Monday, November 5, 2012

Berkshire Hathaway's 3rd Quarter 2012 Results

Berkshire Hathaway (BRKa) released its latest quarterly earnings this past Friday. Some things worth noting:

1) Berkshire's cash position continues to grow.

The pile of cash on Berkshire's balance sheet is now almost $ 48 billion compared to a bit over $ 40 billion at the end of the prior quarter. So they are still set up for another very substantial acquisition, but Buffett recently said, in this CNBC interview, it's not easy to get deals done due to pricing the current environment.

2) Book value at the end of the 3rd quarter rose 11.9% compared to year-end 2011. At the quarter's end, book value sat at roughly $ 111,700 per Class A share. As I write this, Class A shares are selling for $ 129,800 or a 16% premium over that book value (or 116% of book value). Berkshire announced last year that the company will repurchase shares at a 10% or less premium over the book value:*

Our Board of Directors has authorized Berkshire Hathaway to repurchase Class A and Class B shares of Berkshire at prices no higher than a 10% premium over the then-current book value of the shares. In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise. If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retain their interest.

Buffett explained this further in the 2011 Berkshire Hathaway shareholder letter. At that small premium...

...repurchases clearly increase Berkshire's per-share intrinsic value. And the more and the cheaper we buy, the greater the gain for continuing shareholders. Therefore, if given the opportunity, we will likely repurchase stock aggressively at our price limit or lower.

It's well worth reading the Intrinsic Business Value and Share Repurchases sections of the latest letter to more fully appreciate Warren Buffett's and Charlie Munger's thinking on this. Also, check out pages 99-100 of the 2011 annual report and the owner's manual for good explanations of how they view intrinsic value. At a minimum, as the share price approaches that 10% premium over the book value, Buffett has made it easy to know when he thinks the shares are selling at an attractive discount to intrinsic value.

The bottom line is that, at the stated price limit, they don't consider the discount to intrinsic value to be small one. In fact, they'd be unlikely to bother buying back the shares if it was.

3) Berkshire was a net seller of stocks during the quarter.

The Consolidated Statement of Cash Flows in the latest 10-Q (the cash flows from investing activities section) reveals, once again, more selling of equity securities than buying. That shouldn't be terribly surprising but is, at least, mildly interesting. More specifically, Berkshire bought nearly $ 1.2 billion in equities while selling nearly $ 3.2 billion worth in the latest quarter.

Quarter-to-quarter changes don't mean a whole lot but the moves are still worth keeping an eye on.

Stepping back just a bit from the most recent quarter, Berkshire bought $ 6.5 billion of equities in the first three quarters of 2012 while selling $ 7.0 billion. That's not exactly running away from equities but, for a comparison, in the first three quarters of 2011 there was over $ 11 billion of equity purchases compared to under $ 1 billion of stocks sold. In any case, we'll get more details on changes to the portfolio when the 13F-HR is released later this month. The specific changes (buying and selling) that occurred should become less of a mystery at that time.

4) Berkshire sold at least some of one or more of its consumer stocks.

Based upon the latest 10-Q, the cost basis of the consumer products (Note 5 under Notes to Consolidated Financial Statements) stocks dropped (from $ 9,843 billion to $ 8,160 billion = a drop of $ 1,683 billion) compared to the prior quarter. So that's where at least a good portion of the selling appears to have been done.

In the prior quarter, meaningful amounts of Johnson & Johnson (JNJ), Kraft (formerly KFT, now MDLZ) and KRFT after the spin-off), and Procter & Gamble (PG) were sold. With the further reduction in cost basis of consumer products stocks this quarter, it seems not at all unlikely that the selling might have continued with at least some of these same stocks.

With the limited information available, it's obviously difficult at best to guess why a stock (or stocks) may have been sold.

Some of the reasons that come to mind include:
  • A less than optimistic (or downright pessimistic) view of the long-term prospects for a particular equity
  • An expensive share price relative to per-share intrinsic value
  • A relatively attractive alternative investment that requires some freed up cash
Among others. Only time will really tell but, once again, the yet to be released 13F-HR should shed some light.

Adam

Related posts:
Berkshire Hathaway's 2nd Quarter 2012 Earnings: August 2012
Berkshire's Book Value & Intrinsic Value: May 2012
Buffett: Intrinsic Value vs Book Value - Part II: May 2012
Buffett: Intrinsic Value vs Book Value: April 2012
Berkshire Hathaway Authorizes Share Repurchase: Sept 2011
Should Berkshire Hathaway Repurchase Its Own Stock?: Sept 2011

* 10% premium over the book value or 110% of the book value. It's been described both ways in different publications.
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