As I reflected on the recent purchase of Heinz Foods by Berkshire Hathaway, I thought about some of Warren Buffett's other purchases that met some initial skepticism. In 2005, Berkshire purchased a 22 percent position in BNSF (originally called Burlington Northern Santa Fe Railways) and four years later acquired the remaining shares at nearly $100 a share. There were some felt that Buffett's long love of trains -- including a well-detailed model train set he once owned -- had something to do with the purchase. People forget that Warren Buffett always looks for the that diamond in the rough, that company that would be a great long-term investment or purchase outright for a discount. However, there is a greater story when it comes to the transformation of the freight rail industry in the last generation. Today BNSF has more than 32,000 miles of rail throughout the Midwest and along the West Coast. It competes against Union Pacific and while they are the nation's second largest freight rail network, they are the major player hauling corn and coal. In order to better understand why it is a good bet, you have to travel back and see where freight rail nearly went off the tracks. In the 1970s, the rail industry had a near-death experience. When people think of trains, they still conjure memories of the heyday of passenger rail travel where families back east would enter urban cathedrals like Grand Central before they entered trains with names like "The San Francisco Chief" or "The Rocky Mountain Rocket." We all know what happened. Jet travel was faster and cheaper; within a decade, passenger rail was on a one way trip to insolvency. On the freight side, trucks were far more nimble than trains and they were eating into their share. Overregulation of the railroads was onerous. The once-powerful New York Central and Pennsylvania Railroads lost ground, merged together, and failed so spectacularly that it's demise is still taught in business school today. The money-losing passenger rail lines became AMTRAK, the Northeast corridor freight lines became Conrail, a government-owned entity. Companies like Union Pacific, the Atchison, Topeka and Santa Fe Railways, or others who owned smaller fragmented lines were merged together. The rest of the industry limped through the 1970s and 1980s until deregulation helped them rebuild their financials. When you look at the current BNSF rail network, it represents the sum total of countless mergers and consolidations. How did rail rebound? Freight rail began a turnaround in 1980 when the Staggers Act deregulated the industry. Freight rail rates dropped considerably and companies got the breathing room they needed to rebuild and reinvest. Billions were spent to purchase better fuel efficient engines, improve rail lines, and maximize the efficiencies. Since 1980, freight rail's marketshare has risen from roughly 30 percent to 43 percent. More importantly, freight rail had to learn to adapt to a new world of transportation. They had to work with their competitors by participating what's known as "intermodal transportation." When you purchase a wrench sold at Home Depot, but made in China, its travel to the United States is a supply chain ballet. Containers of wrenches and other tools are placed in large containers when they leave from Chinese ports. Then they sail the Pacific and arrives in Los Angeles or the Port of Oakland. When they arrive in America, they are loaded by crane on to specially designed piggyback flatcars that carry twice as much weight than a generation ago. At some point, they are off-loaded on semi-trailer trucks that arrive at distribution centers before they end up in your local store. When rates are compared, rail has become the most efficient way to move product While freight engines look the same as they did in the 1970s, there has been a total transformation under the hood. Smarter trains with flexible fueling allow companies to better hold down fuel costs. Now a generation of hybrid locomotives is starting to come on line and freight rail has become a far more efficient method of getting goods to their final destination. BNSF is exploring natural gas as an alternative for normal propulsion and if that works, they will use a domestic and inexpensive fuel that may further revolutionize the cost equation for freight rail. Today CSX and its competitors can move a ton of freight at roughly 500 mpg/ton. Meanwhile average family sedan, which is roughly two tons, gets an average of 25 mpg or 12 mpg/ton. Now that US domestic energy production is increasing, only trains can get crude oil to market. Coal and other raw materials cannot travel by truck or plane. The tonnage for delivered crushed stone, gravel, sand have also increased year over year. So let's get back to Warren Buffett for a moment. Completing the BNSF acquisition in 2010 as the stock market was slowly finding its way out of the 2008 collapse was classic Buffett. He purchased a critical American brand on the cheap, even though Berkshire paid a premium for their stock. For Buffett, freight trains offer a durable competitive advantage within the delivery chain that planes or truck cannot match because you cannot get lumber to market in a converted DC-10. Now that the complexion of American business is changing in freight rail's favor, Warren Buffett will get the last laugh for a purchase some labeled as foolhardy. Freight rail companies, when run well, will be profitable for the long haul.
Published: Thursday, 7 Mar 2013 | 6:08 AM ET By: Patti Domm CNBC Executive News Editor Justin Sullivan | Getty Images A Burlington Northern Santa Fe train sits idle at the Port of Oakland. Rail company BNSF Railway expects to be moving a million barrels of oil a day in the not too distant future, and it would like to move it with natural gas powered locomotives. The domestic oil and gas drilling boom has made oil more plentiful and gas abundant and cheap. The oil is locked in the mid-Continent, awaiting new pipelines, but it already is moving on trains. Natural gas is now cheap enough to be considered as a fuel for locomotives and other vehicles. (Read More: Buffett to Cramer: 'Real Money' Spent on NatGas Rail Conversions) At the same time, oil shipments by rail have soared, along with the increase in domestic crude production, up about 1 million barrels in the past year. BNSF CEO Matt Rose said the railroad now ships 525,000 barrels a day and expects that to grow to 700,000 barrels by the end of the year. Shipments could reach 1 million barrels in the next 18 months. "Over the last several years, we've been working with our two rail engine suppliers,General Electric and Caterpillar, and we believe they have some real solutions," said Rose, speaking at the IHS CERAWeek conference in Houston.Rose said the company plans to pilot a program for an LNG engine and will work with policy makers and regulators to seek approval over the next year. BNSF was once Burlington Northern and is owned by Berkshire Hathaway. "This would be the largest transformation since from the steam locomotive to the diesel locomotive," he said. If approved, the engines would reduce emissions and provide more competitive rail product versus the highway, he said. Rose said the first oil shipment by train was by EOG was in late 2009, and since then BNSF has seen a surge in oil shipments. Even with new pipelines coming on line, Rose expects the business to do well, since customers like the flexibility and it will be difficult to put pipelines into densely populated areas like the East Coast. "Customers like it for flexibility and reliability. We also know we have to do it in a safe manner," he said. Andrew Lipow of Lipow Oil Associates said about 65 percent of the Bakken oil produced in North Dakota is being shipped by rail currently. BNSF is also shipping 275 million tons of coal this year, able to power 10 percent of the electricity generated in the U.S. Discuss this topic @ Share Investor Forum - Register free Read the full transcript of the October 24 2012 Squawk Box Interview with Warren BuffettDownload the 2010 Berkshire Hathaway Annual ReportDownload the 1977 - 2011 Warren Buffett Letter's to Berkshire Hathaway Shareholders Warren Buffett @ Amazon Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012: A Fortune Magazine Book by Carol J. Loomis Buy new: $16.66 / Used from: $11.95Usually ships in 24 hours Warren Buffett's 3 Favorite Books: A guide to The Intelligent Investor, Security Analysis, and The Wealth of Nations by Preston George Pysh Buy new: $12.99 / Used from: $16.04Usually ships in 24 hours
