Berkshire Hathaway: Buffett sits on cash as Covid-19 changes business models

The Sage of Omaha, Warren Buffett, is closely followed by professional investors, with good reason. He has, over six decades, produced market-beating returns by investing in companies with business models that can stand the test of time. Lately, Buffett has been withdrawing from old favourites and he is also not investing in the stock of his own company. The world is changing rapidly and irrevocably, including for Berkshire Hathaway – an investment trust type vehicle which held its first-ever virtual annual meeting at the weekend. Buffett is also getting used to slopping around in casual gear as he works at home like the rest of us confined to our homes in Covid-19 lockdown. As Morningstar senior equity analyst Gregg Warren underscores: not even Buffett, who has the mantra of buying when others are fearful, has been snapping up undervalued stocks. Instead, he has been sitting on the sidelines in cash, working out what will be different forever and how this will impact on listed companies. – Jackie Cameron.Even Warren Buffett wonders if people will return to offices.By Chip Cutter.___STEADY_PAYWALL___.(The Wall Street Journal) – Count Warren Buffett among those questioning the future of offices.The 89-year-old chairman and chief executive of Berkshire Hathaway who has spent years railing against corporate bloat, said on Saturday that the coronavirus pandemic could lead to longer-term shifts in the way people do their jobs. With offices closed and cities sheltering in place, millions of people have spent the past few weeks working remotely."The supply and demand for office space may change significantly," Mr. Buffett said. "A lot of people have learned that they can work at home, or that there's other methods of conducting their business than they might have thought from what they were doing a couple of years ago. When change happens in the world, you adjust to it."Like many Americans, Mr. Buffett said it had been more than seven weeks since he had put on a tie. "It's just a question of which sweatsuit I wear," he joked.The comments came on Saturday during Berkshire's annual meeting in Omaha, Neb., a more than four-hour affair followed by investors world-wide. Typically, thousands of shareholders attend the event in person to hear Mr. Buffett and his longtime business partner, Charlie Munger, muse about the state of the company and the world. This year's event was streamed from an empty arena. Mr. Munger wasn't present and Mr. Buffett answered questions submitted by shareholders via email.Mr. Buffett spent much of his time making a bullish case for the long-term health of the American economy, doing so at times in a format he has long shunned: a slide presentation. He also touched on the future of jobs at his company, his opinion of the Paycheck Protection Program meant to aid small businesses and how the nation should be treating front-line workers.Berkshire outlook: Layoffs possibleBerkshire, a conglomerate that includes the insurance company Geico, railroads, energy companies and brands such as Dairy Queen and See's Candies, employs about 391,500 people.Even though Berkshire held about $137.3bn in cash at the end of the first quarter, Mr. Buffett said it is possible the company may need to lay off some workers in the short term.At Berkshire, the company's manufacturing businesses could see a steep drop in demand, Mr. Buffett said. "In those cases, we would have layoffs at some point," he said. Still, over the long term, he said he expected the company to keep hiring."Five years from now, I think Berkshire will be employing considerably more people," Mr. Buffett said.The PPP: 'Hell to administer'While none of Berkshire Hathaway's fully owned subsidiaries has applied for government stimulus or assistance under a loan program for small businesses, Mr. Buffett praised the efforts.The Paycheck Protection Program, which gives loans to businesses with 500 or fewer employees that can be forgiven if they don't lay off workers, was a "very good idea," he said.The program has drawn intense criticism from small businesses frustrated in their attempts to receive loans, and some public companies that secured the money have returned it after blowback. Mr. Buffett said he credited Congress and other public officials for acting swiftly."It must be hell to administer," he said. "It just isn't that easy to inaugurate incredibly large [programs]. There's going to be a certain amount of fraud. Everything doesn't go perfectly. But I'm 100% for taking care of the people that really get hurt by something that they had nothing to do with."'We Don't Even Know Their Names'Asked how the country could better support health care workers, delivery drivers and food-service employees