What are we reading?

  1. Covid long term economic impact less than 2008 (here)
  2. The world after coronavirus (here)
  3. Saudi Arabia, Russia push U.S. to coordinate cuts (here)
  4. Asset light businesses faces an awful future (here)
  5. They all retired before hit 40 and this happened (here)
  6. Buffett’s bet on Occidental is looking more dicey (here)

What are we reading?

  1. Facebook, Google could lose over $44B of ad revenues in 2020 (here)
  2. Airlines are getting bailout money — but there are strings attached (here)
  3. Google and Facebook can’t save the advertising industry this time (here)
  4. America’s largest trucking companies won’t reveal how or if they will get sick drivers back home if they get infected (here)
  5. Berkshire Hathaway sold $390M of Delta and Southwest stock (here)
  6. Bare necessities you need for a bear market (here)
  7. Risk to jobs now unprecedented since the Great Depression (here)
  8. Delta airlines is losing $60M a day as Covid rages on (here)
  9. United airlines no longer counting on snapping back (here)
  10. The month Covid felled American business (here)

Thoughts on Buybacks and Berkshire

There are capital allocators and there are good capital allocators.

At one end of the spectrum, you have airlines who are being eviscerated for spending close to all their  free cash flow on buybacks. The management, fully aware of the operating leverage of their fixed assets, not only levered the company financially but also did not build up any resiliency in their balance sheets for any external shocks and are now looking for federal help to stem the crisis. Ditto with banks, where the supposedly Fort Knox balance sheets were tested and fed liquidity tap has opened up again and buybacks suspended. A classic case of buyback when the prices are high and not so much when they could be a bargain to their TBV.

On the other hand end of the spectrum, we have companies like Berkshire. While their equities portfolio is getting hammered with the rest of the market, they are sitting on mountains of cash ($128B+) as of Dec 2019 and an environment where they can deploy the cash effectively. Berkshire has resisted doing massive buybacks just because it had cash and is now looking smarter and better positioned than other companies that deployed a ton of cash at market highs.

Now the rubber will hit the road for Berkshire. They are in an environment where they can deploy cash more easily and furthermore the shares are trading at a multiple of book value that Berkshire has purchased stock back in the past.

H/T to @investor_bad who posts Berkshire daily BV with respect to the portfolio changes.

 

Berkshire adds index funds?

Something peculiar caught my eye in the Berkshire 13F filing this quarter. It is a very small holding and completely irrelevant given the size of the equity portfolio for Berkshire. The position is sized at a little over $25M and is too small even for Berkshire’s two investment managers, Todd and Ted. However, this is the first time to the best of my knowledge that Berkshire has purchased the S&P index (SPDR and the Vanguard S&P 500 ETF) as part of its main portfolio.

Time will tell whether this is the beginning of Berkshire deploying excess cash through an index fund or just a small position with no relevance in the bigger picture. While Warren Buffet has long been a proponent of S&P index for general investors, this is the first time he has used it as part of Berkshire’s portfolio.

13-f Link here

Consolidated portfolio changes from Dataroma (here)

What are we reading?

  1. You got a free internet upgrade and then your bill went up (here)
  2. Interesting q2 investment commentary from horizon kinetics (here)
  3. Interview with Liberty Media founder and John Malone partner, Peter Burton (here)
  4. A dozen things I have learnt from John Malone (here)
  5. PershingSquare Holdings buys Berkshire Hathaway – Page 10 (here)
  6. Netflix’s content budget seems greater than it seems (here) (Worthwhile to read the entire series)
  7. How I spotted a fraud before it was too late (here)

Berkshire Quarterly Watch!

Berkshire Hathaway announced another solid quarter on Saturday. With unrealized investment gains flowing through its P&L, the results do incorporate wild swings in equities that needs to be accounted for while evaluating the results.

Revenue for Berkshire was up almost 2% YoY from $62.2B in 2018 to $63.6B in 2019. Investment gains were $10B in Q2 2019 compared to $6.3B in Q2 2018. Energy revenues were slightly down from $3.7B to $3.6B in Q2 2019. Insurance losses were sharply up from $9.4B to $10.7B or 13.8% on a much lower revenue growth of 3%.

Screenshot from 2019-08-04 06-00-08

Screenshot from 2019-08-04 06-06-53

The results do not include the Kraft Heinz results for the first half of 2019 as the results have not been announced yet.

