No. of Recommendations: 23
https://seekingalpha.com/article/4673927-why-i-sol...
That's a fairly thoughtful bearish case, much more nuanced than usual. The writer actually knows something about the company, at least.
The conclusion is pretty well stated, given his bearish case:
"The last thing I wanted to do was sell Berkshire and write a big tax check to various governments. Actually, that's the second to last thing I wanted to do. The last thing I want to do is give back a significant portion of a big gain, and I think that's a likely outcome from here. I can deal with a stretched valuation. I can deal with some structural business headwinds. But the combination of both usually leads to capital loss."I would quibble with the way he views some things, but that's normal, I quibble with everybody.
Notably, he seems inappropriately concerned about Berkshire's consolidated debt, dismissing the headline cash number as largely meaningless because it's not that much bigger than the debt. (while simultaneously decrying the record level of cash! Which in any case it isn't, as a fraction of the firm)
But...no. That's not the way the debt works.
The railroad and utilities holdings are in effect "arm's length" subsidiaries, like any of public stock holdings. An existing company was purchased, with economics that worked in part because they had their own debt and leverage and credit rating and regulatory reporting already built in. By buying (say) BNSF and letting it keep its debt, it's the purchase price that matters, not the "enterprise value". This is for the critical reason that Berkshire is not on the hook for debt at BNSF, it's non-recourse. If that debt defaulted, the creditors would not get the cash pile.
By exact analogy, if I buy shares in Hershey for $187, I don't consider my portfolio to have additional debt of $37 because of the $37 per share of debt that Hershey has. Hershey's debt per share doesn't wipe out or in any way invalidate $37 of my cash pile each time I buy a share. That's because I am not on the hook for Hershey's debt. What matters to me, for both risk level and cost basis for calculating returns, is the $187 cost basis.
Yes, Berkshire itself does have debt, but the appropriate number is $42.69bn, not the $128bn that the writer quotes. That's because my shares in Berkshire head office are not guarantors of the $85.6bn in debt inside the railroad/energy division.
The meaningful discussion to have would be about whether the bear case is fundamentally sound - which more than anything else comes down to whether the good times are in effect permanently over within the rails and utilities. And secondarily whether management can pull at least one more needle-moving investment idea out of the bag before slowly becoming a glorified cash cow. But I don't have answers to those good questions, so I can't add them here.
Jim
