Starting with the balance sheet, we see that Berkshire ended the first nine months of the year with $48 billion in cash and equivalents (up from $38 billion at year end 2011) across insurance and other, railroads, utilities and energy, and finance and financial products; in addition, the company has another $32 billion in fixed income investments, with $11.5 billion in foreign sovereign bonds (96% of which are rated AA or higher by at least one major rating agency), $12.3 billion in corporate bonds, and the remainder split between mortgage backed securities and a smattering of domestic bonds (treasuries, munis, etc.).
Since the start of the year, shareholder’s equity has increased from $164.85 billion to $184.6 billion – a solid 12% boost in book value through the first nine months of 2012; with average shares outstanding of 1,652,184, book value per “A” share stands at $111,731 (or $74.50 per “B” share). As a reminder, the board of directors approved a common stock repurchase program in September of last year authorizing Berkshire to repurchase shares at a 10% premium to book value, as long as consolidated cash and equivalents still exceeded $20 billion; at this point, the repurchase activity can be commenced at $81.95 per “B” share, essentially putting a soft floor about 6% below Friday’s closing price.
Moving to the P&L, we can see that the quarter was another strong one for Berkshire, leaving us with impressive year to date results. In insurance and other, earned premiums increased 15.8% in the quarter to $8.85 billion, which pulled the year to date increase to 5.3% (driven by GEICO and Berkshire Hatahway Reinsurance Group, while premiums earned at Gen Re were flat as underwriters “continue to exercise discipline by not accepting offers to write business where prices are deemed inadequate”). Year to date, Berkshire has recorded an underwriting gain across all the insurance businesses (GEICO, Gen Re, BHRG, and BH Primary Group), with pre-tax earnings for the entire insurance group up 23% to $5 billion; at GEICO, the result were even stronger than reported, but were partially masked by the prospective adoption of accounting changes related to DPAC (accelerates the timing of certain underwriting costs).
In railroads, utilities and energy, revenues increased 7.5% in the quarter (+7.7% at BNSF, with a relatively even split between pricing – revenue per car – and volume), and are up more than 6% year to date to $24.1 billion (compared to a 3.8% increase in expenses). Looking at the breakdown, it’s interesting to see that coal volumes were up 4% in the quarter, and have declined 3% year to date – much better than their east coast peers, who are being hammered by the shift to natural gas and the buildup of coal inventories at utilities.
I’m not positive what Warren was thinking at the time, but I would bet that the dichotomy between PRB and Appalachian coal (in terms of “cleanliness”) wasn’t overlooked when choosing Burlington Northern. Year to date, pre-tax income is up more than 19% to $3.9 billion; with each passing quarter, the 2010 purchase of BNSF (at an implied valuation of $34 billion) looks better and better.
The year to date increase in net earnings of 42.6% is largely due to a significant decrease in losses from derivatives ($184 million year to date, compared to $2.36 billion). If we adjust the year ago period for this “loss” (remember, the equity index put contracts are European style options and the majority contain no collateral posting requirements, with a remaining average weighted life of 8.2 years), the increase in net earnings is around 10%. Importantly, the 2012 figures includes a material decline in investment income, due to the redemption of the GE and Goldman (GS) preferred stock in 2011 (dividends from these investments totaled $416 million in the first nine months of 2011), making the comparative increase that much more impressive.
In the 2011 annual letter, Warren said the following about CapEx: “In total, our entire string of operating companies spent $8.2 billion for property, plant and equipment in 2011, smashing our previous record by more than $2 billion. In 2012, these expenditures will again set a record.” Looking at the cash flow statement, we can see that Berkshire is not only on pace to set another record – the previous mark will likely be smashed yet again: through the first nine months of this year, additions to property, plant & equipment have totaled $7.2 billion (with $2.3 billion tied to Mid-American and $2.7 billion at BNSF), an increase of more than 25% from the year ago figure.
In terms of equities, Berkshire has invested $6.45 billion through September, compared to $11.35 billion heading into the final quarter of 2011; in addition, Warren, Todd and Ted have sold more than $7 billion worth of equities this year (including JNJ, PG, etc.) compared to under $1 billion a year ago. The pace of M&A has also slowed, with $1.8 billion spent on bolt-on acquisitions to date, compared to $8 billion in 2011 (which included increased ownership in Marmon and acquiring the remainder of Wesco); collectively, these actions have resulted in the $10 billion increase in cash and equivalents, compared to cash outflows of $3.4 billion through Q3 2011. Obviously, this could all change very quickly – as Warren recently noted on CNBC, he’s always elephant hunting and “salivating” in anticipation of the next big acquisition.
Here’s an update on the big warrant positions that Berkshire holds:
|Company||# of Shares||Cost (per Share)||Current Price||Expiration|
|Goldman Sachs||43.48M||$5B ($115)||$123.25||10/1/2013|
|General Electric||134.8M||$3B ($22.25)||$21.30||10/16/2013|
|Bank of America||700M||$5B ($7.14)||$9.85||2021|
As was reported by the financial media, Berkshire has recently terminated some credit contracts tied to state/municipal debt securities; in August 2012, the company terminated contracts with a notional value of $8.25 billion, bringing the company’s exposure (the maximum undiscounted future value of losses payable under the contracts) to $14.6 billion from $24.2 billion at year end.
Across the board, the quarterly and year-to-date results are solid; as we come to the end of the year, I can only hope that the divergence between price and intrinsic value widens – if we get back to the low 80s (around 1.1x book), I think I’ll be salivating even more than Warren is.
About the author:
I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.