote.

“Why the purchasing frenzy? In part, it’s because the CEO job self-selects for ‘can-do’ types,” Buffett noted. “If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life.

Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate size. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a haircut.) If the historical performance of the target falls short of validating its acquisition, large ‘synergies’ will be forecast. Spreadsheets never disappoint.”

© 2018 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 on a stock buy so good, “that I’m actually starting to remember that it was my idea.”

(BRK.A), (BRK.B)

Berkshire Hathaway’s investment in Chinese new energy company BYD has worked out so well that it’s now among the company’s top fifteen stock holdings.

In 2008, Berkshire Hathaway bet on BYD’s potential, purchasing 225 million shares. It’s an investment that has grown almost ten-fold in just a decade.

Berkshire’s original investment of $230 million is now worth roughly $1.96 billion.

Whose idea was it to purchase a stake in the company?

“Charlie (Munger) called me one day and says, ‘We’ve got to buy BYD. This guy that runs it is better than Thomas Edison,’ Warren Buffett explained while appearing on CNBC’s Squawk Box. “And I said, ‘That isn’t good enough.’ And then he called a little later and said, ‘He’s a combination of Edison and Bill Gates.’ And I said, ‘Well, you’re warming up but it still isn’t good enough.’ Anyway, Charlie wanted to do it. Now, it’s worked out so well that I’m actually starting to remember that it was my idea. As it’s coming back to me. I think I persuaded Charlie. But unfortunately I’m on the record that it’s his deal. But BYD, Charlie’s in love with the company, and it’s done very well. And the fellow that runs it, you know who’s autos and batteries, but he’s got big, big ideas and he’s very good at executing. So, but I leave it to Charlie.”

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2018 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 Insurance Losses from Hurricane Season ran to $3 Billion

(BRK.A), (BRK.B)

Last fall’s spate of three mega-catastrophe hurricanes that hit the U.S. has led to billion dollar losses for Berkshire Hathaway’s insurance companies.

“We currently estimate Berkshire’s losses from the three hurricanes to be $3 billion (or about $2 billion after tax),” Warren Buffett stated in his annual letter to shareholders. “If both that estimate and my industry estimate of $100 billion are close to accurate, our share of the industry loss was about 3%. I believe that percentage is also what we may reasonably expect to be our share of losses in future American mega-cats.”

Despite the scale of the disasters, Buffett noted that the impact on Berkshire was minor, with it reducing Berkshire’s GAAP net worth by less than 1%.

He went on to note that other reinsurers “suffered losses in net worth ranging from 7% to more than 15%.”

Buffett wrote that a mega-catastrophe hurricane that caused $400 billion in damage, which the company estimates has a 2% probability annually, would see Berkshire incurring losses in the $12 billion range.

A loss of that magnitude would in no way jeopardize the conglomerate, as it is below the annual income generated by Berkshire’s non-insurance activities.

© 2018 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.

Buffett Decries Effects of New GAAP Accounting Rule

(BRK.A), (BRK.B)

Warren Buffett warned in in his annual letter to shareholders that a new GAAP accounting rule on unrealized capital gains would lead to “truly wild and capricious swings in our GAAP bottom-line.”

The rule impacts Berkshire’s Hathaway’s portfolio of $170 billion in marketable stocks, not including the company’s shares of Kraft Heinz.

“For analytical purposes, Berkshire’s ‘bottom-line’ will be useless,” Buffett warned, noting that swings in Berkshire’s equity holdings could obscure the actual performance of its operating companies.

“The new rule compounds the communication problems we have long had in dealing with the realized gains (or losses) that accounting rules compel us to include in our net income,” Buffett wrote. “In past quarterly and annual press releases, we have regularly warned you not to pay attention to these realized gains, because they – just like our unrealized gains – fluctuate randomly.”

© 2018 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 Per Share Book Value Soared 23% in 2017

(BRK.A), (BRK.B)

Despite losses from three mega-catastrophe hurricanes that hit the U.S. in the fall of 2017, Berkshire Hathaway’s per share book value still rose by 23% in 2017, Warren Buffett noted in his annual letter to shareholders.

Of the total gain of $63 billion, $36 billion were generated by Berkshire’s operations, and $29 billion resulted from the impact of the recently passed tax bill.

