Berkshire Hathaway – Gettin’ Lots Of Love, And For Good Reason

Berkshire Hathaway is getting lots of love recently.  As a core long-term holding, if you do not own BRK-B, now could be the time for a starter position. We all know of Mr. Buffett and his stock picking acumen.  However, the real value in BRK.B lays in its base business as an insurance company and the investments it makes with its substantial cash flow, also known as the insurance float.

The insurance float is described as the moneys collected by insurance companies that are not paid out in claims.  For example, when you pay a premium on your auto policy, they cover operating costs of keeping the lights on and of the claims being paid for other policyholders who have accidents. The difference between the two is the insurance “float”.   

Berkshire Hathaway has amassed a sizable amount of insurance float.  At the end of 2013, BRK has $77 billion on the books, up $7 billion in just the previous 3 years.  In other words, BRK had generated $2.3 billion a year in new investable cash.   Since the early 1970s, BRK has grown its insurance float by 19% compounded a year. 

Most other insurance companies invest their float in fixed income instruments, such as bonds.  Bonds have been the traditional place for insurance companies to invest their float.  BRK, on the other hand, buys companies and operates them for the additional cash flow they can provide.  The media puts the spotlight on BRK’s publicly traded stock holdings but the most compelling investment thesis is the privately held companies that are subsidiaries of BRK. 

As of Dec 2013, BRK held $115 billion of listed companies in its insurance portfolio.  This compares with holdings of $166 billion in other assets such as railroads, utilities, energy and financial firms.  BRK has more than 80 units that operate airplanes and power plants, manufacture mobile homes, bricks, and chemicals, and sell products from furniture to chocolate to running shoes. Links to the websites of 60 of these companies can be found here.

For example, BRK recently closed on the purchase of largest privately held auto dealer in in the country, located in Dallas.  From the press release,

“Berkshire Hathaway Automotive is fifth among all U.S. auto dealership groups with over $9 billion in revenue and 81 independently operated dealerships with over 100 franchises in 10 states, including Arizona, California, Florida, Georgia, Illinois, Indiana, Missouri, Nebraska, New Mexico and Texas. Through its affiliated administrator MPP, Berkshire Hathaway Automotive is able to offer its auto retail customers a unique, industry-leading portfolio of proprietary vehicle service and ancillary contracts, which are insured by its two affiliated insurance underwriters, Old United Casualty Co. and Old United Life.”

BRK has accomplished quite a feat by building an economically sensitive portfolio of assets from its growing base of insurance float.   The downside is this strategy adds economic growth risk while other insurance companies have higher interest rate and bond default risk due to their fixed income portfolios.

Nonetheless, BRK has shown the ability to manage its assets for both higher investable cash flow and the purchase of companies at reasonable prices for reasonable growth. This difference will continue to aid BRK to continue to grow earnings by 7% to 9% a year.     

Of question is whether BRK is getting too large to keep up with its rich history.  Even after spending $26 billion on acquisitions in 2013 and 2014 combined, their cash hoard still grew to $63 billion, or $22 billion more than at the end of 2012.  Management has pegged $20 billion as a comfortable cash cushion for its business profile, leaving a potential investable fund of over $43 billion.  For comparison, this excess capital would be enough to buy half of Boeing (BA), United Technologies (UTX) or 3M (MMM) – for cash.    

With rising earnings trends in place, BRK is getting more attention from brokerage houses.  Over the past 90 days, earnings estimates have been rising and now stand at $7.61 for 2015 and $8.22 for 2016. 

BRK is one of those stalwart American companies that belongs in every investor's portfolio.  Why?  Because it makes money for its shareholders hand over fist, has done so for the past 50 years, and will continue to do so going into the future.  BRK very infrequently goes on sale and now is a good time either to add to an existing position or to begin a starter position.

Disclosure: Long BRK-B

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George Fisher 7 years ago Author's comment

This article was first published in the May 2015 issue of Guiding Mast Investments newsletter.