Berkshire Remains Busy

Berkshire Hathaway recently released its second quarter form 13-F, which details the investment conglomerate’s domestic equity holdings as of the end of June 2009. And in this last quarter, Berkshire has continued to be active by selling positions in some holdings, as well as adding a new name to the portfolio.

It should be noted that in last week’s second quarter earnings report, it appears as though Berkshire has been more active in purchasing fixed income securities—primarily international ones—than equities. That said, it is still instructive to monitor Berkshire’s holdings to try and gauge changes in the conglomerate’s thinking. It should also be mentioned that Berkshire does receive exemptions from the SEC to disclose some of its positions, until the conglomerate is able to build a full position in a particular stock.

New Names and Additions

In the last quarter, Berkshire added shares of medical technology company Becton, Dickinson and Company (BDX), which adds yet another healthcare related business to Berkshire’s equity portfolio. And on this front, Berkshire has continued to build back up its position in another healthcare related company, Johnson & Johnson (JNJ), which it was forced to sell some of late last year in order to raise capital for other investments.

In my opinion, each of these moves is noteworthy, as there seems to have been a subtle move towards healthcare and pharmaceutical companies in Berkshire’s portfolio over the last couple years. It is impossible to know for certain Berkshire’s thinking, but if I were to conjecture, I don’t necessarily think it is a favorable top down view of the healthcare sector on Berkshire’s part. Rather, in my view, it could be that many of those businesses have very strong franchises, and have seen their share prices decline as a result of the political uncertainty regarding healthcare reform.

Eliminations and Subtractions

There was only one complete elimination from the portfolio, which was the shares of Constellation Energy (CEG), which Berkshire received as consideration when Constellation pulled out of a deal to be acquired by Berkshire subsidiary Mid-American Energy. Berkshire has been selling its position in Constellation since the beginning of the year, which also had the effect of posting nice gains in Mid-American’s second quarter earnings.

As for the subtractions, Berkshire continued to sell its position in used car retailer Carmax (KMX) during the second quarter. Carmax’s business likely continues to struggle as new car companies liquidate inventories of new cars with the help of both company and government incentives.

Berkshire also continued to sell some of its stake in UnitedHealthcare (UNH), Wellpoint (WLP), Home Depot (HD), Eaton Corp (ETN), and integrated energy company ConocoPhillips (COP). As for Conoco, Berkshire indicated that it sold even more shares since the end of June. These Conoco sales will likely produce realized losses, which Berkshire can use to shield future gains from taxes.

While not showing up as a sale in the second quarter, Berkshire subsequently has also indicated that it has trimmed its position in bond rating firm Moody’s (MCO), which I don’t think is overly surprising given that the reputation of the bond rating firms is effectively on life support right now. That said, Berkshire still owns about 17% of Moody’s.

Unchanged Positions

The bulk of Berkshire’s equity portfolio was unchanged from the prior quarter. Here is a listing of those names:

• American Express (AXP)
• Bank of America (BAC)
• Burlington Northern (BNI)
• Coke (KO)
• Comcast (CMCSA)
• Comdisco (CDCO)
• Costco (COST)
• Gannett (GCI)
• General Electric (GE)
• GlaxoSmithKline (GSK)
• Ingersoll-Rand (IR)
• Iron Mountain (IRM)
• Kraft Foods (KFT)
• Lowes (LOW)
• M&T Bank (MTB)
• Nalco Holdings (NLC)
• Norfolk Southern (NSC)
• NRG Energy (NRG)
• Procter & Gamble (PG)
• Sanofi Aventis (SNY)
• SunTrust Banks (STI)
• Torchmark (TMI)
• US Bancorp (USB)
• United States Gypsum (USG)
• Union Pacific (UNP)
• UPS (UPS)
• Wabco Holdings (WBC)
• Wal-Mart (WMT)
• Washington Post (WPO)
• Wells Fargo (WFC)
• Wesco (WSC)

You might also be interested to know that this blog was mentioned in a Bloomberg article that I have linked here.

This and That

Also, if you haven’t already done so, please be sure to register before time runs out for the first “Late Summer Buffett Conclave” (www.buffettconclave.com), which is a social and networking event on August 28th in Chicago for folks interested in Berkshire. We already have a great group of attendees, and still have space to fit in a few more "Buffettologists." Disclaimer: Neither Mr. Buffett nor Berkshire Hathaway nor any of its employees are affiliated with this event.

Justin

Copyright © 2009 BuffettInsights

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.

Berkshire Grinds Out 2Q Earnings

Berkshire Hathaway reported second quarter earnings Friday that were largely mixed. While the headline number showed an improvement, that was largely due to gains in some of Berkshire’s derivative contracts, which are non-cash and tend to create more volatility in the conglomerate’s quarterly earnings. Including these derivative positions, though, Berkshire’s second quarter earnings grew 14%.

