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No Big Surprises in Omaha; Berkshire Shares Look Undervalued

Jeremy Glaser
Drew Woodbury, CFA

Jeremy Glaser: For Morningstar, I’m Jeremy Glaser. The 2013 Berkshire Hathaway Annual Meeting just wrapped up, and I am here with Gregg Warren and Drew Woodbury for their takeaways on the second half of the meeting. Gentlemen, thanks for joining me again.

Drew Woodbury: Thank you.

Gregg Warren: Thanks for having us.

Glaser: So I think one of the most interesting questions in the second half was about, if the 1.2 times book value for [repurchasing Berkshire shares] is really a hard floor for Warren Buffett if he were to always buy if the stock went below there. What do you think about his answer to that? Do you think there are some more repurchases in the future?

Warren: I think it's probably more of a gray line than anything else. I think he basically pointed out that they would only really be buying back shares if they had a significant amount of cash on the sidelines that they could dedicate to it and that the stock was actually trading at significant value or discount to its intrinsic value, which is a little bit different than this 1.2 times book. But intrinsic value is generally above the book value overall. But we've always sort of guessed that he would probably be more willing to buy back stock between 1.1 and 1.2, enough of a discount to that line that he's drawn on the sand.

Woodbury: Yeah. It's probably hard for him to go out exactly at 1.2 and do it without kind of moving the market.

Glaser: So another thing that came up a lot was talk about the economy, such as if deficits are holding back the economy or how housing is doing. What was your take on his thoughts of the U.S. economy and what it meant for his portfolio?

Woodbury: Yeah. So he claims not to be too great of an economic prognosticator over the long term. He kind of described what was going on now, that things are improving. He didn't think there's any possibility of a double-dip recession, even before, earlier when there was more of a concern. He still views housing as a very good asset for people, especially if they are going to be living in the same community for a long time and with the low interest rates available, that's an attractive asset class for him.

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Warren: Well, I think you also had a consensus from both Charlie Munger and Buffett on the current deficit, that the spending that we did post-financial crisis was necessary to really keep us from going over the edge, and that we’d be in much, much worse shape if we had not spent that money. That said, we're recovering relatively slowly, but at the same time they don't feel like there's a chance of a big pullback.

Glaser: Were you surprised this year that there was much less conversation about politics than there was in an election year last year, so it's just the nature of a post-election lull? Or do you think shareholders are less interested in his political opinions?

Warren: I think last year was a little bit unique because it was an election year, but I think he was also a lot more vocal about where he stood on things like taxes. So that created an environment where you'd have the room split 50-50 on particular issues like taxes or government spending or government intervention. So it was interesting this year; there was much, much less of an issue.

Woodbury: Yeah. And he even said himself that when you bring up something like politics, that half of people by nature are going to agree with you and half are going to disagree. So it's better to kind of avoid, and I think they tried that strategy this year. Buffett is a professed Democrat and Munger is a Republican, but he has emphasized that they still agree on most of the key issues in general.

Glaser: So, looking over the entire meeting, what were some of your big takeaways? What are you going to go back to Chicago with? Is it going to impact your valuation at all for the company?

Warren: I don't think there was anything that was said today that would generally impact the value of the firm. We just raised our fair value estimate from $175,000 to $187,500 for the Class A shares. Based on what we're seeing with the company coming into 2013, first-quarter earnings were fantastic; it really supports what we were expecting from the firm this year. So on that regard, there really wasn't much there that would change our opinion. I think there were some interesting points on succession and some interesting things to think about as far as the opportunity set going forward, that we may work into our assumptions.

Woodbury: Yeah, I don't think there was anything too new or surprising that came out of this. In the past two years, there's kind of been some hot-topic issues that needed to be resolved. Two years ago with David Sokol; last year there was Buffett's cancer diagnosis. So those are kind of things that were pressing questions that needed to be answered. But this year there was no main topic that really needed to be cleared up, but kind of more of the same that we hear most years from the meeting.

Glaser: So you just raised your fair value estimate; nothing too new at the meeting. What do you think about the attractiveness of the shares today?

Warren: Right now, I think they are trading at about a 15% discount to our fair value estimate. I mean, it's a decent enough return for somebody who is long-term oriented.

Glaser: Well, Gregg and Drew, thanks so much for joining me today.

Warren: Thank you.