Citywire A-rated Richard Pitt – CEO and portfolio manager at BlueAlpha Investment Management
For those agonising over missing the 30%-odd rally in global markets over the last eight weeks – fear not, for you are in excellent company. Even the ‘Oracle of Omaha’ apparently failed to catch this one.
Berkshire Hathaway has more than $130bn in cash on its balance sheet – a number which has grown by a factor of six times over the last 10 years. To many people’s surprise, and the consternation of some, Buffett engaged in only modest share purchases in the first quarter of 2020 and nothing during the March sell-off.
So what to do with Buffett’s Berkshire billions?
Let’s immediately knock off $20bn for risk outcomes that the company must always be prepared for, given their risk-underwriting activities. Let’s also keep a further $20bn in cash, given a very uncertain path ahead for the economy, and the likelihood that good businesses may well become cheaper as the economy slows and the consumer struggles.
That leaves just under US$100bn for investment – hardly a trivial sum. The challenge with investing such vast amounts of capital is that it requires, in the parlance of Buffett, an ‘elephant-sized’ acquisition. We think we might have found that elephant.
Berkshire recently sold all of its investments in four US airlines – and good riddance to them. Howver, along the lines of ‘in a gold rush, sell shovels’, may we be so bold as to suggest that an appropriate ‘elephant’ for Berkshire may be Boeing?
Operating in a duopoly market with an endless list of barriers to entry, Boeing now trades 70% off its high and has lagged the market by 50% over the last five years.
It has, admittedly, had its fair share of serious issues. There were fatal plane crashes that seem directly linked to its own safety technology; and, secondly, its customer base is literally grounded. What value is an order backlog of 5,000 planes if no one is flying?
The result of these challenges is that Boeing is now valued at only twice the enterprise value of Zoom and about half that of Netflix. The barriers to entry of both businesses (I think quite low) are fertile ground for debate. What is hardly up for debate is whether or not we will eventually get off the couch, turn off Netflix, ‘Zoom’ out and get back to living. And surely that means travelling once again.
Boeing has the potential to be Buffett’s next American Express, which he purchased during crisis in 1964. Even in the unlikely event of acquiring the whole company at a 10% premium, he would still have change of about $20bn.