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Warren Buffett

Low Interest Rates Cut Value of Berkshire’s Insurance Float

(BRK.A), (BRK.B)

With the advent of unprecedented negative interest rates in Japan and the Eurozone, the value of Berkshire Hathaway’s insurance float is diminished.

Europe’s central banks have slashed interest rates below zero, and at the 2016 Berkshire Hathaway annual meeting, Warren Buffet noted the moves have rewritten Aesop’s ancient adage that a “bird in the hand is worth two in the bush.”

Buffett noted that right now “a bird in the hand is worth 9/10s of a bird in the bush.”

Cheap money has also driven up the costs of Berkshire’s acquisitions, as competitors’ access to capital diminishes one of Berkshire’s key advantages.

Even with Berkshire having just closed on its $32 billion acquisition of aerospace manufacturer Precision Castparts, the company is heading back towards having $40 billion at the ready for acquisitions.

“We have excess cash everywhere at Berkshire,”  Buffett said, as he emphasized that he was ready to put it to work buying more large companies. “We would love to find another three or four types of Precision Castparts.”

With all its cash at the ready for acquisitions, Berkshire still maintains a reserve of $20 billion in case of economic downturns or other needs.

© 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 Automotive

“Subtract a Billion” Says Buffett, Lamenting Soaring Auto Dealership Valuations

(BRK.A), (BRK.B)

When Berkshire acquired Van Tuyl Group, Warren Buffett trumpeted the growth potential of the newly renamed Berkshire Hathaway Automotive.

“This is the beginning of a journey that will have no end,” Buffett noted upon completion of the acquisition. “Cecil and Larry have given us the ideal platform with which to build an auto dealership business that will be thriving and growing 50 and 100 years from now. The fun has just started.”

Unfortunately for Berkshire, the acquisition of Van Tuyl set off a dramatic rise in auto dealership valuations that has rippled throughout the industry, and frustrated efforts for Berkshire to add new dealership groups at what it feels are reasonable valuations.

At the 2016 Berkshire Hathaway annual meeting, Buffett acknowledged that they “hadn’t had much luck” in acquiring more dealerships.

One of the few acquisitions was the April 2015 purchase of Frank Kent Honda in Fort Worth, Texas.

Soaring Valuations

The steep rise in valuations has kept Berkshire Hathaway Automotive mostly on the sidelines even as the Kerrigan Advisors’ Blue Sky Report showed that U.S. dealership buy/sell activity soared to record highs in 2015. The Report noted “activity by new entrants outpacing public company acquisitions by over four to one.”

The Blue Sky Report showed that while the competition for auto dealerships was fierce in 2015, it did not favor the public companies, which in addition to Berkshire Automotive also includes CarMax and Penske Automotive Group.

“A number of iconic multi-dealership groups came to market in 2015 and were acquired by both established consolidators and new entrants. Faced with this stiffer competition, the publics found it more difficult to compete for larger group transactions, and represented just 7% of the buy/sell market in 2015.

Meanwhile new dealership buyers, including family offices, private equity firms, and public conglomerates, acquired 29% of the franchises sold, a stunning accomplishment,” said Erin Kerrigan, Managing Director of Kerrigan Advisors. “We believe new entrants will increasingly shape dealership consolidation and meaningfully impact the future of auto retail.”

The Blue Sky Report went on to note that while the market for auto dealerships is still very active, the market may be peaking.

“In 2015, dealership valuations rose to historically high levels, new entrants made sizable acquisitions, manufacturers approved numerous multi-dealership transactions, and real estate prices returned to pre-recession levels,” continued Kerrigan. “In summary, it was a year that is hard to beat.

While the 2016 buy/sell market is expected to be as active as 2015, we anticipate the proportion of sellers completing a successful sale could decline as industry growth plateaus and dealership earnings flatten.

Buffett Says Subtract a Billion

Warren Buffett noted that the $4.1 billion price he paid for Van Tuyl Group also included a billion dollars in securities, as Van Tuyl also has a large float tied to financing and its extended warranty program, which was also acquired by Berkshire.

Buffett said that people should “take a billion off the purchase price,” as the reported price has given other dealership groups an inflated sense of their market value.

Is there still a major auto dealership that’s just ripe for a Berkshire acquisition? There just might be. Read this Mazor’s Edge Special Report.

© 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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Charlie Munger Minority Stock Positions Stock Portfolio Warren Buffett

Berkshire Gives Mixed Signals on AmEx Stake

(BRK.A), (BRK.B)

Warren Buffett has long regarded Berkshire Hathaway’s stake in American Express like he views his stake in Coca Cola. It’s one of his “forever stocks.”

