FRI, NOV 03, 2023
Berkshire loses first round in billion-dollar battle over truck stop deal
Pilot's Jimmy Haslam, who also owns the Cleveland Browns NFL team, appears with Warren Buffett in a live CNBC interview on October 3, 2017. Haslam's father, Jim Haslam, founded the original Pilot company in 1958.
It's an important question because the Haslams have a 60-day window at the beginning of each calendar year, starting this coming January, in which they have the option to require Berkshire to buy their 20% stake at a price based on PTC's earnings, but finalized after the option is exercised.
Pilot contends that Berkshire's adoption of "pushdown accounting" at PTC will "artificially depress" its earnings, which in turn will reduce how much money the Haslams get for the remaining 20%.
In the initial complaint, the amount of money that Pilot says is at stake was redacted, but in today's oral arguments lawyers said the Haslam's payday could be reduced by around $1 billion.
William Lafferty, an attorney representing Berkshire, argued the accounting change was actually made before it took control, citing a March 2022 memo sent by a PTC executive to Berkshire "saying, essentially, let's use pushdown accounting to avoid taking this big, in particular, compensation-related expense on the company's books."
He opposed an expeditated trial, saying Pilot has known since March, when it got a PTC financial statement, that pushdown accounting had been adopted, but delayed going to court until last month.
A view inside the Pilot Co. company's headquarters in Knoxville, Tennessee, October 8, 2021. REUTERS/Harrison McClary
William Savitt, representing the plaintiffs, countered that Pilot knew PTC was using pushdown accounting in its financial statements but didn't know if it would be used to calculate the price of its 20% stake.
"We tried to get a straight answer out of a business organization that is reputed to be amongst the most honorable in the world... We were not given a straight answer.
"It was like dealing with a Magic 8 Ball. We ask a question and get an answer along the lines of 'You will see later,' 'Concentrate harder and you will get a better response,' 'It could be so.' An absolute refusal to answer a very simple question."
He said Pilot was still trying to resolve the issue with Berkshire until just before the suit was filed.
Judge Zurn told both sides to be ready for a short trial to be held before Pilot's 2024 options expire at the end of February.
BYD sales continues even as EV maker's profits soar
Last week, Berkshire Hathaway resumed purchases of Occidental Petroleum shares after a break of almost four months.
This week, in its first Hong Kong filing in almost five months, Berkshire revealed it is still selling down its stake in BYD, the Chinese electric automaker.
It reports holding 87.6 million shares as of October 25. That's just under 8% of BYD's outstanding shares.
A filing is only required when the percentage stake crosses a whole number, so we don't know exactly when the shares were sold.
The previous filing was in June, when Berkshire reported holding 98.6 million shares, or just under 9% of the outstanding shares.
Since it began selling last year, Berkshire has reduced the 225 million shares stake it acquired in 2008 for $230 million by just over 61%.
Its remaining shares are currently valued at $2.7 billion.
If Berkshire had kept all 225 million shares, they would be worth nearly $7 billion.
BYD shares are up more than 26% year-to-date, but are down 14% from their 52-week high in late July.
This week, BYD reported earnings of $1.4 billion, its highest-ever quarterly profit, and an increase of 82.2% from the same period last year, as revenues increased by 38.5%.
BYD's rapid growth may be making Berkshire uneasy about holding on to the shares.
In a one-hour interview for the Acquired podcast with Ben Gilbert and David Rosenthal, Charlie Munger said he is a "big fan" of BYD, but the company is so aggressive that it is making him "nervous."
Munger did not explicitly say why Berkshire has been selling.
Munger praises Buffett's Japan investments as 'no brainers'
Munger covered a number of other topics during his appearance on the podcast.
He praised Buffett's big investments in Japanese "trading houses," saying they were a "no-brainer," because Berkshire could borrow yen in Japan over nearly a decade while interest rates were very low and then use that money to buy the stocks that pay a dividend of 5%.
The "trading houses," Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co., and Sumitomo Corp., are large companies that import goods and services across multiple industries.
