Warren Buffett’s key company, Berkshire Hathaway delivers its December quarter and 2015 results on Friday night and we already know that the group will have once again failed to outperform the S&P 500 index, which is one of its key annual performance benchmarks.
But we will also get the long awaited chairman’s letter to investors and the wider market generally – Mr Buffett could tackle any subject, but watch for more comment on succession and the performance of key senior executives in the company.
A week before the expected report, ratings group Standard & Poor’s has quietly changed the way it views and rates the company -moving from treating it as an insurer with some industrial add ons, to a diversified conglomerate with a wide spread of financial and industrial operations, as well as a huge investment portfolio.
S&P also dropped a previously announced move to possible cut Berkshire’s credit rating.
In a statement S&P’s Laline Carvalho credit analyst said the change, “reflects our view of the increasing importance of Berkshire Hathaway’s noninsurance businesses relative to the group’s consolidated operations.”
“On a pro-forma year-end 2014 basis including recently acquired PCP (Precision Catparts), Berkshire’s noninsurance operations represented more than three-fourths of the group’s consolidated EBITDA and approximately half of consolidated tangible assets.” As well it owns a major railroad, huge electricity generating and distribution interests food distribution and real estate marketing business.
S&P’s change of rating basis came as the group said it was also no longer looking at a one to two level cut in Berkshire’s credit standing.
The company was placed on a “CreditWatch Negative” last August due to uncertainty over how Berkshire would pay for the $US37 billion Precision Castparts acquisition.
At the time, Buffett said that the 21% price premium in the deal was a “very high multiple for us to pay” that would require about $US10 billion of borrowing.
S&P now says that it has concluded the purchase is “neutral” to its AA rating of Berkshire’s debt. That analysis was done after S&P decided to reclassify the company as a conglomerate.
The new "stable" outlook reflects S&P’s expectation that Berkshire "will continue to report solid profitability metrics, significant cash flow generation and strong EBITDA margins in the next two years."
When Berkshire bought the Burlington Northern and Santa Fe Railroad back in 2010, S&P cut Berkshire to “AA+” from its top “AAA”, and trimmed that further in 2013 to AAA.
But S&P said on Friday that it won’t be raising Berkshire’s rating in the next two to three years due to “operating and execution risks” related to the acquisition strategy of the newly minted “conglomerate.”