Over the last half-century, Buffett has built a reputation as a contrarian investor, betting against the crowd to amass a fortune estimated at $54 bn Over the last half-century, Warren E Buffett has built a reputation as a contrarian investor, betting against the crowd to amass a fortune estimated at $54 billion. Buffett underscored that contrarian instinct in his annual letter to shareholders published Friday. In a year when Buffett did not make any large acquisitions, he bought dozens of newspapers, a business others have shunned. His company, Berkshire Hathaway, has bought 28 dailies in the last 15 months."There is no substitute for a local newspaper that is doing its job," he wrote.Those purchases, which cost Buffett a total of $344 million, are relatively minor deals for Berkshire, and just a small part of the giant conglomerate. And Buffett has begun this year with a bang, announcing last month his takeover, along with a Brazilian investment group, of the ketchup maker H.J. Heinz for $23.6 billion.Despite the Heinz acquisition, Buffett bemoaned his inability to do a major deal in 2012."I pursued a couple of elephants, but came up empty-handed," he said, adding that "our luck, however, changed early this year" with the Heinz purchase.Written in accessible prose and largely free of financial jargon, Berkshire's annual letter holds appeal far beyond Wall Street. This year's dispatch contained plenty of Buffett's folksy observations about investing and business that his devotees relish."More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price," Buffett wrote, referring to his longtime partner at Berkshire, Charlie Munger.Buffett also struck a patriotic tone, directly appealing to his fellow chief executives "that opportunities abound in America." He noted that the U.S. gross domestic product, on an inflation-adjusted basis, had more than quadrupled over the last six decades."Throughout that period, every tomorrow has been uncertain" he wrote. "America's destiny, however, has always been clear: ever-increasing abundance."The letter provides more than entertainment value and patriotic stirrings, delivering to Berkshire shareholders an update on the company's vast collection of businesses.With a market capitalization of $250 billion, Berkshire ranks among the largest companies in the United States.Its holdings vary, with big companies like the railroad operator Burlington Northern Santa Fe and the electric utility MidAmerican Energy, and smaller ones like the running-shoe outfit Brooks Sports and the chocolatier See's Candies. All told, Berkshire employs about 288,000 people.The letter, once again, did not answer a question that has vexed Berkshire shareholders and Buffett-ologists: Who will succeed Buffett, who is 82, as chief executive?Last year, he acknowledged that he had chosen a successor, but he did not name the candidate.He has said that upon his death, Berkshire will split his job in three, naming a chief executive, a non-executive chairman and several investment managers of its publicly traded holdings. In 2010, he said that his son, Howard Buffett, would succeed him as non-executive chairman.Berkshire's share price recently traded at a record high, surpassing its pre-financial crisis peak reached in 2007 and rising about 22 percent over the last year.The company reported net income last year of about $14.8 billion, up about 45 percent from 2011. Yet the company's book value, or net worth - Buffett's preferred performance measure - lagged the broader stock market, increasing 14.4 percent, compared with the market's 16 percent return.Buffett lamented that 2012 was only the ninth time in 48 years that Berkshire's book value increase was less than the gain of the Standard & Poor's 500-stock index. But he pointed out that in eight of those nine years, the S&P had a gain of 15 percent or more, suggesting that Berkshire proved to be a most valuable investment during bad market periods."We do better when the wind is in our face," he wrote. Discuss this topic @ Share Investor Forum - Register free Read the full transcript of the October 24 2012 Squawk Box Interview with Warren BuffettDownload the 2010 Berkshire Hathaway Annual ReportDownload the 1977 - 2011 Warren Buffett Letter's to Berkshire Hathaway ShareholdersWarren Buffett @ Amazon Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012: A Fortune Magazine Book by Carol J. LoomisBuy new: $16.66 / Used from: $11.95Usually ships in 24 hoursWarren Buffett's 3 Favorite Books: A guide to The Intelligent Investor, Security Analysis, and The Wealth of Nations by Preston George PyshBuy new: $12.99 / Used from: $16.04Usually ships in 24 hours
Published: Friday, 1 Mar 2013 | 1:34 AM ET By: Brooke Masters, Chief Regulation Correspondent Getty Images There is a cottage industry dedicated to answering the question: "what would Warren do?" Warren Buffett's investment principles, laid out in his annual letter to shareholders of Berkshire Hathaway, have inspired guides, imitators and even children's books. Thousands travel to Omaha, Nebraska each year to hear him elaborate at the conglomerate's annual meeting. When the next dispatch arrives late on Friday, readers will hope to find an explanation of the thinking behind his latest $12 billion-$13 billion investment, the purchase of ketchup maker Heinz with Brazilian buyout group 3G Capital. Yet the letter is likely to answer in only the most general terms the query: "what will Warren do next?" What is clear is that he will make more big investments. Berkshire's contribution to the bid, which values Heinz at $28 billion, will still leave the collection of more than 70 different businesses Mr Buffett has amassed over four decades awash in cash. At last count, the company had a $48 billion cash pile and, as Mr Buffett discussed the Heinz deal, he said he was he was "ready for another elephant, so if you see one walking by just tell me." (Read More: We Want Your Questions for Warren Buffett) Last year he said that he had turned down two $20 billion deals, while a disclosure by the NYSE Euronext indicates that Berkshire at least considered making a bid for the exchange. Yet part of the challenge of trying to predict Mr Buffett's next move is that the way he invests has changed dramatically over time. His reputation was built from the 1960s through to the 1980s on picking very cheap stocks, for instance an $11 million investment in the Washington Post that grew to be worth more than 40 times the initial stake. The "Sage of Omaha" also purchased businesses he liked, often found close to home and run by people he knew, such as National Indemnity, an insurer, in 1969, and Nebraska Furniture Mart in 1983. However, when he paid $700 million for preferred shares in Salomon Brothers just before the stock market crashed in 1987, it was Berkshire's largest ever investment. At the start of the 1990s, he began to declare in his annual letters that