From Whitney Tilson:
Another spectacular earnings report last Friday from Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), which Mr. Market hasn’t figured out (yet). The headline number was cosmetically down because the Goldman Sachs Group, Inc. (NYSE:GS) and General Electric Company (NYSE:GE) preferreds were redeemed (at a 10% call premium) a year ago, plus this year the mark-to-market (non-cash) on the equity index puts cost $1.2 billion.
In reality,Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), operating earnings were up 38% year over year (22% in the non-insurance businesses), and both Lubrizol and BNSF are now yielding in excess of 15% of purchase price. Operating cash flow was $4.9 billion, cash rose by more than $3 billion sequentially, book value rose 7.5% in the first half of the year, and float was steady at $71.1 billion (up slightly from Q4’s $70.6B, down slightly from Q1’s $71.7B). Overall, intrinsic value is in the $180-190,000 range vs. today’s close of $127,020.
About Wall St. firms tipping major clients about upcoming upgrades or downgrades, a former analyst wrote me:
I spent a year at [a major firm] covering Transportation (was an industry hire basically covering the rails). Periodically, we had to rank-order our stocks according to our expectations for short-term performance. At the time, I expressed my concerns particularly as it seemed like this client was fishing for information ahead of other clients. How an analyst could independently make these predictions while excluding knowledge of future rating changes or other potentially market-moving research was beyond me (I also wondered the extent that insider information could flow through these rankings, which would never find its way into a written report). Of course, when asked for my input into the rankings, I suggested the use of a random number generator in Excel (my boss didn’t think that was funny). He took it perhaps too seriously because his compensation was based on his performance with this tool. I even recall that our DOR at the time (now CEO of the sellside unit) said that we do this because it’s worth “a lot of money to the firm.”
This is not an indictment of my former employer…I believe it is the most honest of research shops out there mostly due to the avoidance of conflicts with an investment bank (though this is changing) but I was surprised to see that they couldn’t turn down this clear conflict of interest. Leaving the business was easy for me, particularly seeing how quickly it was dying.
Disclosure: Long Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) shares for myself and clients