With American Express having struggled in recent years, including losing its co-branded relationship with Costco, the question is whether forever is really forever, or just a long time.

Costco’s jump to Visa is expected to take a big bite out of AmEx revenues, as it represented a whopping 8% of total billed credit card charges.

“I personally feel OK about American Express, and I’m happy to own it,” Buffett, said while taking questions at the meeting Berkshire Hathaway annual meeting. He did note AmEx’s problems, stating that it “has been under attack for decades — more intensively lately — and it will continue to be under attack. It’s too big a business, and too interesting a business.”

Buffett acknowledges that banking and finance draw a lot of attention and competitors, and there is always someone trying to knock you off your pedestal.

In that regard, Charlie Munger was less sanguine about AmEx.

“Anybody in payments who’s an established long-time player with an old method has more danger than used to exist,” he said.

Buffett is loath to sell Berkshire’s stake in AmEx and Coca Cola, because the cost basis is very low, and the profits from the sales would incur billions in taxes. The positions are both so large that they would also be hard to unload without affecting share prices.

Buffett also noted that Berkshire’s fund managers Ted Weschler and Todd Combs may not be as wedded to holdings in those companies as he has been when the day comes that they take over the entire $100+ billion portfolio. Each currently manages a $9 billion 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.

Categories
Insurance Warren Buffett

Buffett Throws Cold Water on Ajit Jain Rumors

  • (BRK.A), (BRK.B)

Two weeks ago rumors began flying that perhaps Warren Buffett had just signaled that Ajit Jain would be his successor as CEO of Berkshire Hathaway.

The rumors started when General Reinsurance Corp. Chairman and CEO Tad Montross announced that he would step down near the end of 2016.

Berkshire quickly announced that Ajit Jain, who already runs a large part of Berkshire’s reinsurance business, would add General Reinsurance to his portfolio.

Buffett watchers jumped on the news, speculating that the odds that Jain would someday take over Berkshire Hathaway had dramatically improved.

Not So Fast Says Buffett

Speaking at the 2016 Berkshire Hathaway annual meeting, Buffett threw cold water on the rumors. Buffett watchers, who hoped to divine the future of Berkshire’s leadership, got no help on their visit to the Oracle of Omaha.

Buffett noted that there are “no tea leaves to read in the fact that Ajit is supervising Gen Re from this time forward.”

While Buffett continues to emphasize that the conglomerate has a succession plan, and the Board is fully behind it, he is not going to reveal it to the public.

From his perspective, to do so would be to risk announcing a successor who might not take the job if a personal “situation” comes into play in the interim period. Buffett didn’t define that situation, but health is just one possible factor.

Speaking of health, Buffett, who at age 85 has no problem parrying five hours of questions at the annual meeting, also noted that the exact timing of succession is also an unknown. He doesn’t look to be interested in stepping down as he clearly loves what he is doing, and his recent $32.3 billion acquisition of aerospace manufacturer Precision Castparts shows he can still do it better than anyone else.

Buffett appeared to be in excellent health and spirits, and when asked if he had regrets for anything he wishes he could do over in life, he chuckled.

“I don’t think I would have started with a textile company,” he joked, referring to Berkshire Hathaway’s origins as a failing New England textile mill.

© 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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Nebraska Furniture Mart

Dallas Nebraska Furniture Mart Lives Up To Its Promise

(BRK.A), (BRK.B)

When Berkshire Hathaway opened its newest Nebraska Furniture Mart in The Colony in Dallas, Texas, the goal was to generate an additional $600 million a year for the furniture chain, which already has the highest per-store volume of any furniture  retailer in the United States.

Boasting a 1.9 million-square-foot facility, and featuring a 560,000-square-foot showroom, the new Dallas NFM dwarfs even the chains other megastores in Omaha, Nebraska; Kansas City, Kansas; and Des Moines, Iowa.

Now, it looks like Berkshire is meeting its goal.

The newest NFM generated roughly $500 million in revenue last year despite having only been open since March 2015.

According to Berkshire’s 2015 annual report, the new store had an immediate impact.

“Revenues of our home furnishings retailers in 2015 increased $572 million (24%) over 2014, driven by Nebraska Furniture Mart, which opened a new store in March of 2015, and from increases at R.C. Willey and Jordan’s.”