he was looking for companies in the $2 billion to $3 billion range, and in 1995 he doubled the size of Berkshire with two small deals – Helzberg Diamonds and RC Willey Home Furnishings – and one big one for the insurer Geico. Mr Buffett paid $2.3bn for the half of Geico that Berkshire did not already own, having spent just $45.7 million to accumulate the first half by 1980. Since then he has signed a steady stream of deals, buying another 27 companies worth more than $1 billion, according to Dealogic. More From The FT: FT: Arrested GLG Analyst is Mining and Metals Head FT: Fitch Warns on US Housing Finance Reform FT: Specialists to Review Report Into HBOS Failure Swallowing companies whole has always been his preference, says Robert Hagstrom, chief strategist for the Legg Mason Investment Council and author of The Warren Buffett Way. "It allows him to do what he thinks is the most important thing, which is to allocate the capital to businesses as he sees fit". So the buying spree has taken in large utility companies, manufacturers, insurers and much more. The unifying themes are simply that Mr Buffett thinks them to be good businesses and, until Heinz, that they have good management already in place. "We don't go into companies with the thought of effecting a lot of change. That doesn't work any better in investments than it does in marriages," said the 1987 letter to investors. Such criteria suggest family controlled businesses will always be in demand, and two of Mr Buffett's largest acquisitions have been controlling stakes in Marmon Holdings – a conglomerate run by the Pritzker family – and Iscar, an Israeli toolmaker. The investor, who helped fund the takeover of Wrigley by Mars, is likely to be one of the first calls should patriarch Forrest Mars Jr ever seek a secure home for his family's confectionery empire. Yet with a $250 billion market capitalization, Mr Buffett's priorities have shifted again in the last decade as Berkshire has grown so large. "What he really looks for is not businesses that throw off cash, its businesses that can absorb cash," says Thomas A Russo of asset managers Gardner Russo & Gardner, a shareholder since 1981. The $39 billion purchase of railroad company Burlington Northern Santa Fe, Berkshire's largest ever, is a prime example. With his power and utility assets Mr Buffett has invested in durable capital intensive businesses that offer a solid return, and potential for expansion. Indeed, it is adding to Berkshire's many existing businesses that appears to have kept Mr Buffett busy, scooping up more than 130 small companies for undisclosed sums since 1995. A long-term observer of Heinz speculated that Mr Buffett could see such potential for the food company, once his new partners at 3G Capital have paid down some of the debt and worked to cut costs: swallowing up another food company in the way that Inbev took over Anheuser-Busch, for instance. Campbell Soup was once considered a possible partner, while Mr Russo points to Reckitt Benckiser, a company increasingly focused on pharmaceuticals which happens to own the French's mustard brand: "It's a huge business, but orphaned there. What could be better than French's mustard teamed with Heinz Ketchup?" Other shareholders are also excited by the combination of 3G and Mr Buffett, even if they cannot predict what lies ahead. Kase Capital's Whitney Tilson says: "I'm trembling with greed at the deals to come." Discuss this topic @ Share Investor Forum - Register free Read the full transcript of the October 24 2012 Squawk Box Interview with Warren BuffettDownload the 2010 Berkshire Hathaway Annual ReportDownload the 1977 - 2011 Warren Buffett Letter's to Berkshire Hathaway Shareholders Warren Buffett @ Amazon Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012: A Fortune Magazine Book by Carol J. Loomis Buy new: $16.66 / Used from: $11.95Usually ships in 24 hours Warren Buffett's 3 Favorite Books: A guide to The Intelligent Investor, Security Analysis, and The Wealth of Nations by Preston George Pysh Buy new: $12.99 / Used from: $16.04Usually ships in 24 hours
JOSH FUNK | February 28, 2013 01:21 PM EST | OMAHA, Neb. — What will life be like without Warren Buffett? Berkshire Hathaway shareholders may have gotten a glimpse into that future. Most of Berkshire's deals last year didn't directly involve the 82-year-old investor. They originated with a subsidiary of the conglomerate, or with one of the two investment managers Buffett has hired. Either way, Berkshire did well in 2012. Buffett's annual letter to shareholders will be released Friday afternoon. Jeff Matthews, who wrote "Warren Buffett's Successor: Who It Is and Why It Matters," says last year's deals are comforting because they show how the company might work after Buffett is gone. "It's very reassuring," Matthews says. "This didn't used to happen." Of course Berkshire's recent $23.3 billion deal to buy part of H.J. Heinz highlights what shareholders will miss most about Buffett: his connections and judgment. Regardless of what kind of deals Berkshire made, Buffett's annual letter is one of the best-read documents in the business world. That's because of his remarkable track record and talent for explaining complicated issues plainly. The future of the conglomerate Buffett built from a failing textile manufacturer is on shareholders' minds because of the billionaire's age. He was also treated for prostate cancer last year. He says the cancer doesn't threaten his life, and he has no plans to retire. Some of Berkshire's biggest deals by dollars last year include: _ A $1.5 billion purchase of mortgage loans from Residential Capital and a $1.2 billion repurchase of Berkshire Hathaway Class A shares. _ A deal to cover up to $4 billion in insurance losses for Cigna Corp. in exchange for a $2.2 billion premium. _ Berkshire's utility division, MidAmerican Energy, agreeing to buy 579 megawatts of solar power for between $2 billion and $2.5 billion. Terms of several other deals weren't disclosed, but analysts say the acquisitions of party supplier Oriental Trading Co. and Prudential's real estate network are unlikely to give a significant boost to Berkshire by themselves. The only deals that likely originated with Buffett are the Berkshire share repurchase, the Oriental Trading acquisition and possibly the Cigna deal. The rest began elsewhere, although Buffett would have signed off on them. "These things are going on all the time with little input from Buffett," says investor Andy Kilpatrick, who wrote "Of Permanent Value: The Story of Warren Buffett." After he's gone, Berkshire plans to split Buffett's job into three roles: CEO, chairman and a head of investment management. The board knows who it would choose to succeed him as CEO. "I don't think we'll get any new details on succession," KBW analyst Meyer Shields says. Buffett seems to like the speculation about who will run the company, so Shields says he probably won't help narrow down the choices. Investors who follow the company say the strongest CEO candidates are Ajit Jain, who runs Berkshire's reinsurance division; Greg Abel, president and CEO of MidAmerican; Tony Nicely, chief executive of Geico; and Matt Rose, CEO of Burlington Northern Santa Fe. Buffett has said that his son Howard, a member of Berkshire's board, would make an ideal chairman. Berkshire has hired two hedge fund managers, Todd Combs and Ted Weschler, who Buffett says are capable of eventually running the company's entire portfolio. They manage portfolios worth about $4 billion while Buffett continues to make most of Berkshire's investment decisions while searching for big acquisitions. For example, the $23.3 billion Heinz deal got started on a plane when Buffett was approached by a billionaire