Category: Commentary

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Commentary GEICO Insurance

Commentary: Self-Driving Auto Fatality Highlights New Era’s Need for Old Fashioned Insurance

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The first death caused by a self-driving car not only showed the current limits of the new technology, and also highlighted the continued need for traditional liability insurance.

While some have questioned whether self-driving cars will need to carry the traditional package of coverages, the accident shows that while self-driving cars will likely make our roads much safer, they will probably never be accident free. There are just too many variables.

Tesla Motors has stated that the May 7 accident in Williston, Florida, occurred because the Tesla Model S’s autopilot sensors did not pick up a white tractor-trailer that drove across the highway perpendicular to the vehicle.

In a statement from Tesla the company stated that, “Neither Autopilot nor the driver noticed the white side of the tractor trailer against a brightly lit sky, so the brake was not applied.”

Killed in the accident was Joshua Brown, 40, of Canton, Ohio.

In addition to Tesla, a number of automobile manufacturers, including Mercedes, BMW, and Audi are moving ever closer to self-driving cars with a host of collision avoidance features that aim to respond quicker and more precisely than a human operator can.

However, Tesla’s statement stressed the limits of its current technology.

“It is important to note that Tesla disables Autopilot by default and requires explicit acknowledgement that the system is new technology and still in a public beta phase before it can be enabled. When drivers activate Autopilot, the acknowledgment box explains, among other things, that Autopilot ‘is an assist feature that requires you to keep your hands on the steering wheel at all times,’ and that ‘you need to maintain control and responsibility for your vehicle” while using it. Additionally, every time that Autopilot is engaged, the car reminds the driver to ‘Always keep your hands on the wheel. Be prepared to take over at any time.’ The system also makes frequent checks to ensure that the driver’s hands remain on the wheel and provides visual and audible alerts if hands-on is not detected. It then gradually slows down the car until hands-on is detected again.”

The End of the Driver as We Know It?

Bryan Reimer, a research scientist in the MIT AgeLab and the Associate Director of The New England University Transportation Center, doesn’t think the driver is headed for extinction just yet, or even in the near future.

“These technologies show a lot of promise, however, you are not going to get into a black box and say ‘take me somewhere’ at the consumer level,” Professor Reimer said in 2015. “New technologies will reduce fatalities and accidents, but it won’t eliminate them.”

There’s Still a Need for the Human Operator

“Higher levels of automation in the vehicle will still have humans in a supervisory role,” Reimer adds, noting that the sophisticated auto-pilot in planes still has human operators even with planes separated by thousands of feet of airspace. “The more automation, the more skill and training you need,” professor Reimer explains, pointing out the extensive training that pilots undergo. In the case of cars, “we have no equivalent educational structure in place.”

He also adds that with the close spacing of cars, which can be in fractions of a meter, and the variability of road conditions, it make roadways “a much more dynamic environment and harder to predict.” With the enormous number of cars on the road, often coming from different directions, it makes “the speed of decision-making much tougher.”

Accidents Happen

In addition, any self-driving technology will have to coexist with human drivers for a long time to come. “If everything was automated, it would be much easier,” Reimer adds, noting that we a tendency to both “over-trust and under-trust technology.”

A Wide Variety of Insurable Risks

Self-driving cars won’t mean the elimination of hazards. For example, there were 250,000 flood damaged cars from Superstorm Sandy in 2012, and in 2013 there were 699,594 cars reported stolen. Add to the mix everything from trees falling on cars, to vandalism, and there are not going to be many people that want to drive their new car without fire, theft and collision insurance.

There certainly will be changes in insurance needs, as changes in the ownership structures mean more car-sharing and ride-sharing scenarios.

The popularity of Uber and Lyft has already seen GEICO respond with ride-sharing insurance, and you can expect more policy innovations as insurers meet new consumer demands.

A Safer World that Still Needs Insurance

We live in a lot safer world than we did a hundred years ago. Commercial buildings have automated sprinkler systems and fire alarms, and homes have smoke detectors and burglar alarms, yet they both still have fires and break-ins, and they still need insurance.

It’s likely that in 2030 your car will still need insurance too.

© 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.

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Commentary

Commentary: Is a Vote Against Bill Gates’s Berkshire Board Membership Getting Closer?

