Investment analysts currently have Warren Buffett and Berkshire Hathaway under fire because of the quality of the financial disclosures coming from the $370 billion company.
Even though Berkshire Hathaway is now the third-largest company on the stock market in the United States, the quarterly filings reveal lesser details than companies of the same size, according to information from analysts, who all urged Warren Buffett to think about expanding disclosures, and in particular about the large insurance businesses of Berkshire Hathaway.
Warren Buffett has rejected the criticism and even told the Financial Times that Berkshire Hathaway communicates “all the relevant factors for a long-term investment in the shares.”
The Financial Times interviewed five of the six analysts of Berkshire Hathaway, and all noted a difficulty with modeling the financial results of the company. One of the analyst said that Berkshire “could stand to reveal more” and others described the level of company disclosure as “poor”, “terrible” and “limited.”
The Berkshire Hathaway businesses span newspapers, real estate, railways, insurance, utilities and manufacturing as well as many other industry subsidiaries. Eight of the companies – if split off from Berkshire Hathaway – would be Fortune 500 companies in their own right.
Berkshire Hathaway Energy and railroad Burlington Northern Santa Fe each publish their own quarterly earnings reports. Analysts say that other divisions of the company provide much less detail than other competitors in the same industry. As Berkshire Hathaway has grown, it stopped splitting out certain businesses of which it used to report individual earnings, and as an example consider Shaw Industries.
“I am not begging for a 10 times increase in the size of the 10-Q [regulatory filing], but disclosure is somewhat limited,” said Nomura’s Cliff Gallant. “For example, in General Re, one of the world’s largest reinsurers, what is growing and what is not? What is it exposed to and what is it not?”
Edward Jones’ Jim Shanahan described the Berkshire Hathaway disclosure as “terrible… It is laughable that you could model this company in the same way as you could any other financial company.”
Berkshire Hathaway has never sought out analyst coverage – they only have six analysts covering them compared to more than 20 for General Electric, as an example – and Warren Buffett said that since he started investing in shares at the age of 11, he never purchased anything due to an analyst recommendation.
“We don’t want anyone buying Berkshire on the basis of an analyst report. We don’t want anyone who has earnings expectations for the next quarter,” said Buffett.
The favorite method of communication for Warren Buffett is his annual letters to shareholders. The next one is due for publication on February 28.
“I have just written 20,000 words in an attempt to make sure our million shareholders are as well informed as possible and have the information I would want if I were in their position,” said Buffett.
Vice Chairman of Berkshire Hathaway, Charlie Munger, and Warren Buffett will also answer six hours’ worth of questions from journalists, shareholders and three analysts at the annual meeting in May, just like they do every year.
The goal of this Q&A session is the make sure that all shareholders have the same level of information all at the same time, according to Warren Buffett, rather than providing institutional investors and large analysts with greater access to info.
“As an insurance analyst, the level of investor engagement is more frequent and with greater depth at the companies I cover,” said Jay Gelb of Barclays. He has been a member of the analyst panel in previous years at the annual meeting.
“There is no earnings call, no investor relations department at Berkshire. The only time we get significant access to management is at the annual meeting and when Warren is on the business cable channels.”
Some of the largest investment banks have chosen to not assign analysts to cover Berkshire because shares trade relatively infrequently and the shares are a high price. When compared to other companies, institutional investor interest is much lower.
Berkshire does not have nearly as much need for investment bank advice on fundraising and deal making as well.