Tag: buffett

So, GE(GE) disappointed and shares are getting pummeled, down 11%. Is it a buying opportunity? I guess I am wondering why one would want to own it anyway?

First the numbers:
Profit from continuing operations dropped to $4.36 billion, or 44 cents a share, from $4.93 billion, or 48 cents, a year earlier. Revenue rose 8 percent to $42.2 billion, less than GE’s prediction of about $44 billion. GE was expected to earn 51 cents a share.

CEO Jeffrey Immelt cut also the annual forecast he had once told investors was “in the bag” for 2008 and did so again on March 13. He says capital markets seized up just days later, forcing GE to slash the value of some securities in the last two weeks of the quarter and blocking some asset sales. The new EPS forecast is $2.20 to $2.30 a share, down from the previous forecast of “at least $2.42”.

So,should you pick up shares? Not me. Even with the sell off today GE still trades at 15 times the new earnings but does sport a 3.8% yield.

For all its diverse businesses GE is essentially s financial services company with 40% of earnings coming from that division. Immelt said today finance units may have a profit decline of 5% to 10% this year and that will offset a non-financial units increase 10% to 15%. The other main driver is it infrastructure business which grew EPS 17%.

All that being said, when you have a business as large and diverse as GE, the value to shareholders comes down to the man at the top. Look at Berkshire Hathaway (BRK.A). A huge business that is basically an insurance business that, like GE, has its other businesses in industry. The difference is that with Berkshire, you have Warren Buffett, perhaps the greatest capital allocator ever at the helm. Through that, he can drive results. Immelt is good, but he is no Warren.

There comes a point where conglomerates simply become to large for shareholders to truly benefit from the performance of the diverse businesses. What happens is a mean reversion to mediocrity in the multiple people will pay for shares. This is why for the last 7 years GE has traded between $30 and $40 a share with only a brief drop below in 2002.

GE’s financial services and health care divisions are now a drag on the high flyer like infrastructure. By itself, it would command a PE of at least 20 based on its growth rate and prospects. GE as a whole now trades at 15.

What GE should do is an Altrai (MO) like spin of the infrastructure business to the shareholders. Without that business, the multiple left on what is left on GE would shrink and then you would have a potential value opportunity there with a nice fat dividend yield. Value inclined investors would likely pick up shares, support the price. This would be offset for current shareholders by the PE expansion on the infrastructure business.

This would allow shareholders to fully benefit from the current strong growth in the infrastructure business while at the same time allowing them to participate in the rebound in financial services and health care.

Likely? No. Would work though..

Disclosure (“none” means no position):Long MO,None

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Berkshire’s (BRK.A) recent activity is discussed.

Berkshire’s (BRK.A) recent activity is discussed.

It seems the time a tech giant dominates the landscape just gets shorter and shorter. Sorry, another post that has Google (GOOG) in it. I Promise it will be the last for a while, barring anything dramatic.

IBM (IBM) was the dominant tech company for over two decades before Microsoft’s (MSFT) Windows relegated them to the also ran status in the early 90’s. Microsoft took the mantel and dominated the landscape for about 14 years, give or take.

Enter Google. After its IPO in mid 2004, it became the wonder-child of Wall St. as its share price zoomed from the $85 a share it went public at to a high of $711 in November of 2007 (shares now sit nearly 40% below that at $440).

It’s brand has become a verb. Even my four year olds’ now know to ask when I do have the answer to a question, “daddy, why don’t you just Google it”. This is powerful and yet it would seem the staggering growth Google enjoyed in its ascent is now a thing of the past and investors are stuck wondering why margins are shrinking and with it, the stock price.

There are a few reasons:

1- No barrier to entry: Berkshire’s (BRK.A) Warren Buffett, when asked about tech investing once said “I cannot invest in something that two teenagers writing code in their parents garage can destroy”. The statement does have merit as Micheal Dell started Dell (DELL) from a Texas dorm room, Google itself was a Stanford University project by its founders and Microsoft was started by college dropout Bill Gates. That being said, tech has moved into ideas, not things. Whomever has the best idea will win and there is no cost involved with that.

2- Opportunities: Those good ideas today have little trouble finding the funding they do need to grow and expand on them. We are not talking about a new way to produce steel that would cost US Steel (X) hundreds million plus to implement, not to mention the prohibitive R&D cost. We are talking PC’s and ideas…cheap..

3- Desertions: This is the single largest reason and the genesis of the post. Look at what has happened to a slew of key people at Google.

