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Berkshire Hathaway; Annual Report March 9, 2011

Posted by shaferfinancial in Finance.
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Berkshire Hathaway represents a lion’s share of my portfolio. So I was very gratified to see a good 2010 for the company. While not a blow-out year, it returned 13% on book value. Buffett again talks about why he uses book value as a metric for valuing his company in this years letter, so if you aren’t sure why, read the letter. In the last 10 years the book value has risen 65%. Not astounding but considerably better than most companies.

Most astounding is that Buffett stated that the earning power of Berkshire has gone up 40% just on the purchase of BNSF railroad. Once again Buffett has struck gold with his impeccable timing. Berkshire produces over $1Billion in every month for which Buffett to invest! Now that is truly amazing.

I have mentioned this before, but Berkshire continues to follow a strategy taking it from investing in public securities to outright ownership of great businesses [68 as of now]. Earnings from these companies has increased 20.5% annually over the last decade. So not only are they a much bigger share of the company, they are producing in excess of 20% growth in earnings.

To the details:
Overall revenue grew 40% from 2009.

Insurance:
The insurance component is the basis of this organization because it provides an opportunity for free capital. Berkshire once again had an underwriting profit for the 8th year in a row. Few insurance operations can match this record. What that means is that the “float” or the premiums paid by customers can be used for investments with no cost or in this case with a profit. Berkshire’s float is up to $66 Billion [in 2000 it was $28B]. In short, Berkshire is able to purchase companies with growing earnings with no cost of capital.

Manufacturing, Service, Retail

Much improvement in this area as we exit the recession. Net Earnings went from $1.1B to $2.4 year on year. Four of the companies set earnings records TTI, Forrest River, CTB and HH Brown. Net Jets, a consistent poor performer was turned around an made a significant profit last year. The businesses related to home construction and real estate though continued to make meager profits compared to 2006.

The two large, regulated, capital intensive businesses also did well.
MidAmerican [Energy producing] saw net earnings increase 6% over 2009. While BNSF saw earnings increase 43% for the year.

Financial products and home building represent a very small part of the company. There was improvement in this area too, although it still remains far below peak.

Securities owned totaled market value of $61.5B. Buffett has gotten more concentrated with his security ownership over the last year. Five large fixed-income investments that Buffett made in the middle of the recession have paid Berkshire handsomely. However, it is likely that three of the five will be done by the end of 2011 [Swiss Re has already redeemed early in 2011]. Buffett expects some of the slack to be picked up when Wells Fargo is allowed by the feds to increase its dividend and sees rising interest rates soon to pump up interest on the treasuries and other cash equivalents.

203 derivatives still remain. For accounting purposes the value of these derivatives rose during 2010. There are 39 equity put contracts left [these are the derivatives that caused all the teeth knashing over the last couple of years]. If the stock indexes stay exactly where they were at the end of the year Berkshire would pay out $3.8B [Premiums received for these were $4.2B]. However they are on the books as a liability for $6.7B. So if the stock market stays the same over the next 5-10 years Berkshire would show a $2.9B profit even though nothing changed! Such is accounting practice today! And of course Berkshire gets to use the $4.2B for its investment purposes over that 10 year time period!

Net earnings were $7,928 per A share an increase of 53%.
Cash on hand was over $35B.

For me this stock is still undervalued even though its price has risen to $128,500 [A] and $85.71 [B]. Last year the price rose 21%. Berkshire is a virtual cash machine that creates huge opportunities for Buffett to ply his skills. I see little in the near future that can slow it down at this point.

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