Recession Hits Omaha: Moody's Downgrades Berkshire Hathaway

Just after 5:00pm ET we caught this bit of news from Fox Business Network,

Hold on, I want to get some breaking news in here. Moody’s is cutting Berkshire Hathaway’s AAA rating to a AA2. Berkshire Hathaway, the company founded by The Oracle of Omaha, Warren Buffett getting cut as well…He owns a huge chunk of Moody’s” Fox Business Network 4/8/2009

This is not necessarily huge news and it's not like Berkshire Hathaway (BRK.A) (click on chart to enlarge) is getting cut down to junk, but it is a notable sign of the times. The ratings cut is fairly important for Berkshire because of its insurance businesses, which does rely heavily on credit markets and debt. Of course, as with any downgrade this will cost the company more in interest expenses. But as of the end of the year, Berkshire reported having more than $25 billion in cash on hand. Something tells me Buffett will find a way to keep his cost of capital down to manageable levels. I mean, it's Berkshire Hathaway! The market seems to agree as during the after hours the stock has barely budged.

Perhaps the greatest value investor of all time is showing signs of strain. The rating cut is specifically related to the decline in profitability coming out of Berkshire’s worst year since Buffett took over in 1965. However, the two rating downgrade is just a signal that, if it can happen to this proud, iconic company, then it can happen to just about anyone. As the anchor person stated, Berkshire does own about 20 percent of Moody’s (MCO) parent company, which adds another interesting dynamic to the event. At Ockham, we have BRK-B as Overvalued currently as the famed company’s earning are expected to slip in 2009.

Comments

[drbob66]

WB should have gotten on Moody's case long ago...these guys always seem to be playing catch-up to what's going on in the markets. They really need to clean up their act.

2009 Apr 08 07:43 PM

[Fabien Hug]

These rating agencies are always fighting the last war.

2009 Apr 09 10:24 AM

[Jeff Skilling]

The worst thing I think Buffett did over the past few years isn't the derivatives or his GE or COP investments - it's his utter failure to exert any pressure on Moody's - being an utterly passive investor. A few major (e.g. Vanguard, Fidelity etc.) ACTIVIST investors in the past decade COULD have put the brakes on a lot of the garbage that was going on. Buffett knew what Moody's was doing was idiotic - he should've called them on it.

2009 Apr 09 11:47 AM

[Vox Rationalis]

"The rating cut is specifically related to the decline in profitability coming out of Berkshire’s worst year since Buffett took over in 1965."

No. Moody's indicated that the primary rationale was the reduced capital cushion caused primarily due to falling stock prices. It then indicated that reduced earnings was a contributing factor. But look closer at the earnings. Comparing 2007 to 2008, earnings fell from $13.2 billion to $5 billion. Of the "lost" $8.2 billion, more than $6 billion were paper mark-to-market losses on derivatives, including $5 billion on the infamous equity index puts. The difference in the two years in investment gains was $6 billion, primarily due to the large gain BRK took in 2007 on its PetroChina investment. From these two entries, it looks like the decline in profitability was due completely to the declining equity markets, which (don't tell the bears) is quite unlikely to repeat its performance this year.

Luckily, there's another easily obtained metric we can use to compare: operating cash flow, where the drop from 2007 to 2008 was 10.34%. For comparison, operating cash flow was 10.36% HIGHER in 2008 than in 2006.

"At Ockham, we have BRK-B as Overvalued currently..."

Really? Overvalued? Pretty bold, considering it's trading at just under 1.3x book and under 1.9x tangible book, both of which are toward the low end of historical measures.

"...as the famed company’s earning are expected to slip in 2009."

Well, I guess you're talking about operating earnings since the lowest estimate I've seen puts the bottom line number about 40% higher than last year. More importantly: do you always base your valuations on a single year's earnings?

2009 Apr 09 03:21 PM