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Having Bill Gates on your board of directors would seem to be a plum thing for any corporation, and for Berkshire Hathaway it’s something they have enjoyed for the last twelve years since he was elected to the board in 2004.

However, according to a report in the Financial Times, UK-based asset management companies Legal & General Investment Management and Aberdeen Asset Management have announced they will vote against board members that have been serving more than fifteen years.

The move is no threat to Bill Gates at this time, but would impact three of Berkshire’s board members that have been serving for more than fifteen years.

Paul Lee, head of corporate governance at Aberdeen, feels that board members “go a bit stale” if they serve for an extended period.

The view that long-term board membership makes a board of directors to compliant and lacking in independence is at the heart of the move to create more turnover. Another issue that often cited is to foster more board diversity, which at most U.S. corporations is overwhelmingly male and white.

Berkshire Hathaway’s thirteen member board has three women, with the most recent one to join being Meryl Witmer, an investment fund manager for Eagle Capital Partners.

So, should you toss Bill Gates off your board after fifteen or twenty years because you have an arbitrary policy on the length of board membership?

Doesn’t make much sense to me.

Corporations should be looking for board members that provides the best advice and oversight. Berkshire’s board will play a key role in the selection and oversight of Warren Buffett’s successor. A deep knowledge and belief in Berkshire Hathaway’s corporate culture is one of the key things they can contribute. They also need to weigh the value of having stability, and in the case of Bill Gates, having a high-profile board member that gets listened to every time he comments, whether it is in the boardroom, or in the press.

© 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.

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Acquisitions Berkshire Hathaway Energy Commentary

Commentary: Is Westar Energy the Next Acquisition for Berkshire Hathaway?

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Kansas’s biggest utility, Westar Energy Inc., is looking for a buyer and Berkshire Hathaway Energy is rumored to be among the companies interested in the acquisition.

With a market cap of roughly $7 billion, Westar is in the same price range as NV Energy, which Berkshire acquired in December 2013 for $5.6 billion.

If Berkshire Hathaway Energy proves to be interested, it will reportedly face competing bids from Ameren Corporation, as well as an investor consortium that includes Borealis Infrastructure Management Inc. and the Canada Pension Plan Investment Board.

Based in St. Louis, Missouri, Ameren Corporation was created December 31, 1997 by the merger of Missouri’s Union Electric Company and the neighboring Central Illinois Public Service Company.

As for Berkshire Hathaway Energy, it has already partnered with Westar Energy on Prairie Wind Transmission, LLC, a 108-mile, 345-kilovolt high-capacity electrical transmission line in south-central Kansas that was completed in 2014.

Westar Energy would be a natural fit for both Berkshire Hathaway Energy and for Ameren.

Berkshire Hathaway’s MidAmerican Energy Company currently serves customers in a 10,600 square miles area composed of Iowa, Illinois, South Dakota and Nebraska.

Ameren’s service area in neighboring Missouri also fits well with Westar Energy, which provides power for approximately 687,000 customers in much of east and east-central Kansas.

© 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.

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Acquisitions Commentary Minority Stock Positions 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 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 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.

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Commentary

Commentary: Never Mind the Stock Price, Berkshire’s Booming!

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With Berkshire Hathaway’s stock price down roughly -12% in 2015, you would think that the conglomerate was suffering a series of major setbacks. Nothing could be further from the truth, as Berkshire just reported record year that brought a 6.4% gain in book value, and saw profits skyrocket 32% in the fourth quarter.

Earnings per share in Q4 were $3,333 (up from $2,529 for the same period in 2014), which beat Wall Street estimates by a hair.

Nervous shareholders may be feeling a little bit better these days, as Berkshire’s stock price year-to-date has been steady (if flat) while the S&P 500 is down -4.59%, and they should rest assured that better days are ahead.

You want to be nervous? Just look at Chesapeake Energy (CHK), and its plunging stock price in 2015, if you want to see a stock really worth panicking about. Chesapeake saw its stock down a precipitous -77.5%, which was related to a very real drop in energy prices that is bringing bankruptcies to a number of players in the sector.

