Berkshire Hathaway’s Annual Meeting: Roundtable Discussion On Buffett, Munger And The Big Gathering In Omaha

Get ready for this year’s “Woodstock for Capitalists.”

Berkshire Hathaway’s (NYSE:BRK.A) (NYSE:BRK.B) Annual Shareholders Meeting takes place in Omaha on Saturday. The event always draws a big crowd, along with interest from investors across the globe, given the much-anticipated presentations from Chairman Warren Buffett and Vice Chair Charlie Munger. This year could be especially notable with the ongoing market volatility, persistent inflation, and talk of a recession. What will the Oracle of Omaha have to say, along with his second in command?

Even more importantly – everyone will be watching Greg Abel, current chairman of Berkshire Hathaway Energy, and his expected ascension to the top, taking over leadership duties from Buffett and Munger.

Seeking Alpha reached out to a few of our analysts to see what they expect from the gathering. Below is our Roundtable discussion featuring Logan Kane, Leo Nelissen, Jim Sloan, and Daniel Jones.

Some analyst backgrounds: Logan Kane covers macroeconomic trends, portfolio strategy, value investing, and behavioral finance. Leo Nelissen covers dividend opportunities, including a focus on major economic developments related to supply chains, infrastructure and commodities. Jim Sloan is a former professor, a retired investment adviser, and a private investor focused on the markets and economic/market history. And Daniel Jones is a value-oriented investor looking for contrarian ideas.

Seeking Alpha: What’s likely to surface at the Berkshire Hathaway meeting? What do you expect to hear at the gathering?

Logan Kane: Over the last 5.5 decades, Berkshire Hathaway has proven to be one of the greatest wealth-creation machines in the world. The entire enterprise is a testament to the power of skill (and patience) over luck. Thousands will gather again this year in Nebraska to read the tea leaves on where to find value in the markets. I don't know exactly what I expect to hear at the meeting, but there are two things I've highlighted to watch.

The first is Buffett's investments in Japan. Buffett himself doesn't generally identify as a macro investor, but Japan is a case where valuations are very cheap in large part due to the government making the currency artificially weak. This means the entire country is 20%-25% cheaper than it would be in a free market for investors with US dollars. Buffett has made several large investments in Japanese companies and recently increased his stakes. Japanese stocks traded for near bubble prices even in the 2000s after falling for 15 years, but over time the valuations have become cheaper and cheaper, while corporate governance has gotten much better. I'm showing Japanese equities as trading for about 13x earnings as of my writing this – a steep discount to the US.

The second question I'd look into is what Buffett's intentions with Occidental Petroleum (OXY) are. He and Munger aren't likely to give away too much information here, but they seem to want to acquire the whole company. We'll hopefully be able to read the tea leaves on this.

Leo Nelissen: Investors attending the Berkshire Hathaway meeting are eager to know if the company plans to take advantage of the current turbulence in the financial sector and expand further into the energy industry. Additionally, I'm personally interested in hearing if Berkshire will comment on supply chain re-shoring since the company is a major railroad operator and has significant investments in the manufacturing sector, such as Precision Castparts.

Jim Sloan: There will be the usual question on dividends to which the answer will once again be a patient no, not now, not ever. Here's why. Buffett may be asked if rising rates have changed his negative view of bonds and also questions about GEICO and the actions being taken to catch up with Progressive's (PGR) use of algos for claims settlements and pricing. Maybe also general questions about Berkshire and AI.

Daniel Jones: It's always difficult to know what to expect when it comes to Warren Buffett. However, I do expect him to dig deep into current economic issues, particularly the recent banking crisis and the inflationary environment. I would love to see a discussion regarding his plans for the incredible amount of capital on the company's books. Cash and cash equivalents, which include treasury securities, was about $128.6 billion at the end of the 2022 fiscal year.

Buffett is known for making significant acquisitions. The most recent one was of Pilot Travel Centers in a deal valued at $8.2 billion. Berkshire Hathaway owned a 38.6% interest in that business dating back to October of 2017. But the firm has finally pulled the trigger on pulling that enterprise into the fold. There's no doubt that the company has enough capital to make some other sizable deals.

I would also be interested in succession talks. The heir apparent for the company is Greg Abel. Historically speaking, Buffett has been pretty quiet on this topic. But it will be interesting to see if there are any changes in his rhetoric, especially given his and Charlie Munger’s ages.

SA: How could this year’s meeting be different from previous meetings?

Logan Kane: This meeting is likely to be similar to the past few years, but I expect legacy to be a big theme this year. Actuarially speaking, it's possible, even likely, that this will be the last annual meeting with both Buffett and Munger there. Buffett's successor is Greg Abel, who just bought about $25 million additional in Berkshire Hathaway stock on the open market. Buffett will be a tough act to follow, but Berkshire's decentralized corporate structure makes me feel confident that the company will run more or less the same when Buffett passes on.

Leo Nelissen: This year's Berkshire Hathaway meeting is expected to have a more focused agenda, with a shorter Q&A session covering key topics. Also, the spotlight is likely to shift toward Greg Abel, who is Buffett's successor and who has been aggressively buying Berkshire stock since last year. Investors are increasingly interested in what they can expect from Berkshire on a long-term basis.

