Holding Company Berkshire Hathaway (BRKB) has released information regarding its vast equity portfolio, which amounted to more than $52.0 billion as of June 30, 2011. It includes large positions in many blue chip companies, such as Coca-Cola (KO – Free Coca-Cola Stock Report), American Express (AXP – Free American Express Stock Report), and Procter & Gamble (PG – Free Procter & Gamble Stock Report). Chairman Warren Buffett has mentioned many times that he consciously avoids technology stocks, since it is simply a business that he finds difficult to understand. However, it turns out that Mr. Buffett has changed course and has committed about $10.7 billion towards purchasing shares of technology behemoth International Business Machines (IBM - Free IBM Stock Report). Berkshire began buying IBM stock in March, and now owns about 5.5%, or 64 million shares, of the company. This comes as a surprise to us, since, as mentioned, Mr. Buffett has adamantly avoided technology stocks for decades. It appears that Berkshire Hathaway has been changing its operational strategies of late.
Several weeks ago, the board of directors authorized a share repurchase program. At that time, according to the board, Berkshire's underlying businesses were worth more than the current stock price. This move, while warmly greeted by investors, was a major deviation from Warren Buffett's typical style. In fact, on a number of occasions, Mr. Buffett has spoken out against buybacks, and since he took over Berkshire more than 40 years ago, had never instituted a repurchase plan.
In our view, the buybacks and the IBM stock purchases are linked. At September 30, 2011, Berkshire possessed about $35 billion in cash and a modest amount of debt obligations. Mr. Buffett has always been focused on using its cash to bolster operations, and has completed dozens of acquisitions and has amassed sizable positions in a number of public companies over the years. However, due to Berkshire's scope of operations, finding meaningful purchases has become increasingly difficult. For example, the company just recently completed the acquisition of Lubrizol, a specialty chemicals producer, for about $9.7 billion. Although Lubrizol makes a fine addition, it achieved net profit of $680 million in 2010, while Berkshire posted earnings of almost $13 billion. Thus, at this point, few purchases could be considered “game changers”. Consequently, we believe that Berkshire is now open to other methods of increasing profits and shareholder value, namely share repurchases and venturing into technology issues.
In sum, we continue to like Berkshire Hathaway stock as a long-term holding. It owns dozens of profitable businesses that ought to perform well, especially if the global economy improves over the next several years. Furthermore, the company will likely remain active on the acquisition and share-buyback fronts. All told, we are forecasting healthy annual earnings gains to 2014-2016, and believe that this high-quality equity possesses worthwhile appreciation potential over that time frame.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.