Berkshire on the other hand is flourishing, and it’s only getting stronger with the newly completed acquisitions of aerospace manufacturer Precision Castparts, and battery-maker Duracell.

The stock market is just that, a market, and it is not always logical—at least not in the short term.

While the disconnect between Berkshire’s profits and its languishing stock price draws lots of sniping from pundits, it should be remembered that a stock can’t wander too far from its fundamentals forever. Eventually, it’s going to move up or down based on the actual value of the company.

As Benjamin Graham famously said, “’In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

© 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.

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Commentary Precision Castparts

Commentary: For Berkshire Hathaway, Precision Castparts is Easy as One, Two, Three

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Now that Berkshire Hathaway has acquired aerospace manufacturer Precision Castparts, exactly what has Berkshire got for all its billions?

One: Berkshire gets a fast-growing company. Precision Castparts’ annual growth rate has been 23% over the past ten years.

Two: Berkshire gets a company with a wide moat, as the costs associated with the aerospace industry create high barriers to entry.

Three: Berkshire gets a company that will benefit from the explosive growth in commercial air travel in India and China over the next two decades.

About Precision Castparts

Precision Castparts manufactures structural investment castings, forged components, and airfoil castings for aircraft engines and industrial gas turbines. It is a world-leading producer of complex forgings and high-performance alloys for aerospace, power generation, and general industrial applications, and its customers include Airbus, Boeing, GE, and Rolls-Royce, among others.

With annual revenues of approximately $10 billion, the company reported $2.412 billion of revenue in the second quarter of 2015. Of that revenue, 72% came from aerospace, 15 % came from power, and 13% came from general industrial and other sales. Operating margins in the last quarter were a healthy 25.7%. The company has a 15% return-on-equity.

The company has 29,350 employees at 157 manufacturing plants.

Strong Management in Place

Unlike both Heinz and Kraft, where 3G Capital took on the duties of replacing senior management, Berkshire is lokking to leave Precision Castparts’ management in place. After all, traditionally that has been one of Berkshire’s acquisition criteria, stating, “Management in place (we can’t supply it).”

In the case Precision Castparts, the company has a strong leader in CEO Mark Donegan, who during his thirteen years at the helm, has led the company to an 11-fold return. Among his strengths, Donegan has a keen eye for the type of “bolt-on” acquisitions that Buffett likes.

An Area Growth for Berkshire

With the Great Recession now in the rear view mirror, airlines are placing large orders to replace aging fleets. These orders, which are primarily to Airbus and Boeing, benefit Precision Castparts as it supplies key components to both the A320neo and 737 MAX.

Doubling the Market

While Precision Castparts manufactures everything high-pressure blades for power generators to medical prosthetics, it is complex metal components for the aerospace industry that not only brings in the majority of its revenues, but also offers solid opportunities for growth.

As large as the commercial market for jets already is, it is expected to double by 2030 due to strong demand from India and China. By 2030, the Asia-Pacific market is expected to grow to 30% of all world-wide passenger mileage.

Boeing predicts that 38,050 new aircraft with a total value of $5.6 trillion will be needed in the next two decades. Roughly 10,500 commercial jets are needed just to replace fleets of old, fuel-guzzling aircraft that are aging out of service.

Locking in a Customer

With the needs of the aerospace market highly specialized, whether its engine turbine blades, or the large wing ribs for the Airbus’s giant A380, there is very little company switching among airplane manufacturers. Witness its relationships with both engine makers Pratt & Whitney and GE that go back over 45 years.

As Berkshire plots its course in the 21st century, it is assured of solid growth in an industry that is highly technical, needs manufacturing on a mammoth scale, and has high cost barriers to entry for potential competitors.

© 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.

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Berkshire Hathaway Energy Commentary

Commentary: Berkshire Hathaway’s Compromise on Nevada Solar Panel Fees is Just Round One

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Berkshire Hathaway has become a world-leader in renewable energy power generation based on its huge and varied solar and wind farms, but it has been on the other side of the renewable energy fence as it comes to rooftop solar panels purchased by consumers.

At issue is who pays for the electric transmission grid when solar panel owners pay little or nothing for power, and sell back their excess power to utilities through the grid.