friend. Berkshire is putting up $12 billion for half of the company and $8 billion in preferred shares that pays 9 percent a year. The 3G Capital investment firm will put up the rest of the money and run Heinz. If Berkshire were buying Heinz outright, the deal would be Buffett's second-biggest ever behind the $26.3 billion purchase of BNSF railroad in 2010. But these small deals by Buffett standards do add up – even at a company as big as Berkshire, which has nearly 300,000 employees and generated net income of $10.3 billion, or $6,215 per Class A share, last year. "If you have a dozen subsidiaries add things each year, you'll have a new company in a couple years," says investor and author Kilpatrick. Before Heinz, many shareholders were focused on the deals Buffett didn't get done. He had said a $22 billion deal fell through last year. "It'll be interesting to see if he gives any detail on the ones that got away," the author Matthews says. With the housing market and overall economy slowly improving, Buffett has plenty of reasons to be upbeat about Berkshire's prospects. Ever since the Great Recession, several Berkshire subsidiaries that sell products for houses, such as Shaw Carpet, Acme Brick and Benjamin Moore paints, have weighed on the company's profits. "My guess is that he'll be very optimistic," Matthews says. Besides those companies, Berkshire owns an eclectic mix of more than 80 subsidiaries, including Geico, General Re, BNSF, NetJets, Dairy Queen and others. Berkshire also holds big investments in companies like the Washington Post Co., Wells Fargo & Co., International Business Machines Corp. and American Express Co. Discuss this topic @ Share Investor Forum - Register free Read the full transcript of the October 24 2012 Squawk Box Interview with Warren BuffettDownload the 2010 Berkshire Hathaway Annual ReportDownload the 1977 - 2011 Warren Buffett Letter's to Berkshire Hathaway Shareholders Warren Buffett @ Amazon Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012: A Fortune Magazine Book by Carol J. Loomis Buy new: $16.66 / Used from: $11.95Usually ships in 24 hours Warren Buffett's 3 Favorite Books: A guide to The Intelligent Investor, Security Analysis, and The Wealth of Nations by Preston George Pysh Buy new: $12.99 / Used from: $16.04Usually ships in 24 hours
By Sapna Maheshwari - Feb 22, 2013 10:04 AM GMT+1300 When Warren Buffett fires the starting gun for the inaugural race at Berkshire Hathaway Inc. (BRK/A)’s annual meeting in May, he won’t simply be searching for his fastest manager. The billionaire also will be spotlighting Brooks Sports, the event’s main sponsor and a Berkshire company. While the sneaker maker has been part of Berkshire’s Fruit of the Loom since 2006, it caught Buffett’s attention about 18 months ago at a dinner party with investment manager Todd Combs, according to Brooks Chief Executive Officer Jim Weber. The conversation turned to running and Buffett, Berkshire’s 82-year- old chairman and CEO, was intrigued by excited chatter about Brooks sneakers. Enlarge image The limited-edition Buffett sneaker will be sold at Berkshire Hathaway Inc.'s annual meeting in May. It will cost $120. Source: Brooks Sports via Bloomberg Enlarge image Jim Weber and Warren Buffett. Photographer: Jeff Lonowski Enlarge image The limited-edition Buffett sneaker will be sold at Berkshire Hathaway Inc.'s annual meeting in May. A cartoon of Warren Buffett breaking through a finish line will be on the insole of the limited-edition sneakers, which will cost $120. Source: Brooks Sports via Bloomberg “Apparently, he said, ‘I think they’re doing pretty well,’” Weber said in an interview at Bloomberg News headquarters in New York. “Then January of last year, Warren actually called and said, ‘Hey, we’ve been thinking about reorganizing some things around Fruit of the Loom’s business and it makes sense to me to spin you guys out,’” Weber said. Now Weber reports to Buffett, who added a 5-kilometer (3.1 miles) race to Berkshire’s annual meeting weekend and agreed to put his likeness on a second collection of limited-edition sneakers for the event. While the brand’s sales are a fraction of those at behemoths such as Nike Inc. (NKE) and Adidas AG (ADS), Brooks has doubled revenue in three years and is poised to exceed $500 million in sales this year. The sneaker maker also has scooped market share from Adidas’s Reebok brand and New Balance Athletic Shoe Inc. by targeting avid runners. Consumer Passion The brand meshes with Buffett’s passion for consumer companies. Though it has only been a running company for about a decade, Brooks has a strong niche and history. The company turns 100 next year, about 45 years younger than H.J. Heinz Co., which Berkshire and 3G Capital are acquiring for about $23 billion. Buffett started paying more attention to Brooks after the August 2011 dinner party, where Combs and Geico CEO Tony Nicely’s wife said they ran in the shoes. Buffett has used stock picks and takeovers to build Omaha, Nebraska-based Berkshire into a company valued at about $250 billion, with about 288,000 employees across its holdings. Its Class A shares fell 0.3 percent to $150,500 at the close in New York. The U.S. running-shoe business is a $7.5 billion market, up from $6 billion about 10 years ago, according to Charlotte, North Carolina-based researcher SportsOneSource. Marathons and half-marathons continue to be viewed as beacons of achievement, and growing health awareness has helped elevate the popularity of the easy-access sport. Women Runners At the same time, more women are running, partly because of the U.S. government’s Title IX, which since 1972 has required publicly funded schools to provide equal athletic opportunities for men and women. Buffett didn’t respond to a request for comment sent to an assistant. When Weber became CEO in 2001, he was Brooks’s fourth leader in about two years and the company was “basically bankrupt,” he said. At the time, the company was owned by private-equity firm J.H. Whitney & Co. Weber, who sat on the Brooks board, decided to aggressively focus the Bothell, Washington-based company on building top-flight shoes for avid runners. That meant shedding merchandise such as baseball cleats and basketball shoes, excelling at making technically sound sneakers while dropping less pricey lines and narrowing distribution to mostly specialty running stores. It was all part of an effort to gain clout with people running marathons or half-marathons. Berkshire Family Brooks entered the Berkshire family through a series of transactions. The sneaker maker was purchased by athletic company Russell Corp. for about $115 million at the end of 2004, and, two years later, Russell was in turn purchased by Berkshire’s Fruit of the Loom for nearly $600 million. Brooks sponsors races, including the Rock ’n’ Roll Marathon series, and looks for grassroots publicity from running blogs, avoiding television campaigns even when promoting new products, Weber said. There are about 15 races a year, including the Boston Marathon, in which the company performs what it calls “statistical shoe counts” -- tallies conducted every 10 seconds as runners stream past -- to see how Brooks stacks up with competitors. Last year, Brooks footwear sales increased 45 percent. “To be truthful, it’s the only way to compete with Nike -- they do what they do so well,” Weber said, noting Brooks typically ranks in the top two at such races with Japan’s Asics Corp. (7936)“We do not have to be cool with a 17-year-old high school football player, and all the other brands do.” Chasing Nike Nike, with more than $24 billion in annual sales, dominates U.S. athletic footwear with its namesake brand claiming about 45 percent of market share last year, compared