/ 6 August 2015

Buffet takes stock as Berkshire slows

Buffett has less control over the companies in his stock portfolio
Buffett has less control over the companies in his stock portfolio

Berkshire Hathaway shares traded at near record highs at the beginning of Warren Buffett’s 50th year of running the company in May. But more recently, the stock has begun to sag.

Shares have slumped 5.2% since December 31 and are headed for their first annual decline since 2011, even as Buffett pulled off one of the biggest coups of his career last month. By backing HJ Heinz’s merger with Kraft Foods Group, he now holds a stake valued at about $26-billion, more than twice what he paid.

But there’s less to celebrate about some other Berkshire investments and businesses. Buffett’s railroad has had to spend heavily to come back from service delays in 2014. His reinsurance business, a main source of funding for the company, is facing increased competition. And some of his biggest equity investments, such as International Business Machines and American Express, have lagged behind the market.

Berkshire’s dozens of subsidiaries include insurers, manufacturers, retailers, electric utilities and the railroad, BNSF. Buffett also oversees a stock portfolio valued at more than $100-billion.

The diversity of those investments could help the company’s post-operating earnings per share of $3 038 when results are released on August 7. That’s a 15% increase from a year earlier.

Book value
Buffett’s favoured yardstick, book value, could have risen by about 2% to about $150 000 a share during the second quarter, according to an estimate from Cliff Gallant, an analyst at Nomura Holdings. Berkshire’s class A shares closed at $214 150 on Tuesday.

Book value per share will get a boost in the current quarter as Berkshire records a gain on the bet on Kraft and Heinz, said Gallant.

Carloads at Buffett’s railroad slipped 0.1% in the second quarter from a year earlier. It’s a narrower decline than at its Western United States competitor, Union Pacific, but some costs have been climbing at BNSF. Buffett pledged to spend $6-billion on upgrades in 2015.

“Outlays of this magnitude are largely unheard of among railroads,” he wrote in his annual letter to shareholders in February. “Our huge investments will soon lead to a system with greater capacity and much better service. Improved profits should follow.”

Buffett has been less sanguine about the future of Berkshire’s reinsurance operations. For decades, he has used the premiums held by these businesses until paying claims, called “float”, to fund his stock picks and takeovers.

Prospects ‘for the worse’
In May, he said the prospects for that business had “turned for the worse” as hedge funds and other investors piled into the industry, driving down the price of coverage. To counteract that, Berkshire has begun to focus on underwriting policies directly for businesses.

Buffett has less control over the companies in his stock portfolio, and some of them have been struggling. He invested almost $11-billion to amass a stake in IBM in 2011. Since then, the computer-services provider has worked to transform itself into a seller of cloud-computing technology and data analytics. Revenue has slipped for 13 straight quarters. IBM shares now trade below the price that Buffett paid to acquire them.

AmEx, another of Berkshire’s largest stock investments, has plunged about 19% this year. It is nearing the end of a partnership with retailer Costco Wholesale, a relationship that accounted for 20% of worldwide loans and 8% of customer spending.

Berkshire’s cash pile has been growing in recent quarters and stood at a record $63.7-billion at the end of March. Although that money is earning almost nothing, long-term shareholders will wait for Buffett to make his next big investment, said Meyer Shields, an analyst at Keefe Bruyette and Woods.

“I don’t think they or their investor base care if it takes another five years for things to be attractively valued,” he said. “Berkshire is very disciplined in terms of what it’s going to pay.” – © Bloomberg