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Berkshire Hathaway / Re: Buffett buybacks: Could Berkshire tender stock?
« Last post by Viking on Today at 07:23:33 PM »
It is a mystery to me as to why investors spend so much time on the question of buybacks both at Berkshire and many other companies.

Say Berkshire retires 20% of shares outstanding at 75% of IV over the next 5 years - a prospect I think that would seem to excite a lot of shareholders. This would result in about 6.25% increase in IV over the 5 years or about 1.25% annually.

Do shareholders really get that excited by the prospect of an extra 1.25% annual increase in IV? It is about the the volatility that the stock experiences intraday.

Of course, it is better to have that 1.25% rather than not having it. But is it really that big of a deal that so much attention gets paid?

There are cases where it makes a real difference. Like AIG in 2011/12 timeframe when a case could be made that it would be able to retire 30-40% of shares outstanding at 50-60% of IV in a relatively short period of time.

No disrespect meant to anyone. A lot of smart investors here and I might be missing something that I cannot wrap by head around.

Vinod

Vinod, for me what a company does with its retained earnings is a super important part of the decision to own shares. Berkshire carrying +$100 billion in cash (more than 20% of its market cap) every year is simply not an effective use of cash and Buffett has said as much. I would love for them to demonstrate they are serious about using meaningful amounts of cash to buy back shares (not all the time but certainly at times when the shares get cheap and they are sitting on too much cash with few opportunities in sight... like perhaps now).

If this process starts when Buffett is still around then we should be able to safely assume it will continue when Buffett is gone. In my mind this also makes the decision easier to be a long term shareholder (post Buffett).
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Investment Ideas / Re: KHC - Kraft Heinz Co.
« Last post by DTEJD1997 on Today at 07:23:26 PM »
Hey all:

Holy smokes!  KHC has a lot of debt!  I mean a LOT OF DEBT!

How much of their historical return has simply been from being insanely levered?

If they are having sales & profitability problems, they are going to have problems with their debt.  BIGLY PROBLEMS. 

The debt may be so large that once they have a PROBLEM with it and are trying to deal with it, it may be too late.

Even at $35, this thing may be "expensive" and VERY risky.
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Berkshire Hathaway / Re: Buffett buybacks: Could Berkshire tender stock?
« Last post by wabuffo on Today at 06:51:44 PM »
It is a mystery to me as to why investors spend so much time on the question of buybacks both at Berkshire and many other companies.

From March 8, 2000 (day when Buffett first mentioned that he would consider making repurchases) vs AutoZone (serial repurchaser).



Snowball...man, snowball!

wabuffo
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Berkshire Hathaway / Re: Buffett buybacks: Could Berkshire tender stock?
« Last post by vinod1 on Today at 06:43:22 PM »
It is a mystery to me as to why investors spend so much time on the question of buybacks both at Berkshire and many other companies.

Say Berkshire retires 20% of shares outstanding at 75% of IV over the next 5 years - a prospect I think that would seem to excite a lot of shareholders. This would result in about 6.25% increase in IV over the 5 years or about 1.25% annually.

Do shareholders really get that excited by the prospect of an extra 1.25% annual increase in IV? It is about the the volatility that the stock experiences intraday.

Of course, it is better to have that 1.25% rather than not having it. But is it really that big of a deal that so much attention gets paid?

There are cases where it makes a real difference. Like AIG in 2011/12 timeframe when a case could be made that it would be able to retire 30-40% of shares outstanding at 50-60% of IV in a relatively short period of time.

No disrespect meant to anyone. A lot of smart investors here and I might be missing something that I cannot wrap by head around.

Vinod
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Investment Ideas / Re: KHC - Kraft Heinz Co.
« Last post by Read the Footnotes on Today at 06:17:24 PM »
I'll throw my 2 cents in ( not sure how far I can throw pennies though).  There are a still a lot of really great brands at KHC.
The industry (obviously became much tougher to get growth from.

1.  If 3g is the only company cutting fat to the bone in a fat industry they have a nice relative advantage.
But if the industry competitors also cuts to the bone then their relative advantage is much less if any.

Thanks for your well reasoned contributions, Longhaul.

The fact that Longhaul mentions relative advantage reveals part of the problem, which is that years ago a Kraft or Heinz investor might have felt they did not need to analyze relative advantage. In the past an investor might have been able to depend on a long history of consumer behavior and of stable market share to form an opinion of the future of the business.

I believe it likely that most consumer product brands are less valuable today than they were several years ago. There are multiple simultaneous trends driving that destruction of brand value, but the progress of technology is ultimately at the root of most or all of them. To me the question is more a matter of why should this be surprising and should we expect similar impairments at other companies even if accounting rules don't result in write downs?

Stable market share and slow changing market conditions could lead to lazy management and bloat. That in turn could provide 3G with an opportunity for cost cutting and rationalization.

The problem is that trying to execute 3G-style changes will be very challenging when at a the same time:
1. the value of KHC (and CPG) brands has likely diminished
2. Secular and cyclical trends appear to be working against the KHC portfolio of products, and
3. The product portfolio may have been neglected and in need of refreshing
4. There is a good bit of debt relative to the new diminished earning power

An additional issue is that this is a turnaround and turnarounds frequently take longer than expected. I am not sure why anyone would have expected  better progress to this point, but people do tend to be too optimistic regarding the speed of the timeline. Finally, these turnarounds are why we have a term like the PE "j curve". Even if the investment is ultimately successful, why shouldn't we expect the progress to look something like it has? This is part of why private equity usually doesn't leave the equity in the public, or why they would at least want to make sure they have 51% of the votes, as they do in this case.

