Nota del 17 de octubre de 2012
No economic moat lasts forever. In the case of Berkshire Hathaway BRK.ABRK.B, we've historically awarded the firm a wide moat rating based on the moat characteristics inherent in its collection of businesses, as well as the company's record of consistently investing the cash provided by its operating subsidiaries in projects that have on average earned more than its cost of capital. That said, we think the sheer size of Berkshire's operations, the nature of some of its more recent acquisitions (of more debt-heavy, capital-intensive businesses), and the ultimate longevity of Warren Buffett and Charlie Munger, who have been integral to the company's success, will all play a role in determining how long Berkshire will continue to generate outsize returns. While we believe the firm still has sufficient competitive advantages to garner a wide moat, we think the trend of its economic moat, which is tied not only to the size and evolving nature of the firm's portfolio, but to the longevity of Berkshire's main capital allocators, has shifted.
While acquisitions and shrewd capital allocation have more than doubled the firm's book value per share over the past 10 years, we think it will be difficult for Berkshire to replicate that kind of performance longer term, even with Buffett at the helm. That's not to say that Berkshire can't continue to put money to work in value-creating projects, it's just that the huge sums of capital that the firm now manages will ultimately limit its ability to generate outsize returns. Furthermore, we think the nature of Berkshire's major investments over the past decade, which have included moves into capital-intensive businesses like railroads and utilities, will also serve to limit overall returns, even as these investments generate value for the firm. Much of this is due to the fact that the returns for some of these businesses are affected not only by the capital-intensive nature of their operations, but in the case of MidAmerican Energy Holdings Company by the regulators who set and monitor the rates and returns for the utilities. We're inclined to believe that future investments will skew toward similar types of capital-intensive businesses, if only because this would help to reduce the number capital allocation decisions that will need to be made in future periods (by individuals other than Warren Buffett in a post-Buffett world).
We also believe the mix shift that has taken place in Berkshire's portfolio over the past decade has effectively raised its cost of capital. The firm's foray into debt-heavy, capital-intensive businesses like Burlington Northern Santa Fe and MEHC has been a marked departure from its traditional practice of running its operating companies and making ongoing investments without relying too much on debt. While parent company debt at Berkshire remains relatively low, at around $8 billion at the end of last year, the firm reported consolidated debt in excess of $60 billion, more than half of which was coming from BNSF and MEHC. While there is bound to be some discount given to these firms as a result of Berkshire being the ultimate backstop for their operations (even though their debt is not explicitly guaranteed by the insurer), much of their cost of debt is tied to their operations (as well as their assets, which are often times pledged to secure their debt). As such, Berkshire's cost of funding these operations tends to be much higher than it would be if the firm financed these businesses directly with the low- to no-cost capital provided by its insurance operations.
It should also be noted that Berkshire's insurance float, which is the cash holdings that arise from premiums being collected well in advance of future claims and continues to be a major source of funding for Berkshire's ongoing investments, is unlikely to grow from its current levels. With much of the growth in the firm's float over the past decade having come from retroactive insurance, as Berkshire Hathaway Reinsurance Group has struck deals to take on responsibility for events that have already occurred, there is a limit to how much growth is really left out there for Berkshire to tap. With the firm potentially hitting a ceiling on the amount of low- to no-cost capital that it can generate longer term and its overall cost of borrowing being influenced more and more by the debt-heavy, capital-intensive businesses that it has been acquiring, we expect its adjusted cost of capital to continue moving upward, all while its returns are trending downward as a result of its size and capital allocation decisions.
With Buffett recently celebrating his 82nd birthday (and Munger getting closer and closer to 90), the biggest unknown for investors (aside from the timing of any change in leadership at the firm) is whether Berkshire will be able to replace the significant competitive advantages that have come from having a capital allocator of Buffett's caliber, with the knowledge and connections he has acquired over the years, at the helm once he is no longer running the show. Although we'd like to believe that Buffett's successors will be able to extract the same advantages from Berkshire's operations that he has over the years, very few people could negotiate the kind of deals that Buffett has done through the years (which, more often than not, were driven by a need to procure the "Warren Buffett seal of approval" and not solely because Berkshire had extremely deep pockets at a difficult time).
We also believe that those responsible for allocating capital after Buffett departs will have their returns constrained not only by the size of the firm's operations, but by the investment decisions that were made long before they took the helm. At this point, we think Buffett has already laid claim to some of the firm's future cash flows by buying up capital-intensive businesses like BNSF and MEHC, which are expected to require a significant amount of reinvestment over the next 10-20 years. We also expect him to continue to pursue these types of businesses, which means that investors should expect a lower return from Berkshire in the future than they have seen in the past, a problem that will only grow in magnitude as the company becomes larger. Additionally, we believe the chorus of shareholders that have been calling for a dividend the past several years will only increase once Buffett is gone, further constraining the amount of capital the next CEO has to work with longer term.