Case Study - Warren Buffett PDF

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Warren Buffett Warren Buffett has become a financial icon based on his great success as an investor in companies and stocks over the past 40 years. He is ranked as one of the wealthiest people in the world, with a net worth of $50B. He is also a noted philanthropist, and has vowed to vie away 99% of his personal wealth. Mr. Buffett was born on August 30, 1930 in Omaha, Nebraska, the son of a stockbroker who became a U.S. Congressman. Taking the advice of his father, Buffet applied to and attended the Wharton School of Business at The University of Pennsylvania. He later transferred to the University of Nebraska-Lincoln, graduating in 1950. After graduation, he enrolled in the MBA program at Columbia University, where he learned from famed professors Benjamin Graham and David Dodd. Buffet graduated from Columbia in 1951 and at the urging of both Graham and his father did not pursue a job on Wall Street. Buffett returned home and taught a college class while managing an investment he made in a Texaco gas station. Then in 1954, Buffett received an offer from Graham to work in his firm, Graham Newman Corp., as a securities analyst. In 1956, Graham closed his partnership and Buffet returned home to Omaha and formed his own partnership, Buffet Associates Ltd, which was later consolidated with other partnerships to form Buffett Partnerships Ltd. After 10 years, Buffet returned 1,156% and managed assets of over $44 million. In 1969, Buffett liquidated the partnership and all assets with the exception of Berkshire Hathaway (BRK.A). Buffett originally purchased shares of Berkshire Hathaway, a textile manufacturing company, in 1962, at under $8 per share, and accumulated a 49% ownership of the company by 1965. As of 1970, the textile business of Berkshire Hathaway was earning only $45,000, while insurance and banking brought in $4.7 million. Buffett divested its textile mills in 1985, and focused on buying small companies and controlling stakes in large publicly-traded companies. In 1976, Berkshire began to acquire GEICO, an insurance company, for $2 a share after it had reported poor earnings. Buffett believed in the company as he saw that its basic business was sound, but it had incompetent management. Berkshire bought the company outright in 1996. Berkshire also owns reinsurer General Re, purchasing the company in 1998. Over the years Buffet bought a number of other businesses, including Shaw Industries, the world’s largest carpet manufacturer, McClane Company, a wholesale logistics distributor, MidAmerican Energy Holdings Company, NetJets, Fruit of the Loom, See’s Candies, and Dairy Queen. Berkshire also bought large equity stakes invests in major public companies, including a 12.7% stake in American Express (AXP), a 9.9% stake in BYD Company, Ltd. a 8.6% stake in Coca-Cola (KO),

a 2.5% stake in ConocoPhillips (COP), a 1.0% stake in Johnson & Johnson (JNJ), a 8.8% stake in Kraft Foods (KFT), a 2.9% stake in Proctor & Gamble (PG), a 4.0% stake in U.S. Bancorp (USB), a 6.5% stake on Wells Fargo & Co. (WFC), and a nearly 20% stake in Moody's Corporation (MCO). Berkshire also invested $5 billion into Goldman Sachs during the financial crisis. Berkshire received a 10% annual dividend and 43.5 million warrants to buy Goldman Sachs shares at $115. Most recently, on November 3, 2009, Berkshire agreed to acquire the 77.4% of BNSF Railway that it did not own for $26 billion in stock and cash. Major Holdings of Berkshire Hathaway

Berkshire Hathaway’s common stock (BRK.A) currently trades for over $100,000 per share. Berkshire has never split its stock and has only issued a dividend once, in 1967. In May of 1996, Berkshire Hathaway did issue class B shares, BRK.B, to deter unit trusts from forming to buy the stock. Class B shares were initially 1/30 of class A shares, however, they were split so that they are now equal to 1/1,500 of a class A share. Shortly after the split in class B shares, BRK.B was added to the S&P 500 list of companies. These strategic financial decisions - not issuing a dividend, not splitting stock, and creating class B shares, were guided by Buffett’s focus on creating shareholder value. Buffett believes in having responsibility to shareholders, and wants all of his business managers to think and act as owners. Berkshire Hathaway under Buffett has proven to be a great investment, with an average return of over 18% over the past 20 years.

Warren Buffet’s strategy of investing is patterned after that of Benjamin Graham, his mentor and college professor. Buffett is a value investor, who only invests in companies that he can understand. He believes that you should only invest in a company when you have an understanding of their operating business; for this reason Buffett has never invested in technology companies. Buffet looks to find the intrinsic value of a company and chooses to invest when he believes the company is undervalued. Buffett only invests in companies that he feels comfortable holding for 20 years. Buffett focuses on the management of the company, to see if they are making smart decisions. He wants to see if they are investing the free cash flow of the company to create shareholder value, such as the issuance of a dividend. Furthermore, Buffett likes to look at financial metrics, which he believes are key to successful companies. He especially focuses on return on equity (ROE) and profit margins. ROE is the rate at which investors earn income on the money they invested in a stock. Buffett uses this metric to compare companies across the same industry. He uses the ROE from the past five to ten years. Buffett also likes to look at profit margin, or income divided by sales. Profit margin indicates the efficiency of management. Buffett not only likes to see a good profit margin, but also one that is increasing. The Stock Price Performance of Berkshire Hathaway (BRK.A)

One of the best examples of Buffett’s successful investments is See’s Candy, which he bought for $25 million in 1972. At the time, See’s sales were $30 million and pre-tax earnings were less than $5 million, and the capital required to operate the business was $8 million. The company therefore was earning a 60% return on invested capital pre-tax. In 2006, sales were $383 million and pre-tax profits were $82 million, with only $40 million being required to run the business. See’s Candy has been a major cash cow for Buffett. Since 1972, See’s pre-tax earnings have totaled $1.35 billion, with all but $32 million, which was reinvested into See’s, allocated for other investments of Berkshire Hathaway. This is the prototypical investment of Buffett; he invests in a company whose business model he understands; the company generates significant cash flow, and has a good return on investment. Investments like See’s Candy have made Buffett one of the most successful investors of all time....