with 1.6 percent at Brooks, said Matt Powell, an analyst for SportsOneSource. Still, Brooks has boosted that from 0.8 percent in 2010, showing “tremendous growth,” helped by its 20 percent share at influential specialty running stores, he said in a telephone interview. The only other brand that may rival Brooks is Under Armour Inc. (UA), though its running-shoe business hasn’t grown as quickly, Powell said. Plus, serious runners tend to become loyal to a shoe they’re logging 1,000 miles in, often sticking with the specific line or the brand overall. “They’re really reaping the benefits today of laying the proper foundation here over the last decade,’” Powell said. “This is a great object lesson for the retail world on how to build a brand and sustain it.” Brooks faces the challenge of expanding distribution while remaining true to its core customer and maintaining share in the specialty stores that tend to sell the sneakers at full price and give the brand credibility. Proceed Cautiously “They have to proceed very thoughtfully and cautiously in order to do that successfully,” Powell said. Brooks’s men’s Ghost 5 sneakers costs $110 online while its women’s Glycerin 10 shoes sell for $140. Both are listed as customer favorites on its website. Brooks, which is also growing in Europe, “easily” has the potential to become a $1.3 billion to $1.4 billion company, as running attracts more athletes worldwide and with the support of Berkshire, Weber said. Berkshire’s annual meeting attracts thousands of investors from around the world and will take place the first weekend in May. Buffett said in a statement last month that the 5K will be “the perfect complement” to products from other Berkshire- backed companies, including See’s Candies and Dairy Queen Dilly Bars. A cartoon of Buffett breaking through a finish line will be on the insole of the limited-edition sneakers and cost $120. Board Presentations In October, Brooks was invited to join a handful of much bigger Berkshire companies, including auto insurer Geico, railroad Burlington Northern Santa Fe and utility MidAmerican Energy Holdings Co., for presentations to the corporation’s board. The brand was first broken out as a standalone company in Berkshire’s 2011 annual report. It helps that Combs and fellow Berkshire investment manager Ted Weschler are both “Brooks guys,” Weber said. “What makes Warren so unique from my perspective is the key metric for him is your brand better be stronger at the end of the year than at the beginning,” he said. “We’ve been on that path at Brooks, so it’s just really powerful for us as a company to have that kind of support.” To contact the reporter on this story: Sapna Maheshwari in New [email protected] When Warren Buffett fires the starting gun for the inaugural race at Berkshire Hathaway Inc. (BRK/A)’s annual meeting in May, he won’t simply be searching for his fastest manager. The billionaire also will be spotlighting Brooks Sports, the event’s main sponsor and a Berkshire company.When Warren Buffett fires the starting gun for the inaugural race at Berkshire Hathaway Inc. (BRK/A)’s annual meeting in May, he won’t simply be searching for his fastest manager. The billionaire also will be spotlighting Brooks Sports, the event’s main sponsor and a Berkshire company.When Warren Buffett fires the starting gun for the inaugural race at Berkshire Hathaway Inc. (BRK/A)’s annual meeting in May, he won’t simply be searching for his fastest manager. The billionaire also will be spotlighting Brooks Sports, the event’s main sponsor and a Berkshire company.QWhen Warren Buffett fires the starting gun for the inaugural race at Berkshire Hathaway Inc. (BRK/A)’s annual meeting in May, he won’t simply be searching for his fastest manager. The billionaire also will be spotlighting Brooks Sports, the event’s main sponsor and a Berkshire company.While the sneaker maker has been part of Berkshire’s Fruit of the Loom since 2006, it caught Buffett’s attention about 18 months ago at a dinner party with investment manager Todd Combs, according to Brooks Chief Executive Officer Jim Weber. The conversation turned to running and Buffett, Berkshire’s 82-year- old chairman and CEO, was intrigued by excited chatter about Brooks sneakers.Discuss this topic @ Share Investor Forum - Register free Read the full transcript of the October 24 2012 Squawk Box Interview with Warren BuffettDownload the 2010 Berkshire Hathaway Annual ReportDownload the 1977 - 2011 Warren Buffett Letter's to Berkshire Hathaway Shareholders Warren Buffett @ Amazon Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012: A Fortune Magazine Book by Carol J. Loomis Buy new: $16.66 / Used from: $11.95Usually ships in 24 hours Warren Buffett's 3 Favorite Books: A guide to The Intelligent Investor, Security Analysis, and The Wealth of Nations by Preston George Pysh Buy new: $12.99 / Used from: $16.04Usually ships in 24 hours
The $23 billion takeover of H.J. Heinz Co. isn’t enough to sate billionaire Warren Buffett. Buffett’s Berkshire Hathaway Inc. has about $15 billion in cash left for deals -- a figure that grows monthly -- after committing $12.1 billion for Heinz. With Buffett saying yesterday his desire for “elephants,” or large acquisitions, remains unsatisfied, the world’s fourth-richest person could set his sights next on targets from Cheerios makerGeneral Mills Inc. (GIS) to hardware supplier W.W. Grainger Inc. (GWW) Buffett has built Berkshire into a holding company with $246 billion in market value through acquisitions of railroads, insurers, newspaper publishers, clothing companies and now ketchup. General Mills, with iconic food brands from Yoplait yogurt to Pillsbury cookie dough, and Grainger, which sells power tools and office equipment, are among 28 U.S. companies between $15 billion and $35 billion in market value that meet the takeover criteria in Berkshire’s annual report, according to data compiled by Bloomberg. Hershey Co. (HSY), the maker of Kisses and Reese’s candies, also makes the cut. “He certainly has the capital to do another deal,” Matt McCormick, who helps oversee $7.5 billion as a money manager at Cincinnati-based Bahl & Gaynor Investment Counsel Inc., said in a telephone interview. “He likes companies in this realm of name-brand products that have economic moats, consistent earnings, strong free cash flow and a reasonable valuation.” Heinz Ketchup Buffett, the 82-year-old chairman and chief executive officer of Berkshire, didn’t respond to an e-mailed request for comment sent to an assistant. Berkshire and 3G Capital, the New York investment firm backed by Brazilian billionaire Jorge Paulo Lemann, will pay $72.50 a share for Heinz, 20 percent more than the stock’s closing level on Feb. 13. In addition to cash from Omaha, Nebraska-based Berkshire, the purchase will be financed with cash from 3G affiliates, plus the rollover of existing debt. The deal is valued at about $28 billion including debt, according to yesterday’s statement. Buffett, in the statement, cited Heinz’s brands, management and “strong, sustainable growth potential.” The Pittsburgh- based maker of Heinz ketchup, Ore-Ida frozen French fries and other foods had sales increases in four of the past five fiscal years and is projected by analysts to post record annual revenue (HNZ) and profit for the period ending in April, according to data compiled by Bloomberg. ‘Right Brand’ “Buffett’s willing to pay a premium for the right brand,” Walter Todd, who oversees about $950 million as chief investment officer of Greenwood Capital Associates LLC in Greenwood, South Carolina, said in a phone interview. “It’s a combination of what he looks at financially and also qualitatively.” Buffett told CNBC yesterday that Berkshire’s cash balance was about $47 billion at the end of 2012, up from $37.3 billion a year earlier. He prefers to keep $20 billion in reserve, leaving about $15 billion following the Heinz transaction, which a filing yesterday shows is costing Berkshire $12.1 billion. “I’m ready for another elephant,” he said during the CNBC interview yesterday. “If you see any walking by, just call me.” “The cash builds from month to month, so the gun is always getting reloaded,” Buffett said. Buffett usually prefers “simple” businesses, “consistent” earning power and “good” returns on equity while employing little or no debt, according to his annual report. Takeover Criteria He has shifted his takeover strategy as Berkshire (A) has grown to focus on “capital intensive businesses.” So-called value investors such as Buffett also purchase companies when their stock prices are low by historical standards compared with earnings. There are 28 U.S. companies with equity values between $15 billion and $35 billion that had capital expenses accounting for at least 10 percent of net fixed assets; generated an average increase in return on invested capital in the past five years that ranked in the top 50 percent; sold for a lower price- earnings ratio than the average stock in the U.S.; and had a return on equity last year exceeding 10 percent, data compiled by Bloomberg show. General Mills would be a fitting takeover for Buffett after the Heinz purchase because both companies have recognizable brands and sell their products in many of the same stores, said Jeff Matthews, a Berkshire shareholder and Naples, Florida-based author of “Warren Buffett’s Successor: Who It Is and Why It Matters.” General Mills “General Mills makes a lot of sense,” Matthews said in a phone interview. “It’s another kind of sleepy, Heinz-type business that has a lot of potential. The distribution channels really overlap.” The company increased its return on invested capital (GIS) -- a measure of how profitably a company uses its debt and equity -- by an average of 6.2 percent over the past five years, data compiled by Bloomberg show. General Mills also generates more free cash flow relative to its stock price than 94 percent of the world’s largest food manufacturers, the data show. It has a market value of almost $29 billion and net debt of about $7.6 billion. General Mills would rival the takeover of Burlington Northern Santa Fe Corp. as Berkshire’s biggest deal. Kirstie Foster, a spokeswoman for Minneapolis-based General Mills, said the company doesn’t comment on speculation. Hershey Chocolate Hershey, the $17.8 billion chocolate company founded in 1894, generated a return on invested capital of 28.6 percent in 2012, higher than all but about 5 percent of stocks in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. CEO John P. Bilbrey plans to boost annual sales to $10 billion by 2017, from $6.6 billion (HSY) last year, and surpass Mars Inc. to become North America’s biggest confectionary maker. Berkshire already owns a candy maker, See’s Candies, and helped finance the purchase of Wm. Wrigley Jr. Co. by Mars in 2008. Last year, Buffett praised the business model of turning commodity ingredients into premium-priced products. “‘Buy commodities, sell brands’ has long been a formula for business success,” he wrote in his annual letter to shareholders last year. “It has produced enormous and sustained profits for Coca-Cola since 1886 and Wrigley since 1891.” Controlling Trust The Hershey, Pennsylvania-based company is controlled by a trust that benefits the Milton Hershey School, which has a majority of the voting rights. After Hershey terminated a sale process in 2002, Pennsylvania passed a law allowing the state’s attorney general to block a sale if it’s “unnecessary for the future economic viability of the company,” according to Hershey’s annual report. Jeff Beckman, a spokesman for Hershey, said the company doesn’t comment on speculation. Consumer packaged-goods companies are appealing because they can weather a weak economy, said Barry James, who helps oversee $3.5 billion as president of James Investment Research in Xenia, Ohio. “They’re not going to be as dependent on rapid economic growth to sustain them,” said James, whose Golden Rainbow Fund (GLRBX) beaten 94 percent of rival funds in the last five years. Consumer stocks including Campbell Soup Co., General Mills and J.M. Smucker Co. advanced yesterday after the Heinz deal was announced. Today, General Mills rose another 0.6 percent to $44.59, its highest closing price since at least 1980, while Hershey rose 4 cents to $80.93. Grainger’s Hardware Buffett’s investment in Heinz won’t spark a stampede for deals in the industry, said James Neely, a Cleveland-based partner at consulting firm Booz & Co. who advises consumer products companies on mergers. “The next deal that he does is just as likely to be in a very different sector,” he said in a phone interview. Grainger, the seller of hardware, office supplies and related equipment that posted record revenue (GWW)and net income last year, is another potential target. The $15.7 billion company earned about 13 cents in operating profit for every dollar of sales in the latest 12 months, more than triple the median 3.9 percent margin among industrial supply distributors, according to data compiled by Bloomberg. “Grainger would fit his criteria,” Michael Mullaney, chief investment officer at Boston-based Fiduciary Trust Co., which manages $9.5 billion, said in a phone interview. It’s “easy to understand what they do. Grainger is a very good service-oriented company. It’s well-run.” Joseph Micucci, a spokesman for Lake Forest, Illinois-based Grainger, declined to comment. Today, Grainger rose 1.4 percent to $229.48, the shares’ highest closing level since at least 1980. It was the second- biggest gainer among stocks in the S&P 500 Industrials Index. Berkshire already owns Campbell Hausfeld, a maker of home improvement products such as paint sprayers, and Iscar Metalworking Cos., which makes metal cutting tools. “I’m sure he’ll pull off something else down the road,” Matthews said. “He’s generating about $1 billion of cash a month. He’s looking for something that’s going to be a good bet in the long run. You have to be prepared for anything from Warren Buffett.” To contact the reporters on this story: Tara Lachapelle in New York at [email protected] To contact the editor responsible for this story: Sarah Rabil at [email protected] Discuss this topic @ Share Investor Forum - Register free Read the full transcript of the October 24 2012 Squawk Box Interview with Warren BuffettDownload the 2010 Berkshire Hathaway Annual ReportDownload the 1977 - 2011 Warren Buffett Letter's to Berkshire Hathaway ShareholdersWarren Buffett @ Amazon Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012: A Fortune Magazine Book by Carol J. LoomisBuy new: $16.66 / Used from: $11.95Usually ships in 24 hoursWarren Buffett's 3 Favorite Books: A guide to The Intelligent Investor, Security Analysis, and The Wealth of Nations by Preston George PyshBuy new: $12.99 / Used from: $16.04Usually ships in 24 hours
