Posts Tagged ‘beating the street’

Warren Buffet BH Annual Shareholder Letter – 2010

Sunday, February 27th, 2011

Warren is ready to start making acquisitions.  Berkshire Hathaway is now earning nearly $1 billion per month in net income and has nearly $38 billion in cash reserves, the largest reserve hoard since 2007.  WB has been known to use his cash cow insurance business to fund acquisitions.  Investment income from his insurance operations alone was $5.2 billion in 2010, and earnings were up 61% from 2009.  It is hard to imagine how Mr. Buffet started his career by purchasing a couple pinball machines.  His company’s cash reserves now rival the gold reserves of many developing nations.  BH’s annual letter to shareholders was released on 2/26/2011 and bodes well for the U.S. economy.  Since 1965, Berkshire has averaged annual returns of 20.2%, while the S&P has returned 9.4%, including dividends.

Warren Buffett 2010 Berkshire Hathaway Letter

Warren Buffett, in his widely followed annual letter to shareholders, said he is prepared for “more major acquisitions,” as the conglomerate on Saturday reported a 61% jump in 2010 earnings and a growing cash hoard.

“We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy,” the billionaire investor said in the letter accompanying Berkshire’s annual report.

The Omaha, Neb., company’s 2010 net income of $13 billion received a big boost from railroad operator Burlington Northern Santa Fe, which Berkshire acquired for roughly $27 billion last February. In his letter, Mr. Buffett called the deal “the highlight of 2010″ and said it is working out “even better” than he had expected, The railroad business generated $4.5 billion in operating earnings last year and $2.5 billion in net earnings, up about 40% from 2009.

While Berkshire has spent tens of billions of dollars on capital-intensive businesses like railroads and utility operators in recent years, its other businesses, such as insurance, are still generating large amounts of cash for Mr. Buffett to invest in financial assets and to acquire more businesses. At the end of 2010, Berkshire’s pile of cash and cash equivalents stood at $38 billion, the highest year-end amount since 2007. Berkshire’s businesses, Mr. Buffett noted, are now earning about $1 billion a month.

As Berkshire tries to keep growing from an ever-expanding base, Mr. Buffett has to find more avenues to invest to achieve his long-stated goal of increasing the company’s value faster than the rate of growth in the Standard & Poor’s 500-stock index.

WSJ’s Jamie Heller and Erik Holm discuss the implications of the newly released letter to Berkshire Hathaway shareholders from billionaire investor Warren Buffett.

Berkshire’s book value, a measure of assets minus liabilities that is a rough proxy for the company’s actual, or “intrinsic,” value, grew 13% in 2010 to $95,453 per share, versus last year’s 15.1% total return in the S&P 500. It was the second year in a row, and only the eighth time in Mr. Buffett’s 46 years of running Berkshire, that the company’s book value change didn’t beat the index, whose returns include dividends. Berkshire is now a component of that index following last year’s B-share stock split and purchase of Burlington Northern.

Mr. Buffett repeated a refrain from past years, stating that Berkshire’s future performance is unlikely to replicate its past. Noting the company’s “now only satisfactory” performance against the S&P in recent years, Mr. Buffett wrote: “The bountiful years, we want to emphasize, will never return. The huge sums of capital we currently manage eliminate any chance of exceptional performance.”

Berkshire’s Annual Report

Mr. Buffett said if Berkshire over time outperforms the market, as shareholders should expect from the company, it will likely be from producing better relative results in bad years for the stock market while suffering poorer results in stronger years.

Shareholders last year weren’t disappointed. Berkshire’s Class A shares, which don’t pay dividends, gained 21% in 2010, besting the S&P and giving the company a market value of roughly $200 billion at year end. The shares are up nearly 6% this year, closing at $127,550 on Friday.

Berkshire’s book value, which grew $26.2 billion in 2010, was boosted by the continuing recovery of stocks in Berkshire’s giant investment portfolio. Wells Fargo & Co. and Coca-Cola Co., Berkshire’s largest equity positions, each rose 15% last year, and each holding is now valued at more than $11 billion.

Stocks and Burlington Northern weren’t the only part of the portfolio that delivered.

