Bumpy Week Adds Intrigue To Buffett's Dispatch
It’s not been a great week for Warren Buffett as the investment world awaits his annual shareholder letter this weekend.
KraftHeinz triggered a storm of protest with its now aborted $US143 billion offer for rival food group, Unilever.
Buffett’s Berkshire Hathaway owns 26.8% of KraftHeinz and would have provided tens of billions of dollars in cash, debt and support for other debt, to make the transaction happen.
But he and the principals behind his partners, 3G Capital were stunned by the opposition and decided last weekend to kill the bid - they could not stand the opposition and the emerging political pressure in the UK and Holland.
They completely misread the situation, as the Financial Times pointed out.
The Unilever bid saw analysts recall the cavalier way Buffett had referred to big job losses at KraftHeinz (around 13,000) and 3G Capital managers slashed and burned their way through costs. Buffett basically said it looks like there were too many people at KraftHeinz and out they went.
For some worried about jobs in the Trump dominated world, there was a whiff of hypocrisy about the Sage of Omaha’s qualified approach to employment and costs.
But KraftHeinz’s 4th quarter report was weak showing falling sales and profits, suggesting the slash and burn approach to growth had quickly run its course. The company wared that new cost cuts would be made to improve profits - but it is revenue growth that is lacking at KraftHeinz, not costs.
And yesterday Marketketwatch.com reported on a nice piece of Buffett hypocrisy.
Marketwatch pointed out that the US Securities and Exchange Commission had caught Buffett and Berkshire using non standard accounting methods (or non standard Generally Accepted Accounting Principles which companies are supposed to use to prepare their accounts and report them).
"Buffett has repeatedly complained about the use of non-GAAP metrics, the non-standard numbers calculated with a formula other than the Generally Accepted Accounting Principles required for all U.S. public companies. His most recent letter to shareholders whinged that it’s become “common for managers to tell their owners to ignore certain expense items that are all too real.”
"Wall Street analysts “often play their part in this charade, too, parroting the phoney, compensation-ignoring “earnings” figures fed them by managements,” he wrote.
“Maybe the offending analysts don’t know any better. Or maybe they fear losing “access” to management. Or maybe they are cynical, telling themselves that since everyone else is playing the game, why shouldn’t they go along with it. Whatever their reasoning, these analysts are guilty of propagating misleading numbers that can deceive investors.”
"Buffett also signed on to the top business leaders’ “Governance Principles” manifesto in July along with J.P. Morgan Chase & Co.’s Jamie Dimon, and General Motors Inc.’ Mary Barra. One of its six “common sense” recommendations was that companies should never use non-GAAP metrics “in such a way as to obscure GAAP-reported results.” The manifesto cited the exclusion of share-based compensation from non-GAAP measurements of earnings, a practice Buffett has consistently criticized.
“However, Buffett’s Berkshire Hathaway has also used alternative financial metrics over the last three years that are widely considered to be non-GAAP.
"Last September, the Securities and Exchange Commission wrote Buffett’s long-time chief financial officer, Marc Hamburg, asking for a reconciliation of non-GAAP operating expenses to GAAP operating expense reported for its manufacturing, service and retailing business segment. Berkshire Hathaway had left out expenses related to the amortization of certain intangible assets.
“In his letter to shareholders in February, Buffett rationalized that move, writing, “we present the data in this manner because Charlie and I believe the adjusted numbers more accurately reflect the true economic expenses and profits of the businesses aggregated in the table than do GAAP figures.”
"Hamburg responded to the SEC with three years of data detailing the impact on its GAAP operating expenses.of the acquisition accounting expenses that had been excluded from the segment’s operating results. He also told the SEC the company would include disclosures in future filings that would clarify “that segment earnings in management’s discussion and analysis do not include acquisition accounting-related expenses.”
"According to data provided to MarketWatch by research firm Audit Analytics, this is not the only time Berkshire Hathaway used non-GAAP metrics. The SEC’s letter this past September, however, was the first time the regulator questioned the company’s use of the non-standard metrics. A search of Berkshire Hathaway SEC filings in the last three years shows the use of the non-GAAP terms “underwriting gain (loss) attributable to segment,” “net investment income before income taxes and non-controlling interests” and an EBIT metric, or “earnings before corporate interest and income taxes.” Ooops.
Marketwatch points out that Buffett has been a long time critic of GAAP. He has said repeatedly that Berkshire’s book value per share, as measured under GAAP, understates the company’s “intrinsic value”, his alternative subjective measure of the company’s worth.
So what will he say this weekend? Will he say anything?. His comments on accounting and job cuts will be watched with interest - that’s if he goes there in the famous shareholders letter.
US media reports say that Buffett’s letter may contain commentary on the rise of passive investment. He told Fortune magazine he expects to write “a lot” about passive investing (a former senior editor at Fortune is his biographer and one of the approved journalist questioners at the May AGM).
Buffett believes most stock investors are better off with low-cost index funds than paying higher fees to managers who often underperform. We have to remember though that Berkshire’s famed portfolio is actively managed - although for the four corner stocks, they are passive holdings - Wells Fargo, IBM, Coca Cola and American Express. The portfolio jumped more than 23% in 2016, outperforming the US market.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.