As Warren Buffett's investment firm, along with 3G Capital, swallows Heinz in a $28bn deal, Telegraph Finance takes a look at some of the Sage of Omaha's biggest deals. Warren Buffett, known as The Sage of Omaha for his investing prowess. Photo: REUTERS Buffett's move to buy Heinz, along with 3G Capital, in a $28bn pact, ranks among his largest deals. The billionaire's investment vehicle is putting up between $12bn and $13bn in cash as part of the purchase, according to US news channel CNBC. "It's my kind of deal and it's my kind of partner," Mr Buffett told CNBC, adding that Berkshire and 3G would be equal equity partners. He noted that the company's signature ketchup had been around for more than a century, saying: "I've sampled it many times." Burlington Northern Santa Fe Just over three years ago, Buffett placed the largest single wager of his investing career, gambling on "the economic future of the United States" by taking control of the American rail giant Burlington Northern Santa Fe in a $44bn deal. Burlington is America's largest railway by revenue, operating freight across large swathes of the west and mid-west. Its tracks are also used by a variety of passenger services. "It's an all-in wager on the economic future of the United States," said Mr Buffett at the time. "I love these bets." General Re Related Articles Buffett buys Heinz in $28bn deal 14 Feb 2013 Buffett's £18bn Heinz deal is industry's biggest 15 Feb 2013 Warren Buffett 'tried to buy NYSE Euronext' 28 Jan 2013 Women will save the US economy, says billionaire Warren Buffett 28 Dec 2012 Should investors bet against Buffett? 19 Jan 2013 Buffett to build world's largest solar project 02 Jan 2013 Buffett made a $16bn move for the "insurer's insurer" in 1998. General Re was the largest reinsurance company in America and earned $1bn a year in revenues in the years before Buffett's purchase. Buffett argued that the investment was benefical because of the synergies it could generate. Bank of America Two and a half years ago, Buffett invested $5bn in Bank of Americain a show of support similar to the help it gave Goldman Sachs during the financial crisis. At the time, Bank of America shares had lost around a third of their value due to worries over its financial health. Buffett's bet on Bank of America earned him a paper profit of $280m in just 24 hours. Goldman Sachs During the financial crisis, Buffett invested $5bn in Goldman Sachs. The billionaire investor later admitted that this investment was a bet the US would use debt to prop up the economy. “It was a bet essentially on the fact that the government would not really shirk its responsibility at a time like that to leverage up at a time when the rest of the world was trying to deleverage,” the investor said. Lubrizol Making good a pledge that he was on the hunt for big acquisitions, back in March 2011 Buffett aggred to pay $9bn for US chemicals maker Lubrizol. Lubrizol, which is based in Ohio, has factories in almost 20 countries. The company expanded into Britain in the 1930s in its first venture outside the US. Buffett said at the time: "Lubrizol is exactly the sort of company with which we love to partner." The one that got away? Reports last month suggested that Buffett made a bid to acquire New York Stock Exchange operator NYSE Euronext last November, but his offer was less than one already on the table from IntercontinentalExchange. Two sources told CNBC that Buffett's conglomerate Berkshire Hathaway was the "Company A" bidder disclosed in a regulatory filing by IntercontinentalExchange. The latter agreed to buy NYSE Euronext in late December for $8.2bn following about two months of talks. Discuss this topic @ Share Investor Forum - Register free Read the full transcript of the October 24 2012 Squawk Box Interview with Warren BuffettDownload the 2010 Berkshire Hathaway Annual ReportDownload the 1977 - 2011 Warren Buffett Letter's to Berkshire Hathaway Shareholders Warren Buffett @ Amazon Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012: A Fortune Magazine Book by Carol J. Loomis Buy new: $16.66 / Used from: $11.95Usually ships in 24 hours Warren Buffett's 3 Favorite Books: A guide to The Intelligent Investor, Security Analysis, and The Wealth of Nations by Preston George Pysh Buy new: $12.99 / Used from: $16.04Usually ships in 24 hours ,
Tyler Crowe | February 4, 2013 Phillips 66's (NYSE: PSX ) recent earnings release was another example of the fantastic run that oil refining and marketing companies have had these past several quarters. Looking past the numbers, though, there was one issue that the company sees as a potential weakness. For a solution, it looks to be turning to a new friend: Warren Buffett. Hop on the oil train Despite the large boom in U.S. oil production, a few parts of Phillips 66's refining operations have what may be considered a feedstock problem. Much of Phillips 66' byway facility in New Jersey has been cracking Brent crude, which is selling at a premium to almost every domestic crude supply. With WTI and Bakken crude spot prices at almost a $20 discount to Brent, these East Coast refiners could seriously improve their margins by moving to domestic feedstocks. The same could be said for West oast refineries as well, because Alaskan North Slope crudes are selling at prices very close to Brent. One of the best feedstock candidates for these facilities is from the Bakken. Not only is the crude cheap in comparison with imports, but it's also a high-quality crude and doesn't have strong local refinery capacity. There is one small problem with Bakken feedtsocks, though: The infrastructure from the region to the East and West Coast is relatively weak. Refiners, midstream, and E&P companies have settled on rail for emerging oil plays for the time being, because the speed to bring rail operations online using existing lines is much faster than building new pipeline networks. The two following images highlight how rail infrastructure is much more robust than pipeline networks in emerging oil regions such as North Dakota. US Class I Rail Infrastructure (Source: US Department of Transportation.) North American Interstate Oil Pipelines (Source: Canadian Association of Petroleum Producers.) To take advantage of this, both Phillips 66 and Valero (NYSE: VLO ) announced in their recent conference calls that they plan to purchase 2,000 and 1,000 rail cars, respectively. While much of Phillips 66's rail efforts will focus on moving Bakken crude, Valero plans to use rail to also move oil sands away from Alberta. So where does Warren Buffett fit into this picture? The largest holder and operator of rail lines in the North Dakota region is Burlington Northern Santa Fe, which is a wholly owned subsidiary of Buffett's Berkshire Hathaway (NYSE: BRK-B ) . If any of these companies hopes to run rail cars in the region, they will need to use Burlington Northern's rail lines to make it happen. According to Berkshire's most recent quarterly earnings report, the largest revenue growth for the railroad company has come from increased petroleum shipments. As long as pipeline capacity remains weak in the region, Burlington Northern will see strong growth from petroleum transport. Rail deliveries aren't the perfect solution, though. Based on Tesoro's (NYSE: TSO ) estimates, it takes about $8 to $9 dollars per barrel to move Bakken crude to its refineries on the West Coast. That's almost double what it takes to transport a barrel of crude via pipeline. It also requires these companies to either construct or expand their rail terminal facilities. Since rail is the only economically viable option right now, though, both refiners and E&P companies will be more than willing to pay the higher price. What a Fool believes Despite the higher costs associated with moving crude via rail, it certainly makes economic sense while spot differentials remain so high and pipeline networks have yet to catch up with production volumes. For the time being, East and West coast refiners such as Phillips 66, Tesoro, and Valero will all use rail as much as possible. While this will be a small gain for these refiners, Burlington Northern could be an even bigger winner. An uptick in rail deliveries could be a strong revenue boost for the company. This advantage might be rather short-lived, though. Enbridge (NYSE: ENB ) has plans to bring a 125,000 barrel-per-day pipeline online that will connect