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Revealing Warren Buffett’s successor is a net positive: Morningstar

Greggory Warren, CFA  |  04 May 2021Text size  Decrease  Increase  |  
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We were a little surprised to see wide-moat rated Berkshire Hathaway (BRK.A) (BRK.B) announce Greg Abel as chief executive Warren Buffett's successor (once he departs the scene). The surprise was in the timing of the announcement, which apparently was forced by a slip-up on Charlie Munger's part during the annual meeting this past weekend as opposed to the announcement itself, both of which have had a positive impact on the stock. This removes one of the major uncertainties hanging over the company.

We have long believed that Abel was the most likely successor to Buffett, given his age (59), which satisfies Buffett's criterion that the company's next "chief executive should be relatively young, so that he or she can have a long run in the job", and his combination of both operational and capital allocation experience during his years at Berkshire Hathaway Energy. With the company's next chief executive expected to fill the role of capital-allocator-in-chief, there were two strong candidates in line to take the top job: Ajit Jain, who oversees all of Berkshire's insurance operations, and Abel, who has stewardship of the noninsurance businesses.

While we've always thought that Buffett and the board had some deference toward Jain; he's closer to 70 and has not shown much interest in following in Buffett's footsteps given the pressures of being in that spot once Buffet departs. We've always thought that Berkshire would likely be better served longer term by having Jain continue to oversee the insurance business, which is really where his passion lies, and have Abel - who will work closely with Jain, as well as Ted Weschler and Todd Combs - focus on properly allocating Berkshire's capital. Buffett did note that while Abel would succeed him if he departed tomorrow, that Jain would succeed Abel if anything were to happen to him.

Annual meeting had moments needing follow-ups

On the annual meeting held over the weekend in Los Angeles (virtually), we thought the meeting lacked quality questions.

While Berkshire Hathaway's annual meeting has always been entertaining, it hasn't generally been a big source of meaningful insight into the firm's operations. This year's event, which had the feel of past meetings--with CEO Warren Buffett and Charlie Munger joined by Ajit Jain and Greg Abel on a stage that resembled the one in Omaha taking questions directly from Becky Quick--was likely more comfortable for shareholders. That said, we feel that it was lacking in enough good quality questions aimed at the managers about the inner workings of Berkshire's businesses. We also think one of the biggest drawbacks of the annual meeting format is that it prohibits follow-up questions, which might directly challenge statements coming from management during the course of the meeting. While Becky Quick was apparently given some leeway to do so (which is something she does on a regular basis as a financial reporter), we felt there were many moments that went begging for follow-ups.

Warren Buffett and Charlie Munger on stage at the Berkshire Hathaway Annual Shareholders Meeting 2021 (virtual)

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Berkshire Hathaway Meeting

Source: Yahoo Finance

If we had to sum up our key takeaways from this year's meeting, at least from an analyst's perspective, we would highlight the following: management's discussion of Berkshire's lack of buying activity during the coronavirus market sell-off last year, the need for the firm to potentially raise its pandemic-related loss reserves, the notion that Buffett may raise the $20 billion cash backstop he's had in place for the insurance operations and his thoughts about the "dry powder" Berkshire has to pursue acquisitions, and the competitive positioning of both Geico and BNSF relative to their better-performing peers. Our general feeling over much of the past year has been that Berkshire was right to guard its cash reserves, and that with viable investment opportunities few and far between the past 12 months, the best option for the company's excess cash has been Berkshire's own common stock.

Berkshire by the numbers

Berkshire reporting stronger first-quarter results than we had been forecasting. We may need to reassess our $440,000 ($293) per Class A (B) share fair value estimate. That said, a lot of this will be driven by our ability to uncover tidbits of information related to the lasting impacts that the coronavirus pandemic could have on Berkshire's operating subsidiaries, which would allow us to make more informed projections for the firm's businesses.

  • First-quarter revenue, which includes unrealized and realized gains/losses from Berkshire's investments and derivatives portfolios, increased significantly to $70.3 billion (from negative $9.0 billion in the prior year's period).
  • Excluding the impact of investment and derivative gains/losses and other adjustments, first-quarter operating revenue increased 5.4 per cent to $64.6 billion.
  • Operating earnings, exclusive of the impact of investment and derivative gains/losses, increased 19.5 per cent year over year to $7.0 billion during the March quarter. When including the impact of the investment and derivative gains/losses, operating earnings increased significantly to $11.7 billion (from negative $49.7 billion in the prior year's period).
  • Book value per share, which still serves as a decent proxy for measuring changes in Berkshire's intrinsic value, increased 1.8 per cent sequentially to $292,175 (from $287.031 at the end of December), slightly below our forecast of $294,207.
  • The company closed out the March quarter with $141.4 billion in cash and cash equivalents, up from $138.3 billion at the end of last year. This left Berkshire with an estimated $116.7 billion in dry powder that could be committed to investments, acquisitions, and share repurchases.
  • The company repurchased $6.6 billion of common stock, spent $47 million on bolt-on acquisitions, and was a net seller of equities during the March quarter.

Greggory Warren, CFA, is a senior stock analyst with Morningstar.

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