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Feb. 23, 2019, 8:16 a.m. EST

Why Warren Buffett’s annual letter may not be all happy news

PG&E bankruptcy, buybacks and equity portfolio in focus for investor letter and Berkshire annual report

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By William Watts, MarketWatch


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He wrote a letter.

Warren Buffett’s annual letter to Berkshire Hathaway shareholders is typically a warts-and-all missive, highlighting good news while also acknowledging missteps.

The letter, alongside Berkshire’s annual report, is scheduled for release at 8 a.m. Eastern on the company’s website , where investors can also comb through Buffett’s past missives. The annual report will put a cap on what’s shaped up to be a strong 2018. Through the first nine months of the fiscal year, Berkshire saw operating profits rise 71% to $19.1 billion versus the same period a year earlier.

Mark Hulbert: 3 things to look for in Warren Buffett’s annual shareholder letter

Share performance, however, has been lackluster. “A” class shares /zigman2/quotes/208872451/delayed BRK.A -0.37%  are up 0.4% over the past 12 months, changing hands Friday near $302,471, versus a 3.1% rise for the S&P /zigman2/quotes/210599714/realtime SPX +0.14% .

On the bad news front, the letter from Berkshire’s /zigman2/quotes/200060694/delayed BRK.B +0.19%  chairman and chief executive and its annual report will be watched for details of the impact of the bankruptcy of California utility PG&E Corp. /zigman2/quotes/202583141/delayed PCG -0.84%  as it faced more than $30 billion in estimated liability costs from numerous California wildfires.

Read: How one investor avoided the PG&E bankruptcy

Cathy Seifert, equity analyst at CFRA Research, observed in a Thursday note that Berkshire’s exposure is twofold. First, Berkshire Hathaway Energy has several units, including its Topaz Solar renewable energy venture, that depend on the utility for the bulk of their revenues through power-purchase agreements.

“While Berkshire Energy accounts for less than 10% of Berkshire’s annual revenues, we still view this development as concerning since it affects Berkshire Energy’s core operating model. As PCG progresses through its bankruptcy process, we anticipate Berkshire could be a potential buyer of some PCG assets,” Seifert wrote.

Second, Berkshire is also one of PG&E’s liability insurers, though it hasn’t yet disclosed its exposure to the utility’s liability claims. PG&E announced in late 2018, as it prepared to file for bankruptcy, that it had increased liability coverage for wildfire events to $1.4 billion from $800 million for the period from Aug. 1, 2018, to July 31, 2019, Seifert said.

Meanwhile, other parts of the letter might sound familiar.

Acquisition drought

Buffett spent a chunk of last year’s letter explaining why Berkshire has been unable to deploy its growing cash pile — estimated to now stand at nearly $104 billion — in acquisitions. In large part, he said, the fault was down to other chief executives who’ve proven ready to open their wallets to make acquisitions regardless of price.

It’s now been three years since Berkshire last bagged an “elephant,” as Buffett refers to the big-time acquisitions, in the form of a $32.7 billion acquisition of Precision Castparts in 2016. As The Wall Street Journal’s Nicole Friedman points out , Buffett also has competition from private equity and other funds looking to make acquisitions and who, like those overly “can-do” chief executives, are also willing to pay more than Berkshire.

Equity portfolio

The lack of big acquisitions puts more of an onus on Berkshire’s $183 billion equity portfolio. Investors will be eager to see any discussion about those equity holdings, which include large stakes in Apple Inc. /zigman2/quotes/202934861/delayed AAPL -0.38% and financial sector stocks. Berkshire did trim its holdings of Apple in the fourth quarter, according to the company’s latest 13-F filing, but the iPhone maker remains its largest equity position.

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$ 303,000
-1,115 -0.37%
Volume: 131.00
May 24, 2019 4:05p
P/E Ratio
18.56
Dividend Yield
N/A
Market Cap
$495.45 billion
Rev. per Employee
$637,113
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/zigman2/quotes/210599714/realtime
US : S&P US
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+3.82 +0.14%
Volume: 1.60B
May 24, 2019 4:49p
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US : U.S.: NYSE
$ 201.69
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Volume: 3.31M
May 24, 2019 4:03p
P/E Ratio
18.52
Dividend Yield
N/A
Market Cap
$494.69 billion
Rev. per Employee
$637,113
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/zigman2/quotes/202583141/delayed
US : U.S.: NYSE
$ 18.83
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Volume: 3.44M
May 24, 2019 4:02p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$9.97 billion
Rev. per Employee
$698,292
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/zigman2/quotes/202934861/delayed
US : U.S.: Nasdaq
$ 178.97
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Volume: 23.71M
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P/E Ratio
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Market Cap
$823.46 billion
Rev. per Employee
$1.98M
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