A few days ago it was reported that Berkshire Hathaway bought back $1.2 Billion dollars worth of CLASS A Berkshire Hathaway(股票代號: BRK-A). The purchase was not done on the open market, and it was all purchased from a single long time investor. For comparison purpose, the company has spent only $126 Million dollars for the net purchase of shares the last four quarters combined.
Berkshire Hathaway has announced raising its maximum target price of Class A shares to 120% of Book Value. Previously the most Berkshire Hathaway was willing to pay was 110% of Book Value. Obviously Book Value is a number updated at most quarterly because it is a balance sheet item.
There is a speculative possibility that Warren Buffett sees an improving economy through the lens of his collections of businesses. Aside from insurance and investment, Berkshire has a number of housing related businesses. I am not sure about the rest of the country, but in the San Francisco bay area, especially the silicon valley, I notice a dramatic positive attitude shift towards housing, and prices are appreciating rapidly. This could mean the company is becoming even more undervalued. The Net Present Value of purchasing its own share could be more favorable than many other investment projects that the company has looked at. Buying a dollar for fifty cents is the primary motive of any value investor.
However, I think, once again, this recent vote of confidence on its own share is just a cover up. This could be part of the succession transition plan. By reducing the float in circulation, this move probably serves to further solidify future management and board control of the company through Class A share, which is worth 1500 times a Class B share but 10,000 times the voting rights of a share of Class B. This large purchase of not-from-the-open market signals the company’s concern of “CONCENTRATION OF POWER” outside the company insiders. In stead of Buying Back on the open market from a variety of retail investors whose individual proxy impact is negligible(Why? Because each share Class A costs $130,000.00 yeah! More than the average “ANNUAL” salary!), Buy Back from one large shareholder, who has the potential ability to influence proxies against management’s wish, in essence eliminates future troubles such as proxy fight.
This is not an attempt to undermine Berkshire Hathaway as an iconic company. On the contrary, Berkshire Hathaway will remain an economic powerhouse for years to come. As long as the management and board serve with the best interest of all the shareholders in mind, shareholders will benefit from the insights and expertise of the managers. A corporation is rarely a place for democratic rule.
Most traders and investors are short sighted. We are wrapped up as a whole in the daily price movement of a stock. It is true that the SHORT TERM RETURN of a stock can come from capturing share price fluctuation. However, LONG TERM RETURN can only come from the long term actual profit the underlying business generates.
Berkshire takes it one step further whenever it can, it buys whole business and skip the waiting for the profit reflection on a stock price. This way Buffett and company have direct access to the profit generated and apply that capital to make more investments that churn out more cash. The current Free Cash Flow after paying for debt service is about $17 Billion a year. The company has about $46 Billion on its balance sheet. That is a lot of ammunition, and the company is yearning for the next big investment.
With Berkshire’s business model and Buffett and company’s sharp investment acumen and unwavering mentality, this is how INTEREST COMPOUNDING can truly work to make people wealthy.
I am long term bullish. A price floor may have been temporarily established at 120% of current book value due to buyback. However, always proceed cautiously and buy with a margin of safety.
We welcome comments and thank you for your supports. Have a Safe and Happy Holidays!