Berkshire Hathaway: Does it Still Need Warren?
Paula is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Berkshire Hathaway (NYSE: BRK-A) shares have slipped at the news that its beloved and famous leader, 81-year-old Warren Buffet, has prostrate cancer. At the time of this writing, it’s unclear whether this is a tiny dip that will only last for a day, or the first sign of a bigger sell-off.
A sell-off would be justified if and only if “the Warren factor” is heavily priced into Berkshire’s value. Great leaders make great companies – just look at Apple – so it’s reasonable to expect a bit of uncertainty when a new leader comes to helm.
Buffet’s cancer is not expected to be terminal, and the vast majority of men who discover and treat stage I prostrate cancer do not die from it within five years. “The good news is that I’ve been told by my doctors that my condition is not remotely life-threatening or even debilitating in any meaningful way,” Buffet said in a letter to shareholders. But based on the slipping share price, it seems that some investors want to price Buffet’s health uncertainty into the stock … nevermind the fact that there is always uncertainty for an 81-year-old.
At any rate, the key question here is whether or not Warren Buffet’s “leadership goodwill” makes a substantial difference on the company valuation. A sell-off would be justified if – and again, I repeat if – Berkshire can’t separate itself from Buffet.
But given Berkshire’s solid fundamentals, I think this company could thrive without Warren (no offense to the chairman and chief executive). There’s no “Warren factor” in the stock price and no justification for a sell-off.
Capital and Debt – Fifty years ago, a young Buffet used the premiums paid to insurance companies to finance his acquisitions of other businesses with minimal debt (first in the form of stock purchases, and later in the form of whole takeovers). Fast forward to today: the insurance industry is as strong as ever, and Berkshire continues to maintain its minimal-debt ethos. In other words, it has financing and capital without the risk exposure that debt carries.
Diversity and Size – Berkshire is the eighth-largest publicly traded company on earth, according to Forbes. It has expanded from its insurance roots into “boring,” recession-resistant industries such as underwear, chocolate, paint, carpet, concrete, chewing gum, soda pop and aviation training. It swooped in to pick up shares of financial services companies when they were “on sale” during the Great Recession, and it’s well-poised to take advantage of the global recovery.
Insulation from Speculators - This stock slip surprizes me because Berk's Class A stock, which costs six figures per share, are designed to be insulated from the roller-coaster of short-term speculators. This time, though, its slipped at almost the same rate as the more volatile Berkshire Hathaway Class B (NYSE: BRK-B) shares. Perhaps some investors are nervous, but I think the majority will evaluate the company's fundamentals without pricing Warren too much into the mix.
The Numbers – Berkshire’s financials are both solid and enviable. It holds a 12 percent operating margin, a 6.5 percent return on equity, and $20 billion in cash.
The bottom line?
Despite Buffet’s celebrity status, the strength of Berkshire is the company itself. While Buffet should be credited for launching and leading the company, there is no fundamental reason to sell off shares at any point if his health declines.
Just look at Apple.
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