NFM’s Biggest Challenge Isn’t Amazon

Unlike many companies that see Amazon and the internet as the big hurdle these days for brick and mortar retailers, NFM says its biggest hurdle is making customers aware that it sells things besides furniture. After all, the company has furniture in its name. When customers get in the store the discover it has one of the most extensive selections of appliances of any retailer.

Flying in the face of the adage that the era of the mall is dead, with retail migrating more and more to the internet, NFM has crafted a powerful regional draw that takes up lots of actual physical space rather than just cyberspace.

The new Dallas store is part of a 400+ acres, 3.9 million square-feet mix of retail, entertainment, dining and attractions that is going by the name of Grandscape.

In addition to retail, the mixed-use real estate development, which will have a ten year build out, will include a hotel and amphitheater, office space, and ±300 multi-family units.

Also included in the development is a $45 million “boardwalk,” district that abuts an 11-acre manmade lake.

NFM is betting that 18 million visitors will come to Grandscape each year, with 8 million of those visitors hopefully shopping at Nebraska Furniture Mart.

© 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

PG&E Joins Berkshire Hathaway Energy Joint Venture

(BRK.A), (BRK.B)

Pacific Gas and Electric Company (PG&E) has formed a strategic alliance with TransCanyon, LLC (TransCanyon), a joint venture between subsidiaries of Berkshire Hathaway Energy and Pinnacle West Capital Corporation, to jointly pursue competitive transmission opportunities solicited by the California Independent System Operator Corporation (CAISO), the operator for the majority of California’s transmission grid.

“The competitive transmission landscape is going to be one of the fundamental strategies to help energy companies like ours drive the most effective transmission projects as we continue to build the power grid of the future. We believe our partnership with TransCanyon will provide a competitive advantage for future projects,” said Gregg Lemler, Vice President, Electric Transmission Operations at PG&E.

The strategic alliance will focus on CAISO competitive transmission projects that will benefit California customers.

“This alliance brings forth the best in both our teams in terms of knowledge of the Western transmission system and our collective experience in the competitive transmission markets,” said Jason Smith, President of TransCanyon. “Our alliance builds on these capabilities and reflects the commitment of PG&E and TransCanyon to provide safe, reliable, affordable and clean energy for all CAISO electric customers.”

The alliance will pursue competitive transmission projects that will be subject to approval by the CAISO and ultimately funded by consumers of electricity on the entire CAISO controlled grid, including PG&E’s customers.

“We want to ensure that PG&E customers are getting the best deal on transmission projects. We believe this alliance will strengthen our collective competitive capabilities to provide better value projects for our customers,” said Lemler.

In 2013, when competition was first introduced to the California transmission market, PG&E, in a joint bid with BHE U.S. Transmission, was selected by CAISO to jointly build, own and operate a transmission line project located in California’s Central Valley region.

In 2014, TransCanyon was formed as an independent developer of electric transmission infrastructure with a focus on the Western United States. It is a joint venture equally held by BHE U.S. Transmission and Bright Canyon Energy. BHE U.S. Transmission is a subsidiary of Berkshire Hathaway Energy, an energy holding company based in Des Moines, Iowa. Bright Canyon Energy is a subsidiary of Pinnacle West Capital Corporation (NYSE: PNW), an energy holding company based in Phoenix, Arizona.

In 2015, PG&E was also selected by the CAISO to build, own and operate two new electric substations in California’s Central Valley and the South Bay.

Each of PG&E’s winning bids were selected in separate competitive solicitations over other qualified bidders. The CAISO approved these projects as part of its annual Transmission Planning Process, and all of the projects will be subject to future approval from the California Public Utilities Commission.

© 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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Minority Stock Positions Stock Portfolio

BYD Ups Its Foothold in Australia

(BRK.A), (BRK.B)

BYD Company Ltd., the Chinese battery-maker and vehicle manufacturer that is roughly 10-percent owned by Berkshire Hathaway, is increasing its electric vehicle foothold in Australia.

BYD has become the first Chinese electric vehicle manufacturer to be certified by the Australian Design Rules (ADRs), the country’s stringent technical standards for emissions, vehicle safety and theft resistance.

The company is already in the Australian market, with its pure electric buses in a shuttle service tested for Sidney Airport between December 2014 and May 2015.

It has also sold its pure electric forklift in Sydney and Melbourne.

BYD’s big vehicle news is the introduction of its e6 pure electric crossover for use as taxi.

According to BYD, with the ADRs certification, the BYD e6 taxi got the green light to access the Australian market, meaning that the company’s global electrified public transportation platform now extends to yet another major market.

