1. Speculation is On
On January 22, 2009, Susie Gharib, PBS Anchor Woman of Nightly Business Report had a One-On-One interview with Warren Buffett . Here is an excerpt of the transcript:
SG: Is there a price at which you would buy back shares of Berkshire? $85,000? $80,000?
WB: I wouldn't name a number. If I ever name a number I'll name it publicly. I mean if we ever get to the point where we're contemplating doing it, I would make a public announcement.
SG: But would you ever be interested in buying back shares?
WB: I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity. That used to be the way people bought back stocks, but in recent years, companies have bought back stocks at high prices. They've done it because they like supporting the stock...
SG: What are your feelings with Berkshire. The stock is down a lot. It was up to $147 thousand last year. Would you ever be opposed to buying back stock?
WB: I'm not opposed to buying back stock.
So the speculation is on: Will or will not Warren Buffett buy back Berkshire Hathaway (BRK-A) (BRK-B) share at current price levels ? At the time of this writing, A-share is at $90,000 and B-share is at $3,000 per share.
2. Warren Buffett’s Philosophy of Stock Repurchase
To be fair, Warren Buffett did name a number and he did it publically! Well, maybe not recently, that was in March, 2000, nine years ago. In his Chairman’s Letter of 1999 that was written on March 1, 2000, Warren Buffett stated:
“Recently, when the A shares fell below $45,000, we considered making repurchases. We decided, however, to delay buying, if indeed we elect to do any, until shareholders have had the chance to review this report.” (Page 17)
Attest to Warren Buffett’s statement, Berkshire Hathaway A-shares traded below $45,000 from February . 29 to March 15, 2000. The window of opportunity was two weeks.
In the same letter, Buffett listed the two conditions under which he considered stock repurchasing advisable:
““First, the company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated.”“ (Page 16)
So we are basically down to two questions:
a) Does Berkshire Hathaway have available funds?
b) Is the stock selling in the market below its intrinsic value?
3. Cash Position
It is hard to argue that Berkshire Hathaway does not have the cash to buy its own shares.
According to GuruFocus data, Berkshire Hathaway had $6.5 billion Free Cash Flow in the Fiscal Year of 2007. Free Cash Flow has increased from $557 million in 1998 to $6.5 billion in 2007. Once of biggest challenges for Warren Buffett is to deploy the cash effectively.
Berkshire Hathaway has not announced its fourth quarter financials yet. It will be announce in early March. So we have to work with the third quarter data. As of September 30, 2008, The company had $33 in cash. Read this excerpt from the Susie Gharib interview:
SG: Everyone wants to know your plans. What you're going to do with all of Berkshire Hathaway's cash, some 30 billion dollars? Is this now the right time to do a big acquisition?
WB: Well we've spent a lot of money in the last 4 months. We spent $5 billion on Goldman Sachs, $3 billion on GE, $6.6 billion on Wrigley, we've got $3 billion committed on Dow. We've spent a lot of money. We've got money left, but I love spending money. Cash makes me very unhappy. I like to always have enough and never way more than enough, but I always want to have enough. So we would never go below $10 billion of cash at Berkshire. We're in the insurance business - we got a lot of things. We're never going to depend on the kindness of strangers. But anything excess in that, I love the idea of buying things and the cheaper they get the better I like it.
SG: You've been talking about doing a big acquisition for a while now, what are you waiting for?
WB: Well we've spent $20 billion dollars... that might not be.
That does not count the $2.6 billion committed to Swiss Re this morning. If he had $33 billion in hand and spent close to $20 billion and he insisted on having $10 billion in hand, it sounds like his hand is pretty tight. But don’t listen to him, listen to me! I am not saying Warren Buffett is misleading us, the truth is this is a guy who also controls $29.5 billion fixed maturity securities and $76 billion in equity securities, and has $16 billion in loans and receivable. Quarterly Cash Flow Statement shows very active financing and investing activities: tens of billion of dollars could go in or out of a given account each quarter.
The point is, if Warren wants to spend a couple of billion dollars on his own stocks, he definitely can. He can sell any one of the stock holdings to buy Berkshire Hathaway.
4. Intrinsic Value of Berkshire Hathaway
According to Warren Buffett himself, as of March 1, 2008, he was content with Berkshire Hathaway’s Margin of Safety when the price was at $4,5000. What has happened since then? A dramatic change: EPS has grown 518%, Sales per share has grown 307% and book value has grown 156%. And yet, the stock price has grown only 100%! Granted, in March 2009, when Berkshire Hathaway reports its annual financial performance, one would expect the contrast tame a bit as the Guru suffer a horrendous fourth quarter 2008 as the rest of us did. Still, it is safe to say that if Warren Buffett thought the stock is undervalued back then, he would think the stock is more undervalue now.
March 1, 2000
Feb. 5, 2009
Earning Per Share
Sales Per Share
Book Value Per Share
Unit: USD. Data source: Gurufocus.com. For March1, 2000 valuation, December 31, 1999 data was used. For February 5, 2009 valuation, Trailing-Twelve-Month data through September 30, 2008 is used .
As a matter of fact, based on the 10-year valuation chart from GuruFocus, Berkshire Hathaway has never been this cheap in the past ten years as measured by price/earning, price/sales and price/book ratios:
5. So He is Going to Buy Back the Stock?
It appears logical for him to do so. But there is one caveat. You see back in 1999, everything else is grossly overvalued. It is hardly the case any more.
One of the reasons he may not be buying back is the alternative investments offer better return to his shareholders. Deep into the current financial crisis, Warren Buffett is seeing a lot of those. Two days ago, he lent $300 million to Harley Davidson for 5 years at an interest rate of 15% per annum. Today, he is injecting $2.6 billion capital to Swiss Re at 12% per year with very sweet conversion rights in three years. One of the things Warren Buffett brags himself about is he is the master of capital allocation. Who knows what else is cooking in his Omaha office?
On the other hand, if he indeed decides to buy back, you will be among the first ones to know, as he said in the 1999 letter:
““We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated. Nor will we attempt to talk the stock up or down. (Neither publicly or privately have I ever told anyone to buy or sell Berkshire shares.) Instead we will give all shareholders — and potential shareholders — the same valuation-related information we would wish to have if our positions were reversed.” (Page 17). “
Now, that's fair!
Political Animal - New Zealand Politics
Share Investor Blog - Stockmarket & Business commentary
Share Investor New Zealand Business News- Get more business news
Shareinvestorforum.com - Discuss this topic further
The Four Filters Invention of Warren Buffett and Charlie Munger by Bud Labitan
Buy new: $29.65 / Used from: $29.64
Usually ships in 24 hours