In the operating businesses, the story was more mixed. The insurance businesses produced satisfactory results, though underwriting profits were mostly down. While auto-insurer GEICO continues to attract new customers seeking cheaper auto-insurance, its underwriting profits were down thanks primarily to higher losses. General Re improved its profits, while Berkshire Hathaway Reinsurance and the primary insurance group saw declines in profitability.

Berkshire did indicate in its quarterly report that it is more willing to take on large exposures than it was earlier in the year, but that it hasn’t yet as industry wide pricing continues to be very competitive. Berkshire’s total insurance float—premiums collected and not yet paid as claims—increased to $61 billion as of June 30. This additional float—as well as preferred stock dividends from GE and Goldman Sachs--helped boost investment income in Berkshire’s insurance operations by a strong 18%.

The utility business earnings also held up okay, despite large revenue declines attributable to both weak demand and lower prices. The results in the utilities did benefit from gains in the stock of Constellation Energy, which Berkshire received as consideration when Constellation pulled out of a deal to be acquired by Berkshire subsidiary Mid-American. If not for these stock gains, Berkshire’s second quarter earnings in its utility businesses would have been down about 7%.

Results in the operating businesses were down more substantially, which wasn’t entirely unexpected, given the revenue and earnings weakness reported by many other similar businesses over the last few weeks. Across the board revenue was down between 20-30% in most of Berkshire’s operating businesses. NetJets revenue was down even more, at 43%, as that business continues to be flat on its back. In addition, NetJets also had a CEO change in just the last week. The one area that held up, and actually showed some modest growth, was McClane (a foodservice provider), which posted an 8% increase in revenue versus the prior year quarter.

Berkshire’s investments recovered somewhat, which helped push the conglomerate’s book value per share up 11.4% during the second quarter. Berkshire’s cash balance now sits at about $21 billion, after its flurry of investment activity over the past year. Berkshire has indicated in the past that it likes to keep at least $10 billion of cash on hand for insurance regulatory purposes, and given the current economic environment, it would seem that Berkshire would want to keep even more cash on hand. As such, if Berkshire were to make an additional investment or acquisition it would probably raise some additional cash to do so by potentially selling some marketable securities, as the conglomerate has already done over the last six months.

You might also be interested to know that this blog was mentioned in an Associated Press article that I have linked here.

This and That

Also, if you haven’t already done so, please be sure to register for the first “Late Summer Buffett Conclave” (www.buffettconclave.com), which is a social and networking event on August 28th in Chicago for folks interested in Berkshire. Disclaimer: Neither Mr. Buffett nor Berkshire Hathaway nor any of its employees are affiliated with this event.

Justin

Copyright © 2009 BuffettInsights

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.

Management Change at Berkshire Subsidiary NetJets

On Tuesday, it was reported that NetJets’ CEO Richard Santulli was stepping down from his post and would be replaced by David Sokol, former head of Berkshire subsidiary Mid-American, on an interim basis. This announcement was interesting on a couple of fronts, as Santulli had spent 25 years at the company he founded, and to step aside during a difficult time for NetJets was surprising. Secondly, Berkshire hasn’t typically moved executives around to run its different businesses, instead typically promoting from within each business, anytime succession has cropped up at the subsidiary level.

In my opinion, this announcement can be viewed from two different viewpoints. It could indicate that NetJets doesn’t possess the internal candidates that the Berkshire brass believed would be right to lead the organization at this juncture, and as a result, Sokol has stepped in until the right candidate could be identified. If this is indeed the case, it will be interesting to watch how Berkshire handles this, as there will likely be further subsidiary company successions in the coming years, as several of the folks running Berkshire’s other businesses are nearing retirement themselves.

The other way to view this announcement, is that it is yet another vote of confidence by Berkshire in Sokol, who many believe may be one of the leading candidates to eventually replace Chairman Warren Buffett as the operating CEO of Berkshire. Furthermore, this would give Sokol additional experience in running another of Berkshire’s businesses, which would seem to strengthen his qualifications.

Whether Sokol stays on at NetJets for the long haul, or if a different internal or external leader is ultimately identified, this move seems to be a very smooth way to handle succession at NetJets, where the business is likely facing a number of headwinds given the presently weak economic conditions.

You might be interested to know that this blog was mentioned in an Associated Press article, which I have linked here.

This and That

Berkshire is due to report earnings this Friday, so please check back this weekend for my analysis of Berkshire’s second quarter results.

Also, if you haven’t already done so, please be sure to register for the first “Late Summer Buffett Conclave” (www.buffettconclave.com), which is a social and networking event on August 28th in Chicago for folks interested in Berkshire. Disclaimer: Neither Mr. Buffett nor Berkshire Hathaway nor any of its employees are affiliated with this event.

Justin

Copyright © 2009 BuffettInsights

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.