From an earnings perspective, significantly lower earnings from Geico, Berkshire Hathaway reinsurance and Primary group affected the overall operating earnings for Berkshire.

Screenshot from 2019-08-04 15-33-21.png

Berkshire continues to maintain a very conservative portfolio on the fixed income side with less than $20B compared to its $200B equity portfolio. It  is a clear sign that WEB thinks that the bond market is overvalued and the returns do not justify the risk.

Screenshot from 2019-08-04 15-17-21.png

On the equity side, Berkshire sold more than it bought in the first six months and the cost basis remained roughly the same at $102.6B. Berkshire sold $4.6B of equities and bought around $2.8B in the first six months.  The only notable news is that Wells Fargo continues to be a key part of the portfolio and BAC has now crossed the 10% ownership threshold for Berkshire.   In the first six months of the year,  $29.3B of net unrealized gains was recognized on the income statement.

Screenshot from 2019-08-04 15-22-08.png

Interestingly, the derivatives that Berkshire wrote before 2008 are starting to expire. Out of the notional exposure of $24B, over $10B will expire in 2019.

Screenshot from 2019-08-04 15-29-46.png

The buyback from Berkshire was also pretty lukewarm in Q2. $440M was repurchased in Q2 2019. With the cash balances further swelling to $122.3B, hopefully the repurchases will get more meaningful over time.

Screenshot from 2019-08-04 15-36-50.png

Brief thoughts on valuation:

Another robust quarter for Berkshire. Our thoughts on the valuation is a simple SOTP that many other value investors do.  Berkshire can be divided into operating earnings of the business and the portfolio investments. Berkshire earned $10.8B pre-tax in their operating business (excluding insurance) in the first six months, with a run rate of $21.6B for the year. At a safe multiple of 10 given the robustness and the mix of the businesses, it amounts to $216B. I prefer to take the insurance earnings as zero given the cyclical nature of the business even though Berkshire has made profits very consistently. Portfolio investments at the face value of equity + fixed income + equity method investments and cash is approx. $358B. In total, the intrinsic value is about $574B with 2.452B B shares outstanding resulting in a conservative intrinsic value of  $234 / B share.

Disclosure: Long BRK.B

Not a recommendation.

Berkshire Files with SEC on 10% ownership in BAC

We all know that Warren Buffett and Berkshire Hathaway have been bullish on banks in America. It looks like the fest is all set to continue. Berkshire Hathaway just filed a Form 3 with the SEC as a 10% owner of Bank of America (BAC). You can find the filing here

It looks like Berkshire has added over 54 Million shares in BAC since April 2019. What is even more interesting is that Warren Buffett and Berkshire have been actively selling down Wells Fargo every quarter for the last few years to keep its ownership interest below 10% (here) as it hampers their ability to do business with the bank (here)

It also looks like it is okay to own up to 25% of a bank as long the investor gets a permission from the federal reserve and assures them that they would remain a passive investor.

Whichever way you look at it, between WFC, BAC and the growing stake a JPM, Warren Buffett is owning a huge piece of the American banking system. And his actions are the strongest indicators on how Berkshire feels about the current valuation of American banks and areas where large amounts of capital can be deployed for Berkshire.

Short Post on Berkshire

While there are a lot of commentators out there commenting on Berkshire’s results, here is a short different take on it.

  • In 2018, Berkshire took a pre-tax mark to market losses of $22.4B on investments and derivatives and $17.8B on a post tax basis
  • Berkshire reinsurance group did not have a great year and lost $1.1B pre-tax driven by property casualty and retroactive reinsurance.
  • Berkshire’s portion of the Kraft Heinz goodwill impairment was $2.7B in 2018
  • $19.8B of Fixed Income securities compared to $172B of equities
  • $109B in Cash and treasury bills
  • Offset by strong earnings in the rest of the operating businesses and insurance companies resulting in a book value increase of 0.4% and net income of $4B for the year.

If on a year like this, Berkshire does not lose money, it talks a lot about the fortress balance sheet and the resiliency of the business model. I know that Buffett talks about not using BVPS any more. I look at it differently. It was an understated proxy for intrinsic value. Now, it is vastly understated for the intrinsic value.

It is often about return of capital before return on capital. There are a lot of commentary about Berkshire being an index fund. It might be but the risk profile is completely different.