Monday, December 17, 2007
Warren Buffett’s Berkshire Hathaway is a great company, but its stock is now overpriced.
—Barron’s, December 17, 2007
So say the editors of Barron’s, on this week’s cover no less.
And while the editors set up their negative call by claiming “Barron’s has been bullish on Berkshire in recent years,” this is in fact not the first time Barron’s suggested selling the stock.
The first time, I recall, was back in the early 1990’s, when a hedge fund manager reconstructed the bottoms-up value of Berkshire Hathaway—which is not all that hard to do using the public market values for the companies whose stocks Berkshire owns, plus a reasonable estimate of the market value of the companies Berkshire owns outright, insurance being the bulk of the value—and concluded Berkshire Hathaway stock was over-priced at a bit under $6,000 per share.
Last trade was $143,000.
So don’t be too surprised if few Berkshire shareholders take the magazine’s current conclusion—that the shares are actually worth ‘only’ $132,000 each—to heart.
In typical Barron’s fashion, the current article, with a headline at once emphatic and apologetic—Sorry, Warren, Your Stock’s Too Pricey—contains a few whoppers that will leave longtime Berkshire watchers shaking their heads, including this:
“Berkshire isn’t easy to analyze because of its complexity and because Buffett communicates little with investors save for his appearance at Berkshire’s annual meeting in May.”
While it is true Berkshire engages in no quarterly earnings conference calls with Wall Street’s Finest, Buffett’s communications with investors make up in quality what they lack in quantity.
The heart of Buffett’s annual meeting is a question and answer session with shareholders that spans more than five hours and several dozen questions from any and all comers, yielding long discourses from the Chairman himself on whatever is on his investors’ minds. (See the 11-part "Pilgrimage to Omaha" series here last spring, in which we covered the 2007 meeting.)
Compare that with the typical S&P 500 corporate annual meeting, run by accountants and lawyers and yielding next to no useful information regarding the company, its business, and its management’s long-term thinking, and you’d say Berkshire’s meeting is hands-down the more valuable.
Furthermore, Buffett writes his own annual letter to shareholders, and he takes 20-plus pages, single-spaced, to explain what happened the previous twelve months—a far cry from the normal one or two page, relentlessly upbeat PR job littered with cringe-making catch-phrases such as “core competency” that most investor relations professionals write for their company’s CEO.
While it is true that Berkshire does not disclose much in the way of sales and margin data for individual operating companies such as Shaw Industries and Dairy Queen (and there is good reason for that: a number of Berkshire's businesses are on the decline) the fact is Buffett communicates a great deal more usefully than most CEOs on Wall Street.
He simply leaves out the quarterly earnings patter with the endless “great quarter, guys” backslapping of Wall Street’s Finest.
The other whopper from the editors of Barron’s concerns the issue of Buffett’s age, and it reveals more about their fundamental misunderstanding of Buffett’s role at Berkshire than it does about how long Buffett is likely to stay on the job:
Buffett turns 78 next August, and his actuarial life expectancy is nine years. He’s likely to stay on the job for as long as possible, but in reality few CEOs can handle the demands of the job much past 80.
Yet Buffett is nothing like other CEOs in the way he handles the “demands of the job,” for he has outsourced most of the heavy lifting other CEOs routinely endure in the course of their careers.
Buffett, as we said, does no quarterly conference calls. Nor does he do investment conferences or much of the other public-company glad-handing most CEOs regard as a “demand of the job.”
Furthermore, he does not actively manage the companies beneath him, leaving that to the individuals who have run the businesses for, in most cases, at least thirty years.
Aside from the occasional jaunt to Washington to testify before Congress or his recent trip to China, all that delegation of authority leaves Buffett the time to do what he likes best: to sit in his office, read annual reports and talk on the phone with people he likes.
Hardly “demanding” and likely to lead to an early grave.
Still, the Barron’s story includes at least one worthwhile observation, despite the otherwise superficial discussion of potential risks such as Buffett’s age:
What Buffett now calls a group of “wonderful businesses” may be viewed in the future as a hodge-podge of unrelated companies.
While the businesses are indeed unrelated—they range from retail furniture stores to carpet mills—it is Buffett’s famed desire for as much of their cash flow as he can keep, in his primary role as Berkshire Hathaway’s capital allocator, that may be more of an issue in years to come.
And that is an issue we will explore in our next Berkshire blog.
I Am Not Making This Up
© 2007 NotMakingThisUp, LLC
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.
Posted by Jeff Matthews at 8:13 AM