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Berkshire Hathaway in a Post-Buffett World
For years, pundits, investors, and fans of Warren Buffett have speculated exhaustingly about what will happen to Berkshire Hathaway (BRKB) when the legendary investor steps down from his post as Chairman and CEO. Some of the questions commonly asked are: Who will take over? Will the company’s culture and business strategy change? Will the stock continue to post healthy annual returns?
Warren Buffett took over Berkshire Hathaway about 45 years ago. At that time, Berkshire was a struggling textile firm, but after a few years, due to Mr. Buffett’s influence, the company moved away from that business and entered the insurance industry, offering property and casualty products. These operations provided Mr. Buffett with capital, which he, in turn, invested, purchasing additional subsidiaries, and within several years, built an international conglomerate. Berkshire Hathaway is now an insurance giant, with well-known companies under its flag like GEICO and General Re. It also owns dozens of other businesses that include electric utilities, a railroad, building supply companies, and retailers. These businesses are predominantly run independently, with profits and excess cash being channeled to Berkshire’s Omaha, Nebraska headquarters.
Mr. Buffett and his partner Charles T. Munger utilize this capital to purchase additional companies, as well as to bolster its huge equity positions. It owns large blocks of stock in several blue chip corporations, like Coca-Cola (KO - Free Analyst Report), American Express (AXE - Free Analyst Report), and Proctor & Gamble (PG - Free Analyst Report), to name just a few. Its total equity portfolio now stands at more than $50 billion, and the dividends received from these stocks are also used to bolster and expand Berkshire’s large footprint.
Under Mr. Buffett, Berkshire Hathaway has grown exponentially and is now one of the largest and most profitable companies in the world. In 2009, which some consider a mediocre year for the company (when compared with many prior years), it earned more than $8 billion. Meanwhile, since Mr. Buffett and his team took the reins, the stock has richly rewarded shareholders. Since 1965, the equity, on average, has returned 22% compounded annually through 2009. Needless to say, over this time frame, the stock has handily outperformed the Dow Jones Industrial Average, the S&P 500 and every other commonly-used benchmark. It is this level of profitability and share-price performance that has pundits, and current, as well as prospective, investors greatly interested about Berkshire’s future without Mr. Buffett at the helm.
Over the years, people have offered suggestions and speculated as to who will take over once Mr. Buffett, now almost 80 years old, steps down from his post. Just recently, during an interview, Mr. Munger (86 years old himself) suggested that Li Lu, a successful investor and hedge fund manager may be in the mix to become one of Berkshire’s top investment officers. Mr. Buffett refused to provide any additional color in regard to the comments, and at this time, the succession plan remains a mystery. In our view, whoever picks up the ball will, in all likelihood, be very qualified and have an immensely profitable company to run.
Which brings us to one of those big questions: Will the company’s culture and strategy change? In our view, we would be surprised to see Berkshire’s focus shift in any material way. We believe that the company will remain an insurance powerhouse, with an ever-growing list of profitable subsidiaries. Indeed, its aggressive acquisition strategy isn’t likely to change. Berkshire’s equity portfolio is sure to grow further, too, as it continues to park excess funds in blue chip corporations and other high-quality equities.
Will the stock continue to post excellent annual returns? This question is a little harder to answer, as Berkshire may become a victim of its own success. These days, although a large acquisition, for instance the recent $26 billion purchase of railroad Burlington Northern Santa Fe, may increase shareholder value and company profitability potential, it is unlikely to be a game changer due to the immense size of Berkshire’s existing portfolio of subsidiaries. We believe that Berkshire, with or without Mr. Buffett and Mr. Munger, will possess dozens of successful and profitable companies, but assuming that the stock will continue to provide investors with 22% annual returns is unrealistic.
That said, investors may be presented with a buying opportunity down the line. There is certainly a group of current shareholders worried about the succession plan who fear that Berkshire’s salad days will end with Mr. Buffett’s exit. In addition, some active traders are probably also waiting for that day, and plan on profiting from any possible price drop. At that time, if the price does decline materially, it would, in our opinion, trigger a buying opportunity for buy-and-hold investors interested in taking a position in an immensely profitable and financially sound company. In addition to its subsidiaries and large equity portfolio, Berkshire possesses almost $30 billion in cash assets and a small amount of debt.
Mr. Buffett has built an empire from the ground up and has used his financial acumen to create one of the largest corporations in the world, with operations that span the globe. His investment strategies are continuously studied and investors constantly attempt to mirror his actions. Every word that Mr. Buffett utters is pondered in the hopes of discovering and getting ahead of his next move. And while the succession plan is ambiguous at present, we believe that his choice will be the right one and that the chosen individual(s) will be eager to continue the strategies that made Berkshire Hathaway incredibly successful. Thus, we view a changing of the guard not as a negative, but as a potential buying opportunity for investors.