Ground zero is Nevada, where Berkshire Hathaway Energy’s lobbying produced a host of new fees for existing solar panel owners, and a prohibitive cost structure that caused rooftop solar supplier SolarCity to announce that it would lay-off 2,000 workers and leave the state.

The fees caused an uproar from solar panel owners that watched their expensive capital intensive investments, which had been promoted as bringing many years of savings, lose all economic benefit.

Now, Berkshire is backing off at least a bit.

On February 1, Berkshire’s utility NV Energy will submit a proposal to the State of Nevada Public Utilities Commission proposing to grandfather in the existing 30,000 solar panel owners to the old rate structure for a period of up to twenty years. The move may quell homeowner anger, but it still doesn’t address the viability of the home solar panel industry.

According to reports, Berkshire’s proposed rate changes still do not make new rooftop solar panels viable in terms of cost savings for the homeowner.

Nevada Governor Brian Sandoval has supported NV Energy’s position that additional fees are necessary in order to not leave non-rooftop solar panel homes with the burden for paying for both the transmission grid and the retirement costs of decommissioning old fossil fuel plants, which are primarily highly polluting coal-fired plants.

While it’s probably not a winning long-term strategy for energy producers, such as Berkshire Hathaway Energy, to rely on legislation and rate structures that make home solar panel ownership uneconomical, they are right that they do need to find a way for solar panel owners to pay a share of the maintenance of the transmission grid. However, they must do this without killing what has become a clean power source for hundreds of thousands of consumers.

The Importance of the Transmission Grid

Sometimes lost in the debate is that even rooftop solar panel owners benefit from the grid. The grid supplies power to solar-panel owners at night, on cloudy days, and maintains fleets of repair trucks that not only do regular maintenance, but also respond quickly to natural disasters. The robust ability that utilities have to restore the grid after natural disasters should not be taken lightly, as their collaboration across large geographic areas often means that crews quickly come from hundreds or thousands of miles away to help restore service after hurricanes, blizzards, and other disasters.

For utilities, rooftop solar either represents competition for their centrally generated energy model, or a growing replacement for antiquated power sources.

As a replacement for other power sources, it’s unreasonable to expect utilities to buy back power at retail rates. That’s like asking a clothing store to buy clothes from you at retail and sell it at retail.

The real battle needs to be fought in the marketplace, where the true cost of cleaner forms of energy generation will determine the winners and losers. The cost of solar panels for both residential and utility scale generation has dropped dramatically, and as it continues to drop, it will determine which part of the economic model is most cost effective for consumers.

Another factor that should not be forgotten is that utilities have to cover the cost of retiring old fossil fuel burning plants. These costs must be shared by everyone, as everyone benefitted from the power they produced. Those costs cannot be left for just the consumers that are relying solely on the grid for their electricity needs.

In the end, both sides need a deal where both can prosper. After all, there are many customers that will never have solar panels and will continue to rely on utilities due to their location, cost, or the amount of time they will be living in a given home or apartment. And utilities will not only be needed to provide power to homes, but also factories, hospitals, schools, street lights, and a host of other settings that can’t afford to be left with a disproportionate share of the cost of the transmission grid.

What is also clear, is that Berkshire’s proposal is just the next round in a battle over who pays for the electric grid, and how much.

© 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.

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Commentary

Commentary: Time to Break Up Berkshire Hathaway? Not By a Long Shot!

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Is it time to break up Berkshire Hathaway? A November 14, 2015, opinion piece in Barron’s by retired analyst Thornton Oglove asserts that it is.

In Oglove’s view, Berkshire’s companies are undervalued in its current mega-conglomerate structure and would be worth more spun-off as individual dividend-paying companies.

I beg to differ.

Twelve Big Reasons Berkshire is Stronger Together than Broken Up

1. Berkshire’s not your typical conglomerate. Back in the 1960s, conglomerates got a bad name because weak companies were tied together in the hopes that the combined assets would be overvalued by investors. Unfortunately, as with all things overvalued, prices eventually decline. With Berkshire, you have quality assets that continue to grow in value. What is the value of BNSF Railway today, for example, as compared to when it was acquired in 2009? Not only is it worth significantly more, but only five years after it was acquired, Berkshire had already recouped 100% of the cash it had spent in the acquisition.

