It just had to happen.
Warren Buffett had told his shareholders that the party's over in his annual letter to his shareholders.
- That party is over. It’s a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise. Even if the U.S. has its third consecutive catastrophe-light year, industry profit margins will probably shrink by four percentage points or so. If the winds roar or the earth trembles, results could be far worse. So be prepared for lower insurance earnings during the next few years. ( source: here )
And this has certainly reflected on Berkshire Hathaway share price. Berkshire A shares has since declined substantially from the peak of $150,000 to less than $120,000.
And so it has to happen.
Folks will start writing if the party is indeed over for Warren Buffett himself or as the the falling article asks, Is Berkshire's star fading?
- Since 1965, the company has averaged 21.1-per-cent annual growth in book value per share, dwarfing the S&P 500's annual growth of 10.3 per cent for the same period, according to Zacks Investment Research.
The company's diamond-studded investment portfolio boasts holdings such as Coca-Cola Co. and Gillette Co., but insurance - including reinsurance, property and casualty insurance - is the cornerstone of Berkshire's success.
Company shares are known for their sky-high prices. Though class A shares closed at $116,200 (U.S.) yesterday, as recently as December they were trading above the $150,000 mark.
Stronger competition and pressure from regulators to lower insurance rates in recent months has put a strain on the industry, said Chuck Hamilton, an analyst with FTN Midwest Securities Corp. He predicts Berkshire profits will decline for the next year and a half.
He gave the company's shares a neutral rating and targeted the company's share price at $108,000 (U.S.), just below its 52-week low of $109,800.
The reinsurance business in particular has been hit hard in the past several months, and now it seems even Geico Corp., Berkshire's star insurance player, is facing challenges.
Profit from Geico's insurance policy sales fell 8.3 per cent to $298-million before taxes in the last quarter, but Mr. Hamilton said Berkshire is still trying to ride through the storm.
"Every other advertisement on TV is that damn gecko [Geico's mascot], so I know that Warren Buffett's spending a bloody fortune on advertising."
Standard & Poor's equity research analyst Catherine Seifert also attributed the company's poor second-quarter performance to "a more competitive insurance market environment," but seemed to have optimism for Berkshire Hathaway's future, maintaining a "hold" rating on the class A shares. She forecast the share price will rise to $130,000.
Eric Rothmann, an equity research analyst at Zacks Investment Research, said in a report that the soft performance of the insurance industry would put pressure on the company's core revenue and earnings growth trends.
He noted that Berkshire's shares are currently trading at the lower end of a 10-year average, but also gave the company a hold rating.
"We believe that in the long term, Berkshire will continue to generate above-average returns with below-average volatility," he said in the report. His target for the company's class A stock is $136,000 a share.
In May, Mr. Buffett himself was bracing for expected losses. At the company's annual shareholders meeting - a champagne-drenched party weekend dubbed "Woodstock for Capitalists" - the 77-year-old told 30,000 of his shareholders that he expected profit margins from the company's insurance holdings to significantly drop in 2008. Though his insurance holdings took several hits in 2005 following huge payouts for hurricane Katrina victims, he noted that 2006 and 2007 had been lucky years.
"That party is over," he said in his annual letter to shareholders.
Mr. Hamilton said it's clear Mr. Buffett has "his hands full" with insurance holdings, and predicts the billionaire will continue plucking up undervalued companies in the industrial sector, the December, 2007, acquisition of Marmon Group Inc. being the latest in this trend.
Though Mr. Buffett's Midas touch has allowed companies that fall under Berkshire's umbrella to trade at high prices, Mr. Hamilton questions how long shareholders will be willing to shell out the big bucks.
"You can't keep putting out a 50-per-cent premium for someone who won't be here in a few years," he said. "As hard as they've tried to bring in the right kind of people, can they be as good as Warren Buffett? You have to haircut the value of that stock to reflect that management talent isn't going to be the one in one million person that Warren Buffett was."
"The remarkable success of Berkshire Hathaway is nearly wholly attributable to two men," said Zacks analyst Mr. Rothmann in a report. Charlie Munger, the second man Mr. Rothmann refers to, is the 84-year-old vice-chairman of Berkshire Hathaway.
While acknowledging the company's stellar growth since its incorporation in 1965, Mr. Rothmann predicted in his report that it "will deteriorate under new management."
"It is simply statistically unlikely that the new management of this behemoth conglomerate will be able to continue with Mr. Buffett's and Mr. Munger's long-term market outperformance," he said.
Well Mr. Rothmann is questioning on the capability of the future management. Do you reckon he has a valid point here?
For me, perhaps there is some logic here. Both Warren and Charlie are exceptional human beings and simply superb investor and shrewd businessmen and needless to say, there is perhaps no comparison to what these two has achieved.
But on the other hand, less us not forget that the successor, himself would ultimately be Warren and Charlie last pick of permanent value and perhaps it's rather harsh to rate the successor NOW for a job they have not done yet.
What say you?
ps: BRK rose 3900 to close at 120,100 yesterday.
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