By VW Staff. Originally published at ValueWalk.
A note to readers: Fifty years ago, today’s management took charge at Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B). For this Golden Anniversary, Warren Buffett and Charlie Munger each wrote his views of what has happened at Berkshire Hathaway during the past 50 years and what each expects during the next 50. Neither changed a word of his commentary after reading what the other had written. Warren’s thoughts begin on page 24 and Charlie’s on page 39. Shareholders, particularly new ones, may find it useful to read those letters before reading the report on 2014, which begins below.
H/T getithot, Reddit
Berkshire Hathaway 2014 Annual Letter
To the Shareholders of Berkshire Hathaway Inc.:
Berkshire Hathaway’s gain in net worth during 2014 was $18.3 billion, which increased the per-share book value of both our Class A and Class B stock by 8.3%. Over the last 50 years (that is, since present management took over), per-share book value has grown from $19 to $146,186, a rate of 19.4% compounded annually.*
During our tenure, we have consistently compared the yearly performance of the S&P 500 to the change in Berkshire Hathaway’s per-share book value. We’ve done that because book value has been a crude, but useful, tracking device for the number that really counts: intrinsic business value.
In our early decades, the relationship between book value and intrinsic value was much closer than it is now. That was true because Berkshire Hathaway’s assets were then largely securities whose values were continuously restated to reflect their current market prices. In Wall Street parlance, most of the assets involved in the calculation of book value were “marked to market.”
Today, our emphasis has shifted in a major way to owning and operating large businesses. Many of these are worth far more than their cost-based carrying value. But that amount is never revalued upward no matter how much the value of these companies has increased. Consequently, the gap between Berkshire Hathaway’s intrinsic value and its book value has materially widened.
With that in mind, we have added a new set of data – the historical record of Berkshire’s stock price – to the performance table on the facing page. Market prices, let me stress, have their limitations in the short term. Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. Charlie Munger, Berkshire Vice Chairman and my partner, and I believe that has been true at Berkshire: In our view, the increase in Berkshire Hathaway’s per-share intrinsic value over the past 50 years is roughly equal to the 1,826,163% gain in market price of the company’s shares.
The Year at Berkshire Hathaway
It was a good year for Berkshire Hathaway on all major fronts, except one. Here are the important developments:
- Our “Powerhouse Five” – a collection of Berkshire’s largest non-insurance businesses – had a record $12.4 billion of pre-tax earnings in 2014, up $1.6 billion from 2013.* The companies in this sainted group are Berkshire Hathaway Energy (formerly MidAmerican Energy), BNSF, IMC (I’ve called it Iscar in the past), Lubrizol and Marmon.
Of the five, only Berkshire Hathaway Energy, then earning $393 million, was owned by us a decade ago. Subsequently we purchased another three of the five on an all-cash basis. In acquiring the fifth, BNSF, we paid about 70% of the cost in cash and, for the remainder, issued Berkshire Hathaway shares that increased the number outstanding by 6.1%. In other words, the $12 billion gain in annual earnings delivered Berkshire Hathaway by the five companies over the ten-year span has been accompanied by only minor dilution. That satisfies our goal of not simply increasing earnings, but making sure we also increase per-share results.
If the U.S. economy continues to improve in 2015, we expect earnings of our Powerhouse Five to improve as well. The gain could reach $1 billion, in part because of bolt-on acquisitions by the group that have already closed or are under contract. - Our bad news from 2014 comes from our group of five as well and is unrelated to earnings. During the year, BNSF disappointed many of its customers. These shippers depend on us, and service failures can badly hurt their businesses.
BNSF is, by far, Berkshire Hathaway’s most important non-insurance subsidiary and, to improve its performance, we will spend $6 billion on plant and equipment in 2015. That sum is nearly 50% more than any other railroad has spent in a single year and is a truly extraordinary amount, whether compared to revenues, earnings or depreciation charges.
Though weather, which was particularly severe last year, will always cause railroads a variety of operating problems, our responsibility is to do whatever it takes to restore our service to industry-leading levels. That can’t be done overnight: The extensive work required to increase system capacity sometimes disrupts operations while it is underway. Recently, however, our outsized expenditures are beginning to show results. During the last three months, BNSF’s performance metrics have materially improved from last year’s figures. - Our many dozens of smaller non-insurance businesses earned $5.1 billion last year, up from $4.7 billion
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