2. Berkshire’s greatest strength is its ability to move capital tax free across industries. Under its current structure Berkshire can use its profits from one of its companies to meet the needs of another. Warren Buffett began this practice long ago, and it is why, for example, you don’t find a See’s Candies in every mall. He recognized that See’s profits were better spent invested in other companies in other sectors rather than in building a candy empire.

3. Berkshire can use capital much more effectively for acquisitions than you or I can. In the past year, Berkshire has helped fund the $12.5 billion merger between Burger King and Tim Hortons, gaining among other things a 4.8% stake at a penny a share; merged H.J. Heinz with Kraft Foods in order to form the third-largest food and beverage company in North America (picking up a nice a $4 billion gain in the process); and is now on the cusp of acquiring Precision Castparts in a $42 billion deal that will bring into the fold a major aerospace manufacturer just as demand for commercial airlines is expected to double over the next 15 years. These deals, and a number of other smaller ones, demonstrate that just as a tidal wave of water is infinitely more powerful than a lot people sitting at home filling their teacups, a tidal wave of money is far more powerful than a lot of individual dollars sitting in your bank accounts.

4. Berkshire’s philosophy is one of the reasons its companies are worth so much. Most companies have one eye on the calendar every 90 days as they sweat out the latest quarterly earnings report. Not Berkshire’s companies. Warren Buffett wants his managers making their decisions based what is good for the long term, and he couldn’t care less about appeasing those obsessed with quarterly earnings. This makes a huge difference at capital-intensive companies such as BNSF Railway, which are freed up to make the kinds of capital investments that bring great returns down the line even if they hurt short term earnings. The same goes on the insurance side, where Buffett has never been a fan of excessive underwriting that boosts premiums on the short term, but risks big losses down the road.

5. Berkshire’s diversity is one of its great strengths. Gone are the days when Berkshire was an insurance company above all else. Today’s Berkshire is tremendously diversified with everything from insurance, utilities, and clothing manufacturing, to a leading freight railroad under its umbrella. Investing in Berkshire means weakness in a given sector won’t torpedo your investment.

6. Berkshire provides a great home for companies looking to sell. Got a billion-dollar company that you want to sell? Berkshire could be the perfect home for you. If you’ve founded a company in your garage and watched it grow into a five-billion-dollar company, do you want to sell it to a private equity firm now that you are ready to retire? If you do, the management is likely to be dumped and it’s the company broken up into pieces and sold off. Not with Berkshire, and that’s why companies such as ISCAR Metalworking approach Berkshire about being acquired.

7. Berkshire’s loyalty attracts quality assets. Not every company Berkshire has acquired over the years has worked out, yet Berkshire doesn’t sell off the losers. Why? Because the promise that once you become part of the Berkshire family you stay part of the Berkshire family helps attract quality companies. So if Berkshire has to carry a few underperformers in order to attract quality assets, that loyalty pays off over and over again.

8. Are you as patient as Berkshire? Berkshire is not afraid to sit on its money waiting for opportunity. When the economy collapsed in 2009, Berkshire’s huge cash position allowed it to make extraordinary deals with cash-strapped Bank of America, Goldman Sachs, and others. The Wall Street Journal calculated a 40 percent return on those blue chip investments. Berkshire was also able to acquire quality assets, such as RV-maker Coachman, for a song when they ran into cash-flow problems.

9. Berkshire’s stock portfolio is better than a mutual fund. While Berkshire’s $100 billion-plus portfolio of blue chip stocks, including Coca-Cola, IBM, Walmart, and Wells Fargo, among others, may or may not outperform the broader market in a given year, don’t make the mistake of thinking it is just a mutual fund wrapped in a conglomerate. Berkshire’s portfolio offers an opportunity to put its cash to work and still liquidate stock positions in ways no mutual fund or ETF can. Just look at this summer’s tax-free swap of billions in appreciated Procter & Gamble stock for P&G’s Duracell division, and its recent tax-free swap of Phillips 66 stock for the company’s specialty chemicals division as just two examples of Berkshire leveraging its portfolio.

