For the first time, the May 4 gathering in Omaha, Nebraska, will feature questions from a money manager betting on the stock’s decline. Doug Kass, selected by Buffett for the role, will challenge the value of a stock that gained twice as much as the Standard & Poor’s 500 Index in the year ended yesterday. Class A shares closed at a record $161,025 on April 25.
Buffett, 82, has had to defend the company he’s led for more than four decades at recent meetings as the stock trailed the equity benchmark and Berkshire’s governance was questioned. Concerns abated this year as investments he made during the financial crisis and takeovers added to earnings. The stock market rally also helped an $87.7 billion equity portfolio.
“His core fan base is going to be very happy and relaxed,” said Jeff Matthews, a Berkshire shareholder and author of books about the billionaire. “Their Merrill Lynch account is probably at an all-time high, including whatever they own beside Berkshire. And Buffett has come out of the financial crisis smelling like a rose.”
Operating profit at Berkshire probably climbed 28 percent to $2,072 a share in the first quarter from a year earlier, according to Meyer Shields, an analyst at Keefe Bruyette & Woods. A rebounding U.S. economy may fuel demand at operating units including railroad Burlington Northern Santa Fe, he said. Berkshire is expected to report results May 3.
Having a skeptical view at the meeting is important because Buffett has been repurchasing shares, said Tom Russo, a partner at Berkshire investor Gardner Russo & Gardner. Buffett’s firm said in December that it bought about $1.2 billion of its stock from the estate of a longtime shareholder, and boosted the price it’s willing to pay in the future.
Buffett is seeking “to paint a complete picture” so that investors can make an informed decision about whether keep their shares, said Russo.
Adding a bearish perspective may help focus the meeting on topics that matter to investors. Shareholders at the gathering, which has drawn more than 30,000 attendees to Omaha’s CenturyLink Center, have asked Buffett for his views on topics from politics to taxes.
In an interview last week, Kass declined to say why he was betting against Berkshire’s stock now. Buffett selected him after calling for candidates in a March 1 letter to investors that explained logistics for the annual meeting.
“To spice things up -- we would like to add to the panel a credentialed bear on Berkshire,” Buffett wrote.
Buffett may field questions at the meeting about the deal announced today to buy the 20 percent stake in Israel’s IMC Metalworking Cos. that Berkshire didn’t already own for $2.05 billion. Since Berkshire took control of the toolmaker in 2006, it expanded operations through acquisitions and increased its staff. Buffett said in a March letter to shareholders that he considers the business, also known as Iscar, one of Berkshire’s “powerhouse five” non-insurance operations.
The billionaire’s deal with Jorge Paulo Lemann’s 3G Capital this year to take ketchup maker HJ Heinz Co. (HNZ) private may also get attention at the May 4 gathering. The transaction, approved yesterday by Heinz shareholders, will give Berkshire half the common equity in a new holding company and an $8 billion preferred stake paying a 9 percent dividend.
The deal will lift investment income already bolstered by a bet Buffett made on Bank of America Corp. (BAC) in 2011. Berkshire collects a 6 percent dividend on the $5 billion preferred stake and got warrants to buy 700 million of the lender’s shares at $7.14 each. Bank of America closed yesterday at $12.31, giving the contracts a paper profit of about $3.6 billion.
Shareholders may also ask about Buffett’s deal with Goldman Sachs Group Inc. in March to unwind a $5 billion investment made at the height of the crisis. The agreement will make Berkshire one of the bank’s largest shareholders at no additional cost.
At the 2010 meeting, Buffett defended Goldman Sachs, then under scrutiny over allegations it misled clients prior to the U.S. housing-market collapse. The bank later settled with the U.S. Securities and Exchange Commission for $550 million without admitting wrongdoing. It did acknowledge making a “mistake” and using marketing materials with incomplete information.
Buffett has had to field other tough questions at the meetings. In 2007, his investment in PetroChina Co. sparked protests because the oil company did business in Sudan, where the government had been accused of supporting genocide.
Four years later, he was questioned about his praise for David Sokol, a lieutenant who stepped down after buying stock in Lubrizol Corp. while recommending that Buffett take over the chemical maker. Berkshire’s board said in a report before the 2011 meeting that the manager broke company trading rules.
Sokol was once considered a candidate to succeed Buffett as CEO. The SEC ended a probe without taking enforcement action, Sokol’s lawyer said this year.
Buffett said in February of last year that the board had agreed on a candidate to fill the CEO role once he’s gone, without identifying the individual. Two months later he said he was diagnosed with stage 1 prostate cancer. He completed treatment in September.
Kass has identified succession as a challenge for the company. In a 2008 article on TheStreet.com, the investor cited the difficulty of replacing Buffett among reasons for betting that Berkshire stock will decline. He also cited the risk of losses on derivatives.
The article appeared on March 10, 2008, when the shares closed at $131,400. They dropped below $71,000 in March 2009 amid a global economic slump as liabilities on the derivative contracts climbed.
Kass may have a hard time making his case at the meeting to shareholders who see the value that Buffett has created, said James Armstrong, president of Henry H. Armstrong Associates, a Pittsburgh-based investment manager that oversees about $400 million, including Berkshire shares.
“It is a tough job to be a bear on Berkshire at this point, because the company is such a treasure chest of assets and earnings streams, trading at such a bargain stock price,” he said. “You have to be willing to ignore the mathematics.”
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