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| AP |
The annual missive from the Berkshire chairman is one of the most widely read corporate reports in the business community, but it has a lot to live up to this time around. Last year, the “Oracle of Omaha” went all out, unleashing a 25,000-word opus on Berkshire’s past, present and future to celebrate the 50 years that he’d been at the helm of the company.
No less than Microsoft Corp. co-founder Bill Gates called the last letter “the most important one [Mr. Buffett] has ever written.” Mr. Gates, who serves on Berkshire’s board and owns the company’s stock, is a longtime friend of Mr. Buffett.
But that doesn’t mean the letter for Year 51 will be devoid of news. Berkshire did it’s biggest deal ever in 2015, while the company’s stock turned in its worst performance since the financial crisis. Expect talk of a big change to the way Mr. Buffett runs his annual meeting, and brace for some corny jokes.
Here’s what we’ll be watching for when the letter hits around 8 a.m. Eastern time Saturday.
1. Berkshire’s performance. A good chunk of each letter is set aside to discuss Berkshire’s performance. Last year, Mr. Buffett added a column to the first page of the report to show Berkshire’s annual stock performance–with the bottom line showing a stunning 1,826,163% gain that crushed the 11,196% return of the S&P 500 over the previous five decades. This year, the company will add an entry for 2015, and the comparison won’t be kind: The S&P was essentially flat, while Berkshire was down 12%. The decline was the worst for Berkshire since 2008. Mr. Buffett may acknowledge the underperformance, but don’t expect him to dwell on it or attempt to explain it. He is, after all, the king of long-term investing. To him, a year is nothing.
He may instead trot out a well-used line about how his Omaha, Neb.-based company will be unable to repeat its past meteoric growth. And he’ll certainly tout the successes of various business units–and may admit to a few mistakes.
2. Precision Castparts. In August, Mr. Buffett pulled back the curtain on plans to buy aerospace manufacturing firm Precision Castparts Corp. for about $32 billion in cash. It represents Berkshire’s largest takeover ever, topping its gigantic deal for Burlington Northern Santa Fe in 2010. The deal closed in January. Expect Mr. Buffett to wax lyrical about how the deal came together with the help of Berkshire investing lieutenant Todd Combs, heap some praise on Precision Castparts CEO Mark Donegan, and talk about how Mr. Donegan will continue a strategy of rolling up smaller rivals. And you can be certain that Mr. Buffett will point out that, with the deal, Berkshire now owns 10 companies outright that would be listed on the Fortune 500 were they independent.
3. 3G and Kraft Heinz. Precision Castparts wasn’t the only deal that Mr. Buffett had a hand in last year. H.J. Heinz Co., which was half-owned by Berkshire, reached an agreement in March to merge with Kraft Foods Group Inc. Mr. Buffett may spend some time talking about the power of the Kraft brand, but he’s even more likely to talk about Berkshire’s partner on the deal: Brazilian private-equity firm 3G Capital Partners L.P.
At last year’s annual meeting, some Berkshire shareholders let it be known in no uncertain terms that they weren’t too thrilled with Mr. Buffett’s multiple deals with 3G in recent years. Berkshire is seen by many as a benevolent owner of companies, averse to layoffs. 3G, meanwhile, has a well-deserved reputation for ruthless cost-cutting. In addition, Mr. Buffett has spoken ill of private equity firms in the past. Mr. Buffett has lauded 3G and its leaders, saying the cuts they make are necessary. He’s likely to continue defending 3G, since he’s said he hopes to do more deals with them, and he may attempt to draw a contrast between 3G’s approach and the tactics of other private-equity firms.
4. Clayton Homes. A Berkshire-owned firm called Clayton Homes, the country’s largest manufactured-housing company, has been the topic of a series of articles by The Center for Public Integrity and The Seattle Times that assert that the company “preys on the poor” with predatory lending practices. Clayton Homes has said the story was “misleading,” and Mr. Buffett was a stout defender of the business at last year’s annual meeting. But the stories have continued, with one in December saying that the company was targeting and exploiting minorities–a claim that Clayton has denied. Mr. Buffett may make another attempt to address the issue in his letter this year.
Then again, he may not. Clayton is a tiny part of Berkshire’s sprawling empire, making up about 2% of the conglomerate’s profit. Mr. Buffett may elect to stay silent on the matter.
5. Oil. Mr. Buffett often sets aside a portion of his letter for a lesson on finance or the markets, with past years including discussions of derivatives, investment strategies, and how to evaluate potential acquisitions. Could the turmoil in the oil market get the Buffett treatment this year?
As we noted in a story in Friday’s Journal, analysts say that Berkshire generally benefits when the price of oil drops because it is an input cost for many of its manufacturing and industrial businesses. However, one of Berkshire’s largest contributors to earnings, the BNSF railroad, is increasingly vulnerable to sustained oil-price declines. It also hurts Berkshire-owned car insurer Geico Corp. But the company is making some new investments in companies feeling the pinch from falling oil prices, and Precision Castparts has some exposure there too–which may have helped Berkshire get that deal done.
6. Webcasting the annual meeting. This year, for the first time ever, Berkshire plans to webcast its widely attended annual meeting, which mostly consists of a marathon question-and-answer session with Mr. Buffett and his vice chairman, Charlie Munger. Expect Mr. Buffett to explain his reasons for this big change, which may include a desire to broaden his audience in the U.S. and overseas. He could also touch on his complaints about the media’s coverage of the event and mention the sky-high cost of a visit to Omaha during the annual-meeting weekend.
7. Corny old-man jokes. Mr. Buffett is always good for a few one-liners. He often employs them to put a fine point on a complicated discussion, while in other instances, he seems to use them just because he can. “A girl in a convertible is worth five in the phone book,” for example. Or, “you only learn who has been swimming naked when the tide goes out.” Sometimes, he’ll borrow from someone else: “A line from Bobby Bare’s country song explains what too often happens with acquisitions: ‘I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.’ ” Or, “Woody Allen once explained why eclecticism works: ‘The real advantage of being bisexual is that it doubles your chances for a date on Saturday night.’”
Few things in life are certain, but counting on Mr. Buffett for a few corny jokes is about as good a bet as any.
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