Warren Buffett is finding his rhythm and investors are delighted.
The rapid accumulation of Occidental shares has spurred speculation that Buffett wants to buy the entire company in a long-sought ‘elephant-sized acquisition’ – his phrase – that could cost $70 billion. of dollars. Such a transaction would excite the Berkshire faithful because it would put half of its nearly $150 billion in cash to work with a yield well above the near-zero yield currently on its large holdings of Treasuries.
Berkshire Class A shares are up 19.6% this year at $538,949, topping the
which is down 4.7%. The stock, which closed at a record high on Friday, is also ahead of the S&P over the past 10 years. Class B shares ended the week around $359.
|Recent Price Price||$528,817|
|52 week change||39.9%|
|Market value (bil)||$779|
|Book value per share||$342,621|
|% of revenue from the United States||84.1%|
|First shareholder: Warren Buffett||16.2%|
Sources: Bloomberg; FactSet; business reports
The stock is no longer as cheap as it was at the end of 2021, when Barrons named it top pick for 2022. Still, it remains attractive, especially to patient individual investors, given the company’s diverse earnings stream and extremely strong balance sheet. At a time of global turmoil, Berkshire remains US-oriented, with 85% of its revenue coming from the United States. Its major businesses include the Burlington Northern Santa Fe Railroad, Berkshire Hathaway Energy (a large utility), and Geico.
“I’m very pleased with the pace and scale of cash deployment in recent weeks,” said James Shanahan, an analyst at Edward Jones, which has a buy rating on Berkshire. “The story has been about share buybacks, but with valuation improving, buybacks are slowing.”
Buffett ramped up Berkshire buybacks at the end of 2020, and the aggressive pace continued into 2021 with a quarterly average of $7 billion in shares purchased. Redemptions, however, slowed in the first two months of the current quarter to $2 billion, Barrons estimates, based on the number of shares indicated in the company’s proxy.
Buffett is price-conscious and may be hesitant to buy back a lot of stocks, with stocks trading at more than 1.5 times estimated book value as of March 31. It’s the high end of its price/pound range over the last 10 years.
“We still find Berkshire undervalued, but less than in previous years given the stock is up more than 50% since the end of 2020,” said Chris Bloomstran, chief investment officer of Semper Augustus Investments, a St. Louis investment firm that owns Berkshire. “It should probably outperform the market over the next 10 years.”
He pegged Berkshire’s intrinsic value at approximately $600,000 per Class A share at the end of 2021. The current share price discount to this estimate is not material, but the intrinsic value does not is not static. It is expected to grow steadily with rising Berkshire earnings and potential gains from its $350 billion equity portfolio, led by
Buffett focuses on intrinsic value, but does not give his estimate of this important figure. An understated measure of intrinsic value long favored by investors is Berkshire’s book value, which has tripled over the past decade. It could grow at a high single-digit rate every year during this decade.
Here’s the math: Annual profits are expected to hit $30 billion this year, or a 6% return on investment. If the stock portfolio is growing at an annual rate of 6%, that would add about three percentage points to the book value. Factor in buybacks and Berkshire shares could rise at a rate close to 10%.
The biggest risks for Berkshire are a sustained stock market decline, a deep recession and CEO succession. At some point in this decade, Buffett, who is 91, is unlikely to lead the company, and his likely successor, Vice Chairman Greg Abel, 59, is a largely unknown quantity.
Still, recent deals should put Berkshire on the right track. Berkshire is paying about 1.25 times Alleghany’s book value, which is lower than the average price paid for P&C insurers over the past six years. And the effective price is closer to 1.1 times book value – a bargain – if you factor in the value of Alleghany’s attractive non-insurance business.
Alleghany’s board sold the company without a bid — a questionable but excellent corporate governance decision for Buffett. Berkshire, however, could outbid for an ongoing 25-day shopping period.
And why is Occidental calling on Buffett? He knows this well, having invested $10 billion in Occidental preferred stock, which has a lush 8% dividend yield, in 2019 when the company needed quick funding in a bidding war with
(CVX) for Anadarko Petroleum which he won. Berkshire also obtained mandates for nearly 10% of Occidental’s capital as part of this agreement; they are now just below their strike price.
Shares of Occidental have doubled this year, to $59. Even with the gain, the stock has an expected free cash flow yield of nearly 20%, based on projected 2022 earnings.
Berkshire could combine Occidental with Berkshire Hathaway Energy to create one of the largest energy and utility companies in the country. And a deal with Occidental at $70 billion, or $80 a share, would be right in Buffett’s wheelhouse.
Investment manager Bill Smead, whose Smead Capital Management owns Occidental shares, thinks Buffett wants it all. “That would be nirvana for Buffett,” Smead says.
And a deal with Occidental could be a great capstone in Buffett’s extraordinary 57-year run as Berkshire leader.
Write to Andrew Bary at [email protected]