on the front lines, Mr. Buffett suggested they deserved higher wages and more respect."They're working 24 hours a day, and we don't even know their names," he said. "We ought to do things that help those people."An ideal economy should allow low-wage workers to raise a family on income from a single 40-hour-a-week job, Mr. Buffett said. Many front-line workers must maintain multiple jobs, and employees at meat plants and warehouses have taken to walking out of their companies in recent weeks to protest working conditions."They're contributing a whole lot more than some of the people that came out of the right womb or got lucky and know how to arbitrage bonds or whatever it might be," he said. "You would think with our prosperity, we would hold ourselves to even higher standards of taking care of our fellow man—particularly when you see a situation like you've got today."Though living conditions had improved for those earning the lowest 20% in wages over the past 100 years, "it's really improved for the top 1%," Mr. Buffett said.Write to Chip Cutter at chip.cutter@wsj.comUnrealised investment losses mar Berkshire's resultsFrom MorningstarWe are leaving our fair value estimate in place for the wide-moat company.Greggory Warren, CFAMentioned: Berkshire Hathaway Inc (BRK.A), Berkshire Hathaway Inc (BRK.B)With wide-moat Berkshire Hathaway's (BRK.A)/(BRK.B) first-quarter results being more or less in line with our expectations, we are leaving our $342,500 ($228) per Class A (B) share fair value estimate in place. That said, as we expect to continue to uncover tidbits of information related to the impact that the coronavirus pandemic could have on Berkshire's different operating subsidiaries, we are likely to make adjustments to our near-term assumptions as details become available, which should allow us to make more informed projections for the firm's businesses (and possibly alter our fair value estimate).First-quarter revenue, which now includes unrealised and realised gains/losses from Berkshire's investments and derivatives portfolios, decreased 111.1% to negative $9bn. Excluding the impact of investment and derivative gains/losses and other adjustments, First-quarter operating revenue increased 1.0% to $61.3bn. Operating earnings, exclusive of the impact of investment and derivative gains/losses, increased 5.7% year over year to $5.9bn during the March quarter. When including the impact of the investment and derivative gains/losses, operating earnings fell 453.5% to negative $49.7bn.Book value per share, which still serves as a decent proxy for measuring changes in Berkshire's intrinsic value, declined 12.2% sequentially to $228,953 (from $260,906 at the end of December), slightly better than our forecast of $228,293. The company closed out the March quarter with a record $137.3bn in cash and cash equivalents, up from $128bn at the end of last year. This left Berkshire with an estimated $112bn in dry powder that could be committed to investments, acquisitions, and share repurchases. While the company did repurchase $1.6bn of common stock during the March quarter, the bulk of that took place in February and the total amount was less than the $2.2bn spent on buybacks during the fourth quarter of 2019.**As Berkshire Hathaway's first-ever virtual annual meeting wrapped up, Morningstar's Senior Equity Analyst Gregg Warren recaps his thoughts on the weekend's events. In his latest note, Gregg discusses the tone of this year's meeting, along with Berkshire's lack of buying during the Covid-19 market downturn and the company's decision to sell out of their positions in the major US airlines."The main thing we took away from Buffett's preamble, as well as the question-and-answer segment, was that Berkshire is being extremely cautious right now, given all of the uncertainties surrounding the Covid-19 pandemic and subsequent shutdown/recession. Unlike Buffett's famous maxim to "be fearful when others are greedy when others are fearful," Berkshire actually dumped some stocks, did not pursue any deals, and let its cash balances expand during the first quarter."While it was no surprise to see Berkshire dump the airlines, we were shocked to see that Buffett stopped buying back Berkshire's shares on March 10 and didn't repurchase any of the company's common stock between then and the end of April. Our general feeling has been that with cash reserves being guarded, distressed opportunities few and far between, and many of Berkshire's stock holdings either struggling with the Covid-19 pandemic or subsequent shutdown/recession, the best option for the company's excess cash may be Berkshire's own common stock."

Berkshire Hathaway: Buffett sits on cash as Covid-19 changes business models

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