Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Will Coronavirus destroy Berkshire Hathaway?

Mr. Market and a small army of stock pundits think coronavirus could destroy Berkshire Hathaway (NYSE: BRK.B).

For instance Berkshire Hathaway Class B shares began 2020 at $228.39 on 2 January but fell to $179.72 on 19 June 2020 to $179.03 on 25 June 2020.. Meanwhile critics such as Marketrealist’s Mohit Oberoi, note the S&P 500 has outperformed Berkshire Hathaway since 2020.

However, the SDPR S&P 500 ETF Trust (NYSE: SPY) went from $324.87 on 2 January 2020 to $308.24 on 19 June 2020 to $307.06 on 25 June 2020. Thus the S&P’s share value is a little better than Berkshire Hathaway.

Berkshire Hathaway loses Money

Berkshire Hathaway reported a -$61.476 billion quarterly operating loss on 31 March 2020. In contrast, Berkshire Hathaway reported a $33.566 billion operating income for the quarter ending on 31 December 2019.

Moreover, Berkshire Hathaway reported a -$49.746 billion quarterly common net loss on 31 March 2020. Berkshire reported a $29.159 billion quarterly common net loss on New Year’s Eve 2019.

Thus, Berkshire Hathaway is losing money. Conversely, Berkshire Hathaway reported quarterly revenues of $61.265 billion and a gross profit of $49.979 billion on 31 March 2020.

Hence, Berkshire Hathaway generates enormous revenues and impressive gross profits but loses money. Therefore, Berkshire Hathaway can still make tremendous amounts of money.

How Much Cash is Berkshire Hathaway Generating?

Importantly, Berkshire Hathaway is still generating enormous amounts of cash.

For example, Berkshire Hathaway reported a quarterly operating cash flow of $6.798 billion on 31 March 2020. Conversely, Berkshire Hathaway reported a $12.077 billion quarterly operating cash flow on 31 December 2019.

Impressively, Berkshire Hathaway (NYSE: BRK.B) reported a quarterly ending cash flow of $43.096 billion on 31 March 2020. Notably, Berkshire Hathaway’s quarterly ending cash flow rose from -$10.659 billion on 31 December 2019.

Finally, Berkshire Hathaway had $42.64 billion in cash and short-term investments on 31 March 2020. The cash and short-term investments were down from $64.175 billion on 31 December 2020.

Berkshire Hathaway Still has Enormous Value

On paper, I think Berkshire Hathaway still has enormous amounts of value. For example, Berkshire had current assets valued at $98.257 billion on 31 March 2020. Additionally, Berkshire Hathaway had $760.448 billion in current assets on 31 March 2020.

However, Stockrow estimates Berkshire’s revenues grew at a rate of 0.97% in the first three months of 2020. On the other hand, I think a 0.97% growth rate is not bad in a pandemic that killed 122,139 people as of 21 March 2020.

Berkshire Hathaway (NYSE: BRK.A) still has an enormous amount of value, however it grows at a glacial place. Therefore, Berkshire Hathaway is a company with a gigantic margin of safety with little growth.

Does Berkshire Hathaway violate Warren Buffett’s value investing criteria?

“Growth and value investing are joined at the hip.” – Warren Buffett

However, Warren Buffett believes growth is a key component of the margin of safety. Hence, you can argue that Berkshire Hathaway itself now violates some of Uncle Warren’s criteria for an excellent value investment.

Under Buffett’s criteria, Berkshire is not a value investment because of its slow growth rate. Fortunately, Berkshire Hathaway has the resources to fix that flaw fast.

To explain, Berkshire Hathaway had $42.64 billion in cash and short-term investments on 31 March 2020. Thus, Berkshire has the money to buy or invest in fast-growing companies.

What will Berkshire Hathaway Buy?

For instance, Berkshire Hathaway could buy Uber (NYSE: UBER) or GrubHub (NYSE: GRUB).

I think Berkshire Hathaway needs to buy a fast-growing and potentially cash-rich tech company such as Uber or Grubhub. Uber, Instacart, or Grubhub could be a suitable fit for Berkshire because Uber and Grubhub are infrastructure companies and Berkshire invests in infrastructure. To elaborate, Uber provides rideshare infrastructure and GrubHub and Instacart offer delivery infrastructure.

Additionally, buying Uber could give Berkshire Hathaway access to that company’s autonomous vehicle technology. Uber’s Advanced Technology Group is developing operating systems and infrastructure for autonomous vehicles, including V2VNet. The V2VNet allows autonomous vehicles to share data, Venturebeat reports.

Should Berkshire Hathaway buy Hertz?

Another infrastructure company Berkshire Hathaway could buy is Hertz Global Holdings Inc. (NYSE: HTZ). The rental car company is bankrupt and a “pandemic zombie,” Vanity Fair’s William D. Cohan observes.

Ultimately, the Pandemic will end and the market for Hertz’s product rental cars will return. Meanwhile, Hertz claims to operate 10,200 franchise rental car locations. Hertz also owns Donlen, Thrifty Car Rental, and Dollar Rent-a-Car.

Currently, Hertz is cheap Mr. Market paid $1.68 for Hertz (NYSE: HTZ) shares on 25 June 2020. Yet I think Hertz has enormous potential value.

For instance, Hertz could support ridesharing services such as Uber or Lyft (NASDAQ: LYFT) by providing vehicles or maintenance. Additionally, Hertz could support self-driving vehicles such as those operated by Waymo. For instance, Hertz could provide vans for delivery services such as Instacart or Amazon (NASDAQ: AMZN).

I think Hertz could be a suitable fit for Berkshire Hathaway because it owns auto dealers through Berkshire Hathaway Automotive. I think car rental is the next logical step after selling cars.

Notably, many observers think vehicle rental, ridesharing, and car-sharing could replace car ownership soon. Hertz could give Berkshire Hathaway the infrastructure to cash in that paradigm shift. Autonomous vehicles will push the transformation by making rental cars that drive to customers’ locations possible.

Berkshire Hathaway is still a Good Investment

I think Berkshire Hathaway is still a wonderful investment because it has enormous amounts of cash and a leadership dedicated to growth and acquisition.

In particular, Berkshire Hathaway is dedicated to diversification. Currently, Berkshire Hathaway’s holdings range from the Acme Brick Company to International Dairy Queen to Borsheims Fine Jewelry.

In addition, Berkshire has the resources to make giant acquisitions such as Hertz or Uber if the stock market collapses. Hence, Berkshire Hathaway could grow as the rest of the market shrinks.

In the final analysis, I consider Berkshire Hathaway (NYSE: BRK.B) an outstanding stock because it has enormous amounts of cash and a high margin of safety. Thus, I advise investors seeking a safe stock with growth potential to investigate BRK.B.