When IBM reigned, people began there, worked there, and retired there. Today employment at a tech company is a way station for the next opportunity. The cost and effort required to repair the damage due to the constant churn of key people is staggering. It both interrupts the flow of current work and may derail future projects as the new folks may not share the vision of the old. The disruption to the “finely tuned engine” cannot be quantified. No matter what the business, replacing people is laborious and disruptive. As you move up the skill set level, that effect is amplified.

Now, this is not to say that Google by any means is in trouble. It also does not mean current shareholders cannot still make money in the stock (those of you who bought at the end of 2007, well, it will be a while). It does mean that the company is facing challenges to its dominance on every front. Challenges that up until the past year, it had not.

The most severe of those challenges comes from those who know it the best and can emulate its best practices into their ideas. Most will not succeed in taking the mantel, but, history does show us that the time at the top for tech is growing far shorter.

It is growing shorter not due to competition from other companies, but, competition from within its own ranks..

One can only guess that before my boys hit the 5th grade, the answers they may be looking for may come from another verb……

Disclosure (“none” means no position):None

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Interesting video I cam across.

Mary Buffett talks about the types of businesses Berkshire’s (BRK.A) Warren Buffett likes..

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Here is an interview with Buffett in which he talks about the current situation.

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Many people have long wondered about Berkshire Hathaway’s (BRK.A) succession plan. A move by David Sokol today may be a hint at it.

Warren Buffett has said Berkshire has three internal candidates, including one who could step in immediately, and would like any successor to be young enough to stay on for 15 years. Sokol, the now former CEO and still Chairman at Berkshire’s Mid-American energy subsidiary is 51 years old.

Sokol told the Omaha World-Herald that ending his 17-year run as MidAmerican chief executive will free him to work on acquisitions. He said, “My 100 percent allegiance is to Berkshire and MidAmerican. I’m not going anywhere.”

Could the move be designed to give the new CEO, Gregory Abel time to adjust to his role and assure a smooth transition should Sokol be taking over the operations end of Berkshire?

Buffett has long said the new post would be split into operations and investments. Sokol is very qualified to handle Berkshire’s operations.

Disclosure (“none” means no position):None

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Since the release of Berkshire Hathaway’s (BRK.A) annual letter, posts have been flying out there as to Berkshire’s actual value vs. today’s current $133,000 a share price.

Before we get started and Buffett folks assume some things, let me say this:
– Buffett is the greatest investor of all time
– Berkshire is a one of a kind company

According to Buffett”
“Finally, our insurance business – the cornerstone of Berkshire – had an excellent year. Part of the reason is that we have the best collection of insurance managers in the business – more about them later. But we also were very lucky in 2007, the second year in a row free of major insured catastrophes.

That party is over. It’s a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise. Even if the U.S. has its third consecutive catastrophe-light year, industry profit margins will probably shrink by four percentage points or so. If the winds roar or the earth trembles, results could be far worse. So be prepared for lower insurance earnings during the next few years.”

For all the contributions of the near 70 businesses Berkshire owns, it is in its essence an insurance company. The unit produced a $3.3 billion (down from $3.8 in 2006) of the company’s $13 billion in earnings in 2007. Further, $37 billion of the company’s reported $44 billion in cash and cash equivalents belong to insurance.

Let’s just forget about Berkshire for a minute and say it is company “A”. Company A’s main business had operated under perfect conditions for the past two year and its stock has reacted accordingly with it reaching an all time high just 4 months ago and despite the current market environment, sits only 16% below that. Here is the odd thing about company A’s business, when it is perfect, the prices it can charge for its services falls. It’s margins actually begin to shrink. Then, invariably, there is a shock that causes a large disruption to the business and earnings fall, at times dramatically. Thus is the insurance business……

Berkshire, currently trading at 15 times earnings (down from over 18 at its high) seems to reflect some of this expected insurance deterioration. We may get a hurricane (or a series of them) in 2008, or not. Either way, insurance results will deteriorate and in concert so should Berkshire’s as a whole. If they do not fall, one would expect them to stagnate.

If you were going to buy shares in any company, would you expect to find true value when its principle business line has operated under perfect conditions? Of course not. One would argue that a conservative valuation of the company would under those conditions would be a “fair valuation” not “value”.

I would argue that Berkshire is fairly valued for its current business environment. The last time Berkshire represented “value” was exactly 8 years ago in March 2000 at the height of the dot.com bubble. Since then its share price has risen 256% even after the current drop.

Does this mean today Berkshire buyers will not make money? No. They assuredly will. It does mean that the out-sized gains investors in 2000 have seen will escape them.

Disclosure (“none” means no position):None

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