Berkshire B - Analysing Accounting Assumptions

Berkshire B - AAA rated stock or un-analyzable Conglomerate

Berkshire Hathaway probably needs no further elaboration. Known as the world's most expensive stock, it is a physical manifestation of what happens to a company which can fully reinvest its high rate of return (almost without dividend payout) and let compounding run its full effect. A company that was rejected by the efficient market hypothesis as a six sigma event, sticks out as a sore thumb to academics and a wonder to capitalists around the world. Throes of shareholders make their yearly pilgrimage to Berkshire Hathaway (including notable professional fund managers) to get some nuggets of wisdom from the oracle of Omaha. 

To be frank, I was only recently made aware of Berkshire B stock while poring through the essays of Warren buffet, a book on the profound knowledge on investing, which is not easily communicated through speeches or third party authors alone. The depth of insight surpass third party Buffettlogy and other books I read so far, and it presents a digestible format to the underlying operating business of BK compared to the over summarized annual report. Comparing notes with the Intelligent investor, Warren Buffett ironically created a conglomerate of wide and diverse businesses lumped up in a holding company structure, something that Benjamin Graham cautioned against due to difficult-to-analyze structure, potential good will inflation as well as possible accounting shenanigans.

My recent interest in BK-B was ignited by the recent furor over the huge goodwill write-off of the book value and negative earnings guidance of Kraft-Heinz, whereby Buffet overpaid for the merger and acquisitions of the Kraft-Heinz,  despite often quoting the importance of margin of safety. The PE of BK-B inflated to almost 100 plus from single digits PE and a pure quantitative driven PE focused investor will be startled by the results. Least to say, the recent change in accounting policy made Berkshire bottom line capture the volatility of market prices rather than underlying book value and operating cash flow. Buffett even de-emphasized the importance of the book value in this year's annual report, leaving investors wondering whether Buffett has lost its touch.

Berkshire B is battered down recently, albeit not as much as I envisioned. Berkshire B has recent changes in its accounting policy, investment and operational managers and share buyback policy, while still retaining an impressive cash hoard and stringent in its acquisition policies. 

BKB is a stalwart (With no dividend payout), with old economy operational business, volatile investment portfolio, and access to significant low risk low cost leverage (insurance float)

Bottom line earnings will be volatile and a significant Catastrophic natural disaster or death / departure of key (very senior) managers can introduce wide volatility in the stock price. The margin of safety may not be significant of BKB at this current moment. As I spend more time to go through its annual report, I will do a follow up post on whether I should possibly average down on Berkshire-B if there are more shocks to the Buffett / Berkshire reputation.

On a separate note, Kraft Heinz despite its easy to understand business structure, is out of my circle of competence. I do not have any deep insight and strong interpretation about the impact of the huge goodwill write-off and the actual earnings power of the Kraft-Heinz franchise.  Kraft Heinz fundamentally is a good company with good earnings power, low CAPEX and branding. However, due to its dividend policy and low earnings guidance for the next quarters, I will not be averaging down on it unless it goes cheaper.