10. Berkshire expands the capabilities of its existing companies. Unlike conglomerates that are always acquiring assets only to starve them of the resources that can make them flourish, Berkshire helps its companies grow. Buffett is a big believer in the bolt-on acquisition that adds new capabilities to Berkshire’s existing companies. Many of these acquisitions don’t get much media play, but they continually make Berkshire’s existing companies stronger. For example, Berkshire’s billion-dollar acquisition of Cornelius made the Marmon Group the world leader in beverage dispensing, Lubrizol added Weatherford International’s global oilfield chemicals business, and MiTek Industries added M&M Manufacturing, one of the country’s largest producers of sheet metal products.

11. Berkshire makes its constituent companies stronger and less failure prone. Not only was Berkshire able to scoop up bargains during the Great Recession, but it was also able to ensure the survival of its companies during a time when many companies were filing for bankruptcy protection. Berkshire’s strength and diversity enabled its manufacturing and service companies to survive a financial downturn that wiped out similar companies that had to go it alone.

12. Berkshire allows you to invest like Warren Buffett. Unlike most conglomerates that pay millions to a CEO who may end up using a golden parachute at your expense in a few years, Berkshire’s CEO only earns $100,000 a year. Yes, you got that right, it’s not missing a few zeros. As an investor in Berkshire, you are growing your wealth on the same basis as Buffett, through the appreciation of the stock price. What’s more, he’s doing all the work. Try and find a hedge fund or mutual fund run on the same basis.

Deconglomerate? Not on Your Life!

It’s true that Berkshire will never again experience the explosive growth that it did in its first few decades, but don’t think that with all its diversity it’s the “ponderous” entity that Thornton Oglove claims it is. Warren Buffett’s pretty darn smart and has created an outstanding combination of safety and earning power that will carry on long after he is gone. You just have to look at Berkshire’s outstanding track record of acquisitions over the past six years to prove that its best years are not a distant memory, and that’s more than enough reason to resist the siren call to “deconglomerate.”

© 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.

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Acquisitions Berkshire Hathaway Automotive Commentary

Commentary: Is a Boston Dealership Group a Likely Acquisition for Berkshire Hathaway Automotive?

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When Berkshire Hathaway jumped into the auto retailing business in March 2015, with its $4.1 billion 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 instantly made the newly christened Berkshire Hathaway Automotive Group the fourth largest dealership group in the U.S.

The Van Tuyl acquisition was just the beginning, Warren Buffett noted in his 2015 Berkshire Hathaway Chairman’s Letter, stating, “…if we can buy dealerships at sensible prices – we will build a business that before long will be multiples the size of Van Tuyl’s $9 billion of sales.”

A Plum Waiting to be Picked

Now, a plum dealer group looks ready to sell and Berkshire Hathaway Automotive could be the perfect buyer.

Herb Chambers Companies, a privately-held, Boston-based dealership group with 55 total dealerships, looks to be the perfect fit for Berkshire Hathaway Automotive, and its owner looks ready to sell.

Herb Chambers, a former copier salesman who has spent the past thirty years building a first class dealership group that is the 12th largest privately held auto group in the nation, has already stated that he would sell if the price is right.

He also credits Warren Buffett’s Van Tuyl Group acquisition for boosting his personal net worth to some $1.5 billion, as valuations jumped throughout the whole sector, and private equity money, including financier George Soros, began looking to get in.

In the past, Chambers has turned down offers from AutoNation Inc. and Penske Automotive Group, but with valuations high for auto groups, there could no better time to cash out.

Berkshire Hathaway never likes to get into bidding wars, so what would make Chamber choose Berkshire?

With Berkshire Hathaway Automotive he could still remain in charge of his baby, just like Larry Van Tuyl, who became chairman of Berkshire Hathaway Automotive.

Unlike most private equity investors that quickly replace the existing leadership, Berkshire Hathaway looks as much as possible to keep talented managers at the helm. It was that arrangement that attracted Larry Van Tuyl to Berkshire. As Warren Buffet explained:

“Larry Van Tuyl, the company’s owner, and I met some years ago. He then decided that if he were ever to sell his company, its home should be Berkshire.”

Chambers Knows When to Sell

Herb Chambers is certainly not afraid to sell when the time is right. Three decades ago he founded A-Copy America, and after merging it with Ikon Office Solutions, he cashed out with a sale to Ricoh. It was a shrewd move, and Chambers has proved to be a shrewd guy who currently sells more cars than anyone else in New England.

