Warren Buffett's Latest Letter To Investors

Tyler Durden's picture

For those who follow folksy Uncle Warren, here is the breakdown of Berkshire's Q4 and full year results, as well as his latest letter to investors.

  • Book value at Dec. 31: $134,973/shr
  • Book value up by 18.2% since ’12 end
  • 4Q oper EPS $2,297, est. $2,204
  • 4Q derivative gains $334m
  • 4Q investment gains $880m
  • Insurance float ~$77b at Dec. 31
  • Cash & cash equivalents $48.19b at end of yr
  • Will be aggressive on shr purchases if stock price descends to 120% level

Berkshire Hathaway’s Warren Buffett says in holder letter he would like to buy larger stake in Heinz.

Though the Heinz acquisition has some similarities to a “private equity” transaction, there is a crucial difference: Berkshire never intends to sell a share of the company. What we would like, rather, is to buy more, and that could happen: Certain 3G investors may sell some or all of their shares in the future, and we might increase our ownership at such times. Berkshire and 3G could also decide at some point that it would be mutually beneficial if we were to exchange some of our preferred for common shares (at an equity valuation appropriate to the time).

As usual, Buffett preaches his irrational optimism in a country that over the past 237 years has piled up $17.4 trillion in debt and over $200 trillion in derivatives, which has made the concept of capitalism a mockery as even a modestly sized counterrparty failure would collapse the system. Of course, those like Buffett would be again bailed out. Others wouldn't be so lucky but at least they can have their optimism. From the WSJ:

"Indeed, who has ever benefited during the past 237 years by betting against America?" Mr. Buffett wrote in his annual letter to shareholders, released Saturday along with Berkshire's fourth-quarter and annual report. The "dynamism embedded in our market economy will continue to work its magic. America's best days lie ahead."

On the operational front, Berkshire did well to quite well in a year in which the Fed pumped well over a trillion in extra liquidity which went into the stock market if not the economy:

For the fourth quarter, Berkhire's net income jumped 9.6% to nearly $5 billion, helped partly by gains at its insurance operations. Berkshire owns auto insurer Geico as well as large reinsurance businesses, both of which are core operations that have propelled the company's growth from an ailing textile manufacturer in the 1960s to a diversified holding company with a market capitalization of $282 billion.

 

Mr. Buffett uses the insurance premiums it collects from customers upfront to invest for Berkshire's benefit. Berkshire can use this money, which Mr. Buffett calls "float," because insurance claims are typically paid much later. In 2013, Berkshire's float grew to $77.2 billion. Last year, Berkshire insurance business also generated about $3.1 billion in underwriting profit, its 11th consecutive year of earning such a profit.

 

Revenue and net earnings at one of Berkshire's biggest units, the freight railroad Burlington Northern Santa Fe Corp., rose to $22 billion and $3.8 billion, respectively.

 

Berkshire's "Powerhouse Five"—a group of large non-insurance businesses—made $10.8 billion in pretax profit last year, up from $758 million in 2012, Mr. Buffett wrote in his letter. This group includes Burlington Northern, utility company MidAmerican, chemicals maker Lubrizol and industrial companies Marmon and Iscar. Earnings for these five companies could increase by $1 billion before taxes if the U.S. economy continues to improve, Mr. Buffett said.

It wasn't all high fives this time. In this year's letter Buffett does a mea culpa for his investment in the near bankrupt Energy Future Holdings, fka TXU:

Most of you have never heard of Energy Future Holdings. Consider yourselves lucky; I certainly wish I hadn’t. The company was formed in 2007 to effect a giant leveraged buyout of electric utility assets in Texas. The equity owners put up $8 billion and borrowed a massive amount in addition. About $2 billion of the debt was purchased by Berkshire, pursuant to a decision I made without consulting with Charlie. That was a big mistake.

 

Unless natural gas prices soar, EFH will almost certainly file for bankruptcy in 2014. Last year, we sold our holdings for $259 million. While owning the bonds, we received $837 million in cash interest. Overall, therefore, we suffered a pre-tax loss of $873 million. Next time I’ll call Charlie.

Reuters has some other highlights from the letter:

RED FLAG ON PUBLIC PENSION PLANS:

"Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn't afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension mathematics today remain a mystery to most Americans. Investment policies, as well, play an important role in these problems. In 1975, I wrote a memo to Katharine Graham, then chairman of The Washington Post Company, about the pitfalls of pension promises and the importance of investment policy. That memo is reproduced on pages 118-136. During the next decade, you will read a lot of news - bad news - about public pension plans. I hope my memo is helpful to you in understanding the necessity for prompt remedial action where problems exist."

ON BERKSHIRE'S EXPOSURE OF BofA:

"Berkshire has one major equity position that is not included in the table: We can buy 700 million shares of Bank of America at any time prior to September 2021 for $5 billion. At year-end these shares were worth $10.9 billion. We are likely to purchase the shares just before expiration of our option. In the meantime, it is important for you to realize that Bank of America is, in effect, our fifth largest equity investment and one we value highly."

ON BUYING MORE H.J. HEINZ:

"Though the Heinz acquisition has some similarities to a 'private equity' transaction, there is a crucial difference: Berkshire never intends to sell a share of the company. What we would like, rather, is to buy more, and that could happen: Certain 3G investors may sell some or all of their shares in the future, and we might increase our ownership at such times. Berkshire and 3G could also decide at some point that it would be mutually beneficial if we were to exchange some of our preferred for common shares (at an equity valuation appropriate to the time)."

NV ENERGY 'FITS NICELY' INTO BERKSHIRE:

"NV Energy, purchased for $5.6 billion by MidAmerican Energy, our utility subsidiary, supplies electricity to about 88 percent of Nevada's population. This acquisition fits nicely into our existing electric-utility operation and offers many possibilities for large investments in renewable energy. NV Energy will not be MidAmerican's last major acquisition."

'GEICO'S FLOAT WILL ALMOST CERTAINLY GROW':

"Further gains in float will be tough to achieve. On the plus side, GEICO's float will almost certainly grow. In National Indemnity's reinsurance division, however, we have a number of run-off contracts whose float drifts downward. If we do experience a decline in float at some future time, it will be very gradual - at the outside no more than 3 percent in any year."

HUNT FOR BERKSHIRE'S BEAR:

"And we will again have a credentialed bear on Berkshire. We would like to hear from applicants who are short Berkshire (please include evidence of your position)."

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For all the other folksy witticisms (zero mentions of gold or fondling it this year), you can read them in the letter below (link) or the WSJ liveblog:

Source: BBG, WSJ