Buried in the weekend’s third quarter report from Warren Buffett’s Berkshire Hathaway was a couple of unusual points for the fabled long term investor – unrealised losses on some of its core investments, starting with the 8.2% stake in IBM.
In fact it was a tough quarter (and much of this year) for some of his core long term investments such as IBM, American Express, Coca Cola and Wal-Mart Stores – all of which have suffered slides in share prices, or weak earnings performances which have discouraged other investors, but not Mr Buffett and Berkshire.
Mr Buffett regularly warns shareholders that investment gains and losses often make for volatile quarterly results.
The timing of the IBM comments is important thought for another reason – they came just weeks after IBM produced yet another weaker than expected quarterly report. So ‘the stick and stay’ comments from the company represents a strong vote of support in IBM’s board and management.
Berkshire reaffirmed its commitment to IBM, saying that despite about $US2 billion of market-to-market losses to the end of September – or 15% of the amount Berkshire paid – the group had no intention of selling.
"As of September 30, 2015 and December 31, 2014, we concluded that there were no unrealized losses that were other than temporary. Our conclusions were based on: (a) our ability and intent to hold the securities to recovery; (b) our assessment that the underlying business and financial condition of each of these issuers was favorable; (c) our opinion that the relative price declines were not significant; and (d) our belief that market prices will increase to and exceed our cost.
"As of September 30, 2015 and December 31, 2014, unrealized losses on equity securities in a continuous unrealized loss position for more than twelve consecutive months were $204 million and $65 million, respectively.
"Unrealized losses at September 30, 2015 included approximately $2.0 billion related to our investment in IBM common stock, which represented 15% of our cost. IBM continues to be profitable and generate significant cash flows. (IN other words, the value of IBM’s shares are now 15% below the 2011 purchase cost).
"We currently have no intention of disposing of our investment in IBM common stock. We expect that the fair value of our investment in IBM common stock will recover and ultimately exceed our cost,” Berkshire’s US quarterly report filed with the SEC, said.
“Investment gains in the third quarter and first nine months of 2015 included a non-cash holding gain of approximately $US6.8 billion in connection with our investment in Kraft Heinz common stock,” the filing disclosed (which is why Berkshire reported a record ‘paper’ profit for the quarter of $US9.43 billion, from $US4.62 billion, in the third quarter of 2014.
But third-quarter operating earnings fell to $US4.55 billion from $US4.72 billion a year earlier (that’s before that gain).
Berkshire said that around 58% of the aggregate fair value ($US110 billion) of the company’s investments was concentrated in the equity securities of four companies (American Express Company – $11.2 billion; Wells Fargo & Company – $25.2 billion; International Business Machines Corporation (“IBM”) – $11.7 billion; and The Coca-Cola Company – $16.0 billion). Fair Value at the end of 2014 was $US117 billion, so there has been a noticeable slide in value so far in 2015, with much of that happening in IBM, Coca Cola and Amex shares.
Since the beginning of the year, Berkshire’s shareholders’ equity has increased $8.1 billion and the book value for each Class A equivalent share has increased by 3.3% to $151,083 as of September 30, 2015.
But of Berkshire’s 10 top stock holdings, only two have increased in value over the past 12 months – Wells Fargo and General Motors.
Berkshire’s insurance float (the net liabilities assumed under insurance contracts) at September 30, 2015 was $86.2 billion. That helps finance many of the company’s biggest deals and market plays, such as Heinz, Kraft and the $US32 billion Precision Castparts acquisition.
Overall, revenues at Berkshire were $US58.9 billion for the third quarter, and net earnings were $US9.4 billion. Sales at Berkshire’s railroad, utilities and energy business were flat at $US10.7 billion, while insurance premiums dropped roughly 20% to $US10.5 billion.