Could the perfect exit strategy for Herb Chambers this time involve Berkshire?

Could be. After all, Chambers does have a photo of him and Buffett on the wall of his office.

© 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.

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BNSF Commentary

Commentary: Accident Bad Timing for BNSF in Tribe’s Lawsuit

(BRK.A), (BRK.B)

Talk about bad timing, a BNSF 98-car ethanol train that derailed on September 19, in southeastern South Dakota, adds fuel to the fire for a key portion of the argument in a Native American tribe’s lawsuit against the railroad.

The Swinomish Indian Tribal Community in the state of Washington filed a lawsuit in April 2015 against BNSF alleging that the railroad had violated an Easement Agreement that allowed trains to cross a portion of the tribe’s land. The Easement Agreement enables BNSF to bring Bakken crude oil to the Tesoro refinery in Anacortes, Washington.

U.S. District Judge Robert Lasnik on Friday, September 11, 2015, ruled that BNSF’s request to have the lawsuit dismissed or stayed was denied. The ruling opened the way for the tribe to press its lawsuit, which expressed environmental concerns as a key part of its argument.

Under the terms of the 1991 Easement Agreement, BNSF is allowed to run one 25-car train per day in each direction. The tribe sued contending that BNSF was running as many as six 100-car “unit trains” per week.

A Deal is a Deal

“A deal is a deal,” said Swinomish Chairman Brian Cladoosby. “Our signatures were on the agreement with BNSF, so were theirs, and so was the United States. But despite all that, BNSF began running its Bakken oil trains across the Reservation without asking, and without even telling us. This was exactly what they did for decades starting in the 1800s.”

Under the terms of the Easement Agreement, the Tribe agreed not to “arbitrarily withhold permission” for BNSF’s request to increase the number of trains or cars, and the tribe’s environmental concerns are a key part of its argument that withholding approval would not be arbitrary.

Bridges Cross Fishing Grounds

The Tribe contends that its refusal to grant permission is not arbitrary and is “Based on the demonstrated hazards of shipping Bakken Crude by rail, paired with the proximity of the Right-of-Way to the Tribe’s critical economic and environmental resources and facilities — and the substantial numbers of people who use those resources and facilities on a daily basis — the Tribe is justifiably and gravely concerned with BNSF’s shipment of Bakken Crude across the Right-of-Way in a manner and in quantities at odds with the explicit terms of the Easement Agreement.”

The Swinomish, who call themselves “The People of the Salmon,” are concerned that trains carrying Bakken crude oil run over bridges spanning the Tribe’s fishing grounds in the Swinomish Channel and Padilla Bay. They also note that the track runs across the “heart of the Tribe’s economic development enterprises,” which includes the Tribe’s Swinomish Casino and Lodge, a Chevron station and convenience store, an RV Park, and the Tribal waste treatment plant.

The Tribe stated that these enterprises are the “primary financial source for funding of the Tribe’s essential governmental functions and programs.”

The 1991 Easement Agreement granted the Right-of-Way for an initial 40-year term, along with two 20-year option periods. The current agreement will expire no later than 2071.

The tribe is seeking a “permanent injunction prohibiting BNSF from (1) running more than one train of twenty-five cars or less in each direction over the Right-of-Way per day and (2) shipping Bakken Crude across the Reservation.”

The Swinomish are also seeking monetary damages for the prior trespasses and breach of contract in an amount to be determined at trial.

The South Dakota Accident

While the South Dakota accident was an ethanol train not an oil train, it was exactly the type of accident the Swinomish are concerned about. Seven tank cars derailed with three spilling their contents of ethanol, and one catching fire. The fire spread to a nearby pasture, which was put out by local firefighters, and BNSF hazardous materials teams aided in the clean up. NTSB investigators are currently interviewing the train’s engineer and conductor as they investigate the cause of the accident.

Fortunately, there were no deaths or injuries from the accident, which happened in a rural area that did not cross a body of water. However, the financial damages for BNSF may be far greater than three punctured tank cars if the Swinomish are able to show that their environmental concerns are grounded in reality, and that they have the proof to back it up.

© 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.