the Bakken with its existing network in the U.S. and Canada. Enbridge anticipates the pipeline to come online sometime in early 2013. Current production in the Bakken is about 500,000 barrels per day and is growing, so there is still a lot of takeaway capacity needed for the region. But it shouldn't be surprising if we see other midstream pipeline projects coming up. Even though Burlington Northern is one of the largest rail companies in the United States, it's only one part of Berkshire's massive holdings. The entire Berkshire universe is complex and can be difficult to navigate. To help investors, the Fool's resident Berkshire Hathaway expert, Joe Magyer, has created this premium research report on the company. Inside you'll receive ongoing updates as key news hits, as well as reasons to both buy and sell the stock. Claim a copy by clicking here now. Discuss this topic @ Share Investor Forum - Register free Read the full transcript of the October 24 2012 Squawk Box Interview with Warren BuffettDownload the 2010 Berkshire Hathaway Annual ReportDownload the 1977 - 2011 Warren Buffett Letter's to Berkshire Hathaway ShareholdersWarren Buffett @ Amazon The Essays of Warren Buffett: Lessons for Corporate America, Second Edition by Warren E. Buffett Buy new: $24.32 / Used from: $17.64Usually ships in 24 hoursThe Snowball: Warren Buffett and the Business of Life by Alice Schroeder Buy new: $13.60 / Used from: $4.50Usually ships in 24 hourS
By Josh Funk on August 31, 2012 OMAHA, Neb. (AP) — Warren Buffett's birthday this week was good news for Berkshire Hathaway investors who could celebrate another year of the Oracle of Omaha's leadership. But the milestone also reminded shareholders they need to think about who will run the evolving company after Buffett is gone. The more than 80 businesses that Buffett has assembled at Berkshire are mostly humming along well, posting a profit of more than $3 billion in the most-recent quarter. Its Class A stock closed at $127,183 on Thursday — less than $3 away from its 52-week high set in early August. So there's plenty for shareholders to celebrate. But Buffett's advancing age — he turned 82 on Thursday — coupled with his radiation treatment for prostate cancer this summer, keeps his mortality on the minds of many Berkshire investors. Buffett has said the cancer isn't life-threatening, and he is feeling good. Buffett has outlined Berkshire's succession plan and reassured investors that his board has chosen a successor and two backup candidates, although he won't say who the company's next CEO will be. Buffett is both chairman and CEO. Buffett has no plans to step down, saying he enjoys the dealmaking too much, even though he hasn't landed a sizeable acquisition since buying chemical maker Lubrizol for $9 billion last year. Whoever takes over Berkshire after Buffett will inherit a sprawling conglomerate that is evolving with each new acquisition. The Omaha-based company now relies less on the insurance companies and investments it has long been known for and more on its railroad, utility and manufacturing companies. "The insurance is increasingly more of an engine that runs in the background instead of the driver of the business," said Jeff Matthews, an investor who wrote "Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett." Buffett did not respond to an interview request for this story. Berkshire Hathaway Inc.'s second-quarter earnings report earlier this month showed that easily more than half of the company's profits come from mostly mundane companies like its electric utility MidAmerican Energy, Lubrizol, BNSF railroad, manufacturing and tool companies. The trend has been strengthening ever since Buffett's firm acquired the Burlington Northern Santa Fe railroad in 2010, but it's even more apparent now that Lubrizol has been part of Berkshire for nearly a year. "Even in the best of operating environments, the insurance side of the business will never out-earn the non-insurance side ever again," said David Rolfe, chief investment officer at Wedgewood Partners, which counts Berkshire as its second-biggest investment. The shift in the mix of Berkshire's businesses could make the company more attractive to investors who found the world of insurance and reinsurance complicated. But analysts say the nature of the company isn't likely to change much, even though Berkshire's profits may be coming from different places. "He's got diversity," said stockbroker-author Andy Kilpatrick. "Rather than just a stock company or an insurance company, it's an operating company." Kilpatrick says he doesn't really think the nature of the company has changed because Berkshire just tacks acquisitions on to the existing structure with little attempt to integrate them. "It's not a simple company. It's a complicated company, but it's a successful company," said Kilpatrick, who wrote "Of Permanent Value: The Story of Warren Buffett." Berkshire's insurance and reinsurance companies such as Geico had long driven the company's profits. And they generate $71.1 billion in "float" that Berkshire is able to invest between the time when customers buy policies and when claims are filed. Regardless of how big Berkshire's insurance companies are, they will remain important to the company because of the risk involved with some of the big policies written by the company's reinsurance division. For example, in one 2006 deal Berkshire agreed to cover up to $13.9 billion in potential asbestos claims in exchange for $7.12 billion. And the derivative contracts Buffett wrote insuring the level of certain stock market indexes could create multibillion-dollar losses if they weren't priced right, although Buffett has said he believes those deals will prove profitable. Matthews said insurance is clearly still the riskiest part of Berkshire's business, so Buffett, and whoever follows him, must understand it. "If you do a bad job at the railroad, your earnings might get hurt, but the railroad is not going away. If you do a bad job in insurance, your whole company can go away," Matthews said. Berkshire plans to split Buffett's job into three parts once he is gone. The next CEO will run Berkshire, but two other men hired by Buffett in recent years will oversee investment. Buffett wants his eldest son to succeed him as chairman. As a result of the shift in Berkshire's business mix, the company's earnings should become less volatile over time, and it will increasingly be driven by the results of its operating companies, like Iscar tools and Acme brick. But who knows how the mix of companies might change if Buffett finds a way to use the roughly $41 billion cash Berkshire has on hand for another big acquisition. "At any moment, he could buy some other insurance thing and that could look big again," Kilpatrick said. Besides insurance and manufacturing, Berkshire's subsidiaries include clothing, furniture, ice cream, private jet and jewelry companies. It also has major investments in such companies as Coca-Cola Co., IBM and Wells Fargo & Co. Discuss this topic @ Share Investor Forum - Register freeRead the full transcript of the March 2 Squawk Box Interview with Warren Buffett Download the 2010 Berkshire Hathaway Annual Report Download the 1977 - 2010 Warren Buffett Letter's to Berkshire Hathaway Shareholders Warren Buffett @ Amazon The Essays of Warren Buffett: Lessons for Corporate America, Second Edition by Warren E. Buffett Buy new: $24.32 / Used from: $17.64 Usually ships in 24 hours The Snowball: Warren Buffett and the Business of Life by Alice Schroeder Buy new: $13.60 / Used from: $4.50 Usually ships in 24 hours
Warren Buffett's Burlington Northern Santa Fe railroad and Union Pacific are combating a drop in coal cargoes by catering to the needs of frackers.