A host of Berkshire-owned businesses that had suffered from declining sales and shrinking profits amid the recession now appear to be recovering. Mr. Buffett heralded improvements at units including Fruit of the Loom Inc., Israel-based toolmaker Iscar Ltd. and electronic-components distributor TTI Inc.

Net earnings from Berkshire’s manufacturing, service and retailing operations more than doubled from a year earlier to $2.5 billion in 2010 as the businesses rode the recovering economy. The company’s annual report said it anticipates that “general economic conditions will continue to gradually improve, albeit unevenly, over time.”

Mr. Buffett said an “overwhelming” part of the future investments of Berkshire’s businesses would be in the U.S. Of $8 billion in capital spending slated for 2011, which his letter called a record amount, Berkshire will spend all of the $2 billion increase from last year in the U.S. He said the U.S. offers “an abundance” of opportunity.

Berkshire’s insurance units give Mr. Buffett money to invest until the premiums collected are needed to pay claims years in the future. Mr. Buffett calls these funds “float,” and he reported Saturday that the pool of funds swelled to about $66 billion from $63 billion a year earlier. Investment income from the insurance operations was about $5.2 billion, compared with $5.5 billion in 2009.

In the letter, Mr. Buffett discussed what he and Berkshire Vice Chairman Charlie Munger would regard as a “normal year” for Berkshire. That would be one with a general business climate better than last year’s, but weaker than 2005 or 2006, and one without a large catastrophic event that could trigger large payouts from its insurance business. In such a year, Berkshire’s assets could expect to earn about $17 billion in pretax and $12 billion in after-tax earnings, excluding capital gains or losses, he said.

Mr. Buffett, who turned 80 years old last August, also touched on succession planning in his letter. Besides being Berkshire’s chief executive and chairman, Mr. Buffett is also its chief investment officer with responsibility for the company’s investment portfolio of more than $150 billion in cash, stocks, bonds and other assets. He has said that when he dies, his job at the helm of Berkshire will be split into three, with a separate chairman and chief executive, and one or more chief investment officers.

Berkshire recently hired former hedge-fund manager Todd Combs as an investment manager following a lengthy search for candidates that could potentially step into Mr. Buffett’s role as Berkshire’s chief investment officer. Many money managers had good investing records recently, but Berkshire has been looking for individuals who have a deep understanding and sensitivity to risk and can anticipate the effect of events that have never occurred, Mr. Buffett wrote.

“When Charlie and I met Todd Combs, we knew he fit our requirements,” Mr. Buffett noted. He said the 40-year-old would initially manage funds in the range of $1 billion to $3 billion, an amount that can be reset annually. While Mr. Combs’s focus will be on stocks, he isn’t restricted to that type of investment, Mr. Buffett noted.

The search for competent money managers isn’t over. Mr. Buffett said Berkshire may, over time, add one or two investment managers “if we find the right individuals,” and the managers’ compensation will be tied to their performance.

As in previous years, Mr. Buffett devoted portions of his annual letter to praising the managers of Berkshire’s operating units, including some individuals that company watchers believe are candidates for the Berskhire CEO job.

Mr. Buffett wrote that he “can’t overstate the breadth and importance” of achievements by David Sokol, chairman of utility operator MidAmerican Energy Co. and chief executive of NetJets Inc., who turned the fractional jet ownership business around from a loss.

He noted that Tony Nicely, who runs auto insurer Geico, increased its market share to 8.8% from 2% when he joined the company in 1993, adding he owes Mr. Nicely a huge debt. And Ajit Jain, head of Berkshire Hathaway’s highly profitable reinsurance business, “has added a great many billions of dollars to the value of Berkshire. Even kryptonite bounces off Ajit,” Mr. Buffett quipped.

Mr. Buffett made it clear he has no plans to relinquish any of his jobs. Referring to the investment portfolio, he wrote: “As long as I am CEO, I will continue to manage the great majority of Berkshire’s holdings, both bonds and equities.”

He said that when he and Mr. Munger, 87, are no longer around, Berkshire’s investment managers will have responsibility for the entire portfolio in a manner then set by Berkshire’s CEO and board of directors. The board, he added, “will make the call on any major acquisition.”