In his annual letter to Berkshire Hathaway shareholders released this morning, Warren Buffett says more "major" acquisitions are needed to maintain growth in the company's non-insurance businesses at a "decent rate."
Buffett writes: "We will need both good performance from our current businesses and more major acquisitions. We're prepared. Our elephant gun has been reloaded, and my trigger finger is itchy."
Buffett says the "highlight" of 2010 was Berkshire's acquisition of the Burlington Northern Santa Fe railroad, "a purchase that's working out even better than I expected."
He's expecting that owning the railroad will increase Berkshire's "normal" earnings power by almost 40 percent pre-tax and "well over" 30 percent after-tax. He also writes that Berkshire "quickly replenished" the $22 billion in cash used to buy BNSF, so "the economics of this transaction have turned out very well."
For the year, however, Berkshire's corporate performance lagged behind the S&P 500, as measured by per-share book value, a metric that Buffett calls an "understated proxy" for intrinsinc value, which is hard to pin down.
Berkshire's per-share book value increased by 13.0 percent last year, 2.1 percent points behind the S&P's 15.1 percent gain, including dividends.
Berkshire's compounded annual gain from 1965 through 2010 of 20.2 percent is more than double the S&P's 9.4 percent advance. (Buffett started running things at Berkshire in 1965.)
In the fourth quarter of 2010, Berkshire's net income increased by 43 percent. Buffett calls that measurement "almost always meaningless" at Berkshire, because it includes realized gains or losses from investments while excluding unrealized gains and "in most cases" losses, a situation that opens the door to "game playing" with numbers, a practice for which he has "deep disgust."
For 2011, Buffett says he and partner Charlie Munger expect "a general business climate better than that of 2010 but weaker than that of 2005 and 2006."
He also writes that a "housing recovery will probably begin within a year or so."
Current Berkshire stock prices:
Class B: [BRK.B 84.87 1.51 (+1.81%) ]
Class A: [BRK.A 127550.00 2522.00 (+2.02%) ]
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