Buffett wrote that Berkshire’s disaster-related reinsurance losses, which ran to $3 billion, reduced the company’s GAAP net worth by less than 1%.

Among the company’s ongoing operations, the 2017 earnings from BNSF Railway rose 11% over 2016 levels to roughly $4 billion, and Clayton Homes’ revenues grew to $5.0 billion in 2017, up $780 million (18%) from 2016.

© 2018 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 Steps Down from Kraft Heinz Board of Directors

(BRK.A), (BRK.B)

The Kraft Heinz Company has announced that Warren Buffett will retire from the Company’s Board of Directors following the end of his term at the upcoming Kraft Heinz 2018 Annual Meeting of Stockholders.

Mr. Buffett decided to retire from the Board as he decreases his travel commitments. The Company also announced that the Board of Directors intends to nominate Alexandre Van Damme to stand for election at the 2018 Annual Meeting to fill Mr. Buffett’s vacancy.

“It has been an honor to work with Warren for the past five years,” said Alex Behring, Chairman of the Board of Directors. “His many invaluable contributions to Kraft Heinz will have a lasting impact on the Company for years to come. The Board of Directors looks forward to his continued partnership as Chairman of our largest shareholder, Berkshire Hathaway. We are thrilled to add Alexandre’s expertise and perspective to Kraft Heinz, and believe that his executive experience and leadership will be extremely valuable to the Board, our leadership and company as a whole.”

© 2018 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’s Annual Letter to Shareholders to be Released Saturday

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Tomorrow is the big day for Warren Buffett’s annual letter to shareholders.

Berkshire Hathaway’s 2017 Annual Report to the shareholders will be posted on the Internet on Saturday, February 24, 2018, at approximately 8:00 a.m. eastern time where it can be accessed at www.berkshirehathaway.com.

The Annual Report will include Warren Buffett’s annual letter to shareholders as well as information about Berkshire’s financial position and results of operations.

Concurrent with the posting of the Annual Report, Berkshire will also issue an earnings release.

© 2018 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.

Amazon, Berkshire Hathaway and JPMorgan Chase Team Up on U.S. Employee Healthcare

(BRK.A), (BRK.B)

Amazon, Berkshire Hathaway and JPMorgan Chase & Co. are partnering on ways to address healthcare for their U.S. employees, with the aim of improving employee satisfaction and reducing costs.

The three companies, which bring their scale and complementary expertise to this long-term effort, will pursue this objective through an independent company that is free from profit-making incentives and constraints. The initial focus of the new company will be on technology solutions that will provide U.S. employees and their families with simplified, high-quality and transparent healthcare at a reasonable cost.

Tackling the enormous challenges of healthcare and harnessing its full benefits are among the greatest issues facing society today. By bringing together three of the world’s leading organizations into this new and innovative construct, the group hopes to draw on its combined capabilities and resources to take a fresh approach to these critical matters.

“The ballooning costs of healthcare act as a hungry tapeworm on the American economy. Our group does not come to this problem with answers. But we also do not accept it as inevitable. Rather, we share the belief that putting our collective resources behind the country’s best talent can, in time, check the rise in health costs while concurrently enhancing patient satisfaction and outcomes,” said Berkshire Hathaway Chairman and CEO, Warren Buffett.

“The healthcare system is complex, and we enter into this challenge open-eyed about the degree of difficulty,” said Jeff Bezos, Amazon founder and CEO. “Hard as it might be, reducing healthcare’s burden on the economy while improving outcomes for employees and their families would be worth the effort. Success is going to require talented experts, a beginner’s mind, and a long-term orientation.”

“Our people want transparency, knowledge and control when it comes to managing their healthcare,” said Jamie Dimon, Chairman and CEO of JPMorgan Chase. “The three of our companies have extraordinary resources, and our goal is to create solutions that benefit our U.S. employees, their families and, potentially, all Americans,” he added.

The effort is in its early planning stages, with the initial formation of the company jointly spearheaded by Todd Combs, an investment officer of Berkshire Hathaway; Marvelle Sullivan Berchtold, a Managing Director of JPMorgan Chase; and Beth Galetti, a Senior Vice President at Amazon. The longer-term management team, headquarters location and key operational details will be announced at a later date.

© 2018 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.