7+4 Strategy

BYD’s comprehensive “7+4” electrification strategy in the Australia region aims at electrification of all forms of ground transportation: urban bus, coach, taxi, passenger car, urban logistics trucks, construction trucks, and urban sanitation trucks (7), as well as vehicles for warehousing, mining, airports and ports (4).

The company now gets one step closer to fulfilling its lofty electrification plans in a country that prizes sustainable development.

Currently, the BYD e6 and K9 global footprint is present in over 190 cities in 43 countries in all continents.

BYD and Berkshire Hathaway

In 2008, Berkshire Hathaway bet on BYD’s potential, purchasing 225 million shares, and today owns roughly 9.1% of the company.

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

© 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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BNSF

BNSF Fights Lower Volumes With Lower Prices

(BRK.A), (BRK.B)

BNSF is responding to weak demand for coal and petroleum by lowering its rates for grain and pulse crops.

BNSF is trying to encourage grain producers to move some of their surplus out of storage and into the market.

“BNSF is always evaluating market-based conditions in evaluating rates and, as a result of our recent review, made the adjustments in the northern tier states,” John Miller, group vice-president of agricultural products, was quoted in the Farm and Ranch Guide.

It’s a far cry from May 2014, when BNSF was running two months and 500 car loads behind. Back then it was the overwhelming demand for BNSF’s mobile oil pipeline that was creating rail congestion as 100-car oil trains caused backlogs for grain shippers.

BNSF has cut its price for shipping grain by $100 a carload, and cut the rates $75 per carload for shipping pulse crops, such as peas and lentils.

BNSF is facing soft demand for coal, petroleum, and metallic ores that has only worsened as the year has gone on.

BNSF’s total carloads for coal are down 35.58% year-to-date through April 16, 2016, for petroleum they are down 26.6%, and for metallic ores, carloads are down 37.61%.

Combined carloads, including intermodal freight, are down 7.7% year-to-date from the same period in 2015.

The drop in shipping volume has the railroad idling hundreds of locomotives and furloughing some 400 employees.

© 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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Marmon Group UTLX

UTLX Dramatically Scales Back Tank Car Production

(BRK.A), (BRK.B)

The collapse in crude oil prices that has shuttered wells in the United States, and lowered oil train traffic for BNSF Railway, is also impacting the Union Tank Car Company (UTLX).

UTLX has announced that it is cutting its production by 50-percent.

The Berkshire Hathaway-owned company will cut 230 jobs in Houston, Texas, and also plans to lay-off employees at its plant in Alexandria, Louisiana, as well.

UTLX has sent a Worker Adjustment and Retraining Notification letter to the Texas Workforce Commission notifying it that the tank car facility located on Old Beaumont Highway 90 will be the source of the Texas layoffs.

UTLX will still employ 323 people at the Houston facility after the job cuts are completed in June.

Jeremy DeLacerda, UTLX manufacturing general manager, cited the “current market conditions and the industry-wide demand outlook for railroad tank cars,” as the reason for the lay-offs and production cuts.

“When the economy rebounds and greater demand returns, I look forward to increasing our staffing levels accordingly,” DeLacerda added.

Not the First Time

This is not the first time that UTLX has had to dramatically scale back production due to soft demand.

The UTLX manufacturing facility at England Airpark in Alexandria, Louisiana, endured similar lay-offs in 2006.

“You never want to hear news like this, but it’s not a surprise,” notes Jim Clinton, president and CEO of Central Louisiana Economic Development Alliance

“We knew they would have to cut production on some level,” Clinton added. “I’m sure they were hoping it would not be to the extent this apparently is. But the market is what the market is. They’re a good company that’s responding to market conditions.”

© 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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Berkadia

Berkadia Buys Cleveland-Based Mortgage-Banking Firm

(BRK.A), (BRK.B)

When people talk about hot real estate markets they usually don’t talk about Cleveland, Ohio, but that may be about to change. At least Berkshire Hathaway seems to think so.

Berkadia Commercial Mortgage, Berkshire Hathaway’s joint venture with Leukadia, has acquired Cleveland-based mortgage-banking firm RiverCore Capital.

RiverCore Capital is headed by managing partner Mark J. Vogel.

Among the company’s major transactions were $84,000,000 in non-recourse bridge financing for the One Cleveland Center Penton Media building, and $92,000,000 in senior debt financing for the Flats East Bank.

“Obviously Cleveland’s an interesting market, and it’s one that doesn’t have a lot of national players,” said Justin Wheeler, chief executive officer at Berkadia.

It does now.

© 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.