A while back, I was helping a young person prepare to pitch a stock for a position at a large bank. They were successful in their job search, but their pitch was KHC. I believed that going long KHC at that time was a bad idea. I was surprised by how hard I felt I was having to work to be constructive regarding pitching KHC as a long at that time. The point being I was no fan of KHC. On the other hand, everything is a buy at some point, and there does seem to be some indication that there might be some of the following:
1. Overreaction to SEC involvement
2. Overreaction to non-cash impairment charges
3. Overreaction to a dividend cut
4. Potential for some of the cyclical trends to reverse in the future
5. Potential for some of the secular trends to prove to actually be cyclical
6. Kitchen sink/big bath management behavior

I am not saying that I would expect a home run for KHC, but on the other hand, I doubt I would feel I was working as hard to be constructive if a young person wanted help with a KHC pitch today. Also, as a BRK shareholder, I wouldn't object to BRK buying back shares of BRK, or buying more KHC after Friday's price action, or especially if the price of either continues to trend down. Ultimately what matters is will the businesses be worth more further down the line and not what the results are for the next couple of quarters.
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Berkshire Hathaway / Re: Buffett buybacks: Could Berkshire tender stock?
« Last post by wabuffo on Today at 06:11:39 PM »
i think this will now change in the future. More importantly, i think Buffett finally is ok with Berkshire making significant purchases of shares. But for this to happen, Buffett first felt he needed to do a couple of things:

Perhaps it is just a matter of Buffett needing to set the stage properly:
Quote
"You should be aware that, at certain times in the past, I have erred in not making repurchases. My appraisal of Berkshire’s value was then too conservative or I was too enthused about some alternative use of funds.... We decided, however, to delay buying, if indeed we elect to do any, until shareholders have had the chance to review this report"

Buffett wanted to make sure all shareholders had the same information from his annual letter before doing any share repurchases ... in March, 2000! 

It's the same siren song for almost 20 years! 

I am afraid he's no Henry Singleton.

wabuffo
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Berkshire Hathaway / Re: Buffett buybacks: Could Berkshire tender stock?
« Last post by Viking on Today at 05:57:04 PM »
So in the beginning of the letter he says he is changing how the value of Berkshire is reported in his letters.

Quote
Long-time readers of our annual reports will have spotted the different way in which I opened this letter. For
nearly three decades, the initial paragraph featured the percentage change in Berkshire’s per-share book value. It’s
now time to abandon that practice

He then goes on to say this about buybacks:

Quote

When a company says that it contemplates repurchases, it’s vital that all shareholder-partners be given the
information they need to make an intelligent estimate of value. Providing that information is what Charlie and I try to
do in this report. We do not want a partner to sell shares back to the company because he or she has been misled or
inadequately informed.

Call me crazy, but that sounds to me like reluctance to buy back in size when he was providing investors with per-share book value as the metric to be used to calculate intrinsic value.

I think this is him telegraphing that he is now open to large buybacks, now that potential sellers have been "warned".

Wisowis, i think you have nailed it. In the past Berkshire has pretty much NEVER bought back much stock; even when the shares were dirt cheap. However, i think this will now change in the future. More importantly, i think Buffett finally is ok with Berkshire making significant purchases of shares. But for this to happen, Buffett first felt he needed to do a couple of things:
1.) remove the handcuffs he has self imposed: In the past Buffett has said BRK might buy back stock when it trades at a certain price level to book value (1.2 then 1.4). In this letter he shreds this commitment. He says BV is no longer a good measure to use when valuing BRK; this is a massive change for Buffett and BRK. Now Berkshire will buy shares when they feel they are cheap and shareholders will find out when quarterly results are published; no longer being constrained to only re-purchase when the stock drops below a pre-specified price to book amount is a big benefit to BRK.

And what is cheap? Whatever Berkshire decides.

2.) provide current shareholders with an updated way to properly value the company: he spends a great deal of the current letter doing this and he lays it out quitewell. I am sure there is a reason for this.

Buffett did not repurchase in Q4 because he first wanted to communicate Berkshire’s new philosophy in the Feb shareholder letter, which was probably written before the Dec meltdown. Buffett always looks longterm; the stock will get cheap again and now he will have no self imposed constraints on when to buy back shares.

And, perhaps most importantly, Buffett has now gone out of his way to ‘warn’ or ‘inform’ investors. If they sell and Berkshire subsequently buys back a big amount of shares and this leads to a higher share price they cannot blame Berkshire for not being transparent.
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Investment Ideas / Re: KHC - Kraft Heinz Co.
« Last post by wabuffo on Today at 05:56:03 PM »
The question to me is if one likes the CPG sector, is KHC really the best bet?

POST is actually following the same acquisition/consolidation approach of KHC on a lesser scale (complete with the boatloads of debt - but without the nastiness/arrogance of 3G) and doing a better job of building shareholder value over the same time frame. 

I've owned it in the past but no longer do.  It has its fan-boys and its haters.  FWIW.

wabuffo

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