"If you are as smart as Warren Buffett, maybe two, three times a century you get an idea like that.
"It was like having God just opening a chest and pouring money into it. It was awfully easy money."
But, he pointed out, it wasn't something that just anyone could do, because Berkshire had the strong credit needed to borrow so much at such low rates.
Charlie Munger during a 2016 CNBC interview.
Munger also said Buffett's caution over losing money for shareholders has held back Berkshire's potential returns.
"Warren still cares more about the safety of his Berkshire shareholders than he cares about anything else. If we used a little bit more leverage throughout, we'd have three times as much now. And it wouldn't have been that much risk, either. He never wanted to give the least chance of us screwing up our basic shareholder position."
In addition, Munger said "it's getting hard out there" to find investments at attractive prices, with "all this [expletive] and craziness."
Asked if it is possible that "everything in the whole world is overpriced," Munger replied, "Damn near. Of course, it can be possible. It's not only possible, it's likely and its actually happened."
Charlie Munger also "spent two hours on a recent morning chatting" with Wall Street Journal reporter Karen Langley, who has a selection of highlights from the interview.
Will Berkshire make another big acquisition? "It's at least 50/50. Venture capital has made it so difficult for everybody. They keep bidding the prices up and up and up, and of course that makes the results go down, down and down."
- "Most people probably shouldn't do anything other than have index funds... Why should he try and pick his own stocks? He doesn't design his own electric motors and his egg beater."
- "I think that one of the reasons I was as economically successful as I was in life is because I read so damn much all my life, starting when I was about six years old. I don't know how to get smart without reading a lot."
High interest rates for its cash expected to boost Berkshire's profits
Berkshire's third quarter earnings release and its 10-Q quarterly report are scheduled to be released tomorrow (Saturday) morning at 8 am ET (7 am CT) on the company's website.
According to Barron's, FactSet is expecting Berkshire's operating earnings to increase by around 23% to roughly $9.5 billion after taxes.
High interest rates should boost the return on Berkshire's $150 billion of cash. It's mostly invested in Treasury bills that are yielding more than 5%.
Florida escaped major hurricane damage this year, which should help boost profits at Berkshire's property and casualty insurance operations.
At this year's annual meeting, insurance chief Ajit Jain said the company stands to "make several billion dollars as profit" if Florida did not get hit by a big hurricane.
But Barron's says Edward Jones analyst James Shanahan thinks higher interest rates could hurt Berkshire's housing-related businesses, and weak results already reported by Union Pacific could be a bad sign for Berkshire's BNSF railroad.
Net earnings, which include unrealized gains and losses from stock investments due to accounting rules, will be hit by the market's poor performance during the quarter, but Buffett routinely advises investors to ignore those "meaningless" numbers because they have no lasting impact on the company.
Analyst: Berkshire shares at 'attractive entry point'
She writes, "Berkshire’s diversified revenue and earnings mix is positive for the shares, and following a recent pullback, we view BRK.B undervalued versus historical averages."
BUFFETT AROUND THE INTERNET
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HIGHLIGHTS FROM THE ARCHIVE
Buffett’s favorite quote on the dangers of gambling on stocks (2021)
Warren Buffett cites a quote from economist John Maynard Keynes as he talks about how many newcomers are treating the stock market as a casino. Charlie Munger complains it’s shameful that some professionals are taking advantage of what he calls “the suckers.”
BERKSHIRE'S TOP U.S. STOCK HOLDINGS - Nov. 3, 2023
Berkshire's top holdings of disclosed publicly-traded stocks in the U.S., Japan, and Hong Kong, by market value, based on today's closing prices.
Holdings are as of June 30, 2023 as reported in Berkshire Hathaway’s 13F filing on August 14, 2023, except for:
The full list of holdings and current market values is available from CNBC.com's Berkshire Hathaway Portfolio Tracker.
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Also, Buffett's annual letters to shareholders are highly-recommended reading. There are collected here on Berkshire's website.
-- Alex Crippen, Editor, Warren Buffett Watch
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