Berkshire Hathaway’s (BRK.A) equity portfolio posted strong results in the fourth quarter with an estimated return of 7.6% compared to a 5.5% return for the Standard & Poor’s 500 index. During the quarter, Berkshire reduced its stake in Moody’s (MCO) by 18.9% and also liquidated investments in Norfolk Southern (NSC) and Union Pacific (UNP) to preempt any competitive concerns related to the upcoming acquisition of Burlington Northern Santa Fe (BNI).
Moody’s Position Continues to Shrink
Berkshire has been reducing its stake in Moody’s gradually over the past two quarters, perhaps due to concerns regarding the durability of the economic moat of credit ratings agencies in light of high profile failures of highly rated securities in the financial crisis of 2008-09. At the 2009 annual meeting, Berkshire Chairman and CEO Warren Buffett made comments regarding the ratings agencies that many viewed as lukewarm at the time. Further sales going forward would not be surprising.
Railroad Investments Boost Results
The value of Berkshire’s holdings in Burlington Northern was up 23.5% during the quarter due to Berkshire’s $100/share bid for the shares it does not already own. In connection with the acquisition, we know that Berkshire has liquidated shares in the other railroad holdings based on Warren Buffett’s interview with Charlie Rose on November 13. However, we do not yet know the exact timing due to the absence of a Form 4 filing for the transactions. For purposes of our analysis, we assumed that a sale took place at the close of trading on November 3, which was the day of the Burlington Northern merger announcement.
Year End Book Value at Record High
While we will not hazard a guess as to the exact book value of Berkshire Hathaway at the end of 2009, it appears certain that book value will be at a new record high following the record high book value figure reported at the end of the third quarter. The estimated increase in the value of the equity portfolio, adjusted for the sales during the quarter, is over $4.3 billion which should add $2.8 billion to book value after accounting for deferred taxes.
With 1,551,730 Class A equivalent shares outstanding as of November 30 according to the special meeting proxy, equity portfolio appreciation should add approximately $1,800 in book value per A share. To this amount, one must add retained earnings from the operating businesses, investment income, as well as mark-to-market gains for the equity derivatives portfolio. Berkshire’s Price/Book ratio is almost certainly below 1.2 at the time of this writing. Exact precision is not required to know that this is close to a twenty year low.
A spreadsheet with Berkshire’s 13-F position as of 9/30 and estimated position as of 12/31 has been prepared to facilitate this review. Please read the SEC’s FAQ on which securities are included in the 13-F (foreign issuers not listed as ADRs are omitted). Due to previous requests, the spreadsheet is provided in Excel 2007, Excel 2003, and PDF formats. Within the spreadsheet are links to the relevant SEC source filings.
Disclosure: The author owns shares of Berkshire Hathaway.