Jim Sloan: There may be a sense of Warren and Charlie tying up loose ends while Greg Abel deals with more questions demonstrating detailed command of both strategic and tactical questions.

Daniel Jones: Truthfully, I don't really think there is a high probability of this meeting being all that different from prior meetings. I don't exactly have an expectation regarding this. But given that Buffett is 92 years old and Munger is 99, it would be interesting to see if there's any discussion around them further delegating their responsibilities or even stepping back some. I don't think there's a high probability of this. But it would be intriguing.

SA: How do you feel Berkshire's businesses are managing the inflationary environment?

Logan Kane: This is pretty simple. Berkshire was heavily criticized for its cash pile during the years of ZIRP in the US. Now they're profiting handsomely from the cash they have on their balance sheet, and are able to patiently deploy cash into investments of their choice while being paid a hefty rate of interest. In short, Berkshire has done great in the inflationary environment and should continue to do so.

Leo Nelissen: Berkshire's businesses are relatively well positioned to deal with inflationary pressures due to their pricing power. However, the company also has made investments in the energy sector as a direct hedge against inflation. I anticipate Buffett will discuss this strategy in greater detail at the meeting.

Jim Sloan: Buffett and/or Greg Abel will talk briefly about inflation's impact, as the many and diverse business units provide very privileged data. Yes, they have some inflation, but they’re doing fine. Their regulated units, BNSF and BHE, suffer wage inflation as contracts come up but recapture much of it with price boosts from regulators, with a lead time of course. Apple (AAPL) and other branded consumer units have pricing power. Insurance units also have some pricing power.

Daniel Jones: The topic of inflation is very interesting when it comes to Berkshire Hathaway. Some of the many businesses on its books benefit from inflation, while others suffer significantly. Consider its railroad operations. Labor costs grew 11.9% from 2021 to 2022, though that business was able to increase its revenue by the same amount. But part of inflation also includes fuel costs. And that was particularly problematic. In that line of business, fuel costs went from 12.3% of sales to 18.2%, eating away at some of its profits. It's only because other costs were largely contained, costs such as purchased services, interest expense, and more, that profits for the railroad operation dipped only 0.7%.

In truth, it's really impossible to provide a comprehensive analysis in a short amount of space when it comes to the impact that inflation might have on the firm. But we do know that the company provided investors a sensitivity analysis for significant assets that it has on its books. A 1% increase in interest rates should decrease the value of said assets by about $1.7 billion, based on my calculations. At the same time, liabilities should drop by about $8.9 billion, creating a $7.2 billion net benefit on asset values.

In general, I would say that the company should do reasonably well in an inflationary environment, even if some parts of the business struggle. As a note, one of the parts of the farm that will most likely be hit hardest would be anything related to building products. One notable example would be Clayton Homes. Inflationary pressures, combined with rising interest rates aimed to offset them, resulted in, according to management, a significant decrease in backlog year over year. More likely than not, this will cause problems throughout 2023.

SA: Berkshire stock: BRK.A shares are up nearly 6% year-to-date. Any thoughts on the direction of shares? Maybe a recession play?

Logan Kane: I feel that Berkshire Hathaway is a good bet to outperform the broad market indices, especially after global central banks have been forced to move on from keeping interest rates at or below zero. When money isn't free, capital allocation actually matters. To this point, Berkshire is among the best at this and will be able to provide rescue capital at high rates of return in any economic downturn.

Leo Nelissen: Although BRK.A shares have increased by nearly 6% year-to-date, Berkshire is not a recession play due to its exposure to cyclical industries and the stock market. However, I believe the company could become an attractive long-term investment opportunity on weakness.

Jim Sloan: No idea where BRK.A (or B) shares go over the immediate future, probably along the lines of what the market does, especially value stocks. Over the longer term Berkshire's stock price is likely to outperform the market slightly. It does better than the market in tough times, lagging hot growth sectors when the market is doing well. Berkshire is especially well defended in recessions because of its diverse businesses. It's the same story as inflation. Their customers still need them.

Additional item from Jim Sloan: It will be interesting to see if there's any mention of what role Joe Brandon, formerly Alleghany's CEO, is playing. Brandon is an old Buffett friend and the former CEO of Gen Re from 2001-2008. Unfortunately Brandon was forced to resign by the SEC, but was fully exonerated of any wrongdoing in 2011. Is Brandon being positioned as Aijit Jain's major helper and future successor? Good question to ask.

Daniel Jones: As a rule of thumb, I believe that it's a bad idea to bet against Berkshire Hathaway. The company has a tremendous amount of resources at its disposal and, in the long run, its size, quality management, and diversification should work to its advantage to create attractive shareholder returns. Given the enormity of the company, it may no longer offer market beating returns. But I do think that it could be a good place to store your money during times of economic uncertainty.

What do you expect from Berkshire Hathaway's 2023 Annual Meeting? If you were given a chance to ask a question at the gathering, what would you ask? Share your ideas in the comments section.