Geoff Gannon August 15, 2007

On Berkshire Hathaway’s Holdings

Warren Buffett’s Berkshire Hathaway (BRK.B) has filed a 13F disclosing most (but not all) of its holdings. Information regarding two railroads, Norfolk Southern (NSC) and Union Pacific (UNP), was omitted from the public report and filed separately with the SEC (according to the public 13F).

Changes getting a lot of attention online and in print include:

Dow Jones & Company (DJ): This is a new position. Berkshire held 2,781,800 shares of Dow Jones as of June 30th, 2007. Some people seem confused by this one. They shouldn’t be. It’s simple arbitrage. Shares of Dow Jones have traded below Murdoch’s offer for some time allowing Berkshire to accumulate an arbitrage position in the stock. Buffett felt he knew Murdoch well enough to know he was determined to get the deal done. His comments on the deal reflect this fact. He would never have bought shares of Dow Jones absent the offer from Murdoch. For more on this, see Mohnish Pabrai’s quote in a Bloomberg article on Berkshire’s 13F.

Bank of America (BAC): This is also a new position. Let’s see what might interest Buffett here. We have a very large bank that has had an ROE of about 15% or greater for sometime now while achieving an ROA of over 1% for the past several years. The company is basically a nationwide bank with a lot of customers, but it doesn’t cross-sell very well and certainly hasn’t exploited its customers to the fullest extent possible. Bank customers are surprisingly sticky and thus banking (in the U.S.) is a surprisingly good business.

The company has a huge branch network; it is the closest thing to a national bank you can find in the United States. The retail business is probably what attracted Buffett. This company has a lot of branches and ATMs scattered throughout the United States and thus has daily contact with a great many Americans.

In terms of valuation, it does not appear to be priced higher than U.S. banks as a whole. You also get a cash yield that’s comparable to holding a U.S. Government bond.

Most importantly, the company’s tremendous size (market cap around $200 billion) offers the (now) extremely rare possibility of putting a meaningful amount of Berkshire’s cash hoard to work in this stock. Of course, whether that happens or not will depend on the price of the stock. We’ve seen plenty of “elephants” move out of Buffett’s price range after he acquired the initial stake – at the very least, we haven’t seen a lot come down sharply in price – something which would greatly encourage putting a meaningful amount of Berkshire’s cash to work in a single stock.

For full details on Berkshire’s holdings please see 13D Tracker: Summary of Berkshire Hathaway’s 13FGuruFocus: Warren Buffett Buys Bank of America, Dow Jones…, and Bloomberg: Berkshire Bought Stake in Dow Jones.

See the 13F here.