Warren Buffett: Reading Between the Lines

OMAHA, Neb.( TheStreet) -- Berkshire Hathaway's ( BRK.B) annual report is as notable for the numbers as it is for the homespun, time-tested humor of Warren Buffett.

There is numbers-based trivia in the Berkshire Hathaway report to match the quirky comments for which Buffett is famous.

For example: How many points does it take to win the ping-pong matches held at the Berkshire Hathaway annual meeting, and how old is the reigning junior table tennis champ of the U.S. who dominated Buffett at least year's meeting? The correct answers to this arcane bit of Buffett trivia are 3 (points) and 14 (years of age).
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But it's the bigger numbers in Buffett's annual letter to shareholders that reveal a lot more about Berkshire Hathaway as a company than just the age differential (65 years) on opposing sides of the ping-pong table when Buffett faces off against his junior nemesis.

Read on for a number-by-number, between-the-lines reading of all that Warren Buffett had to say in his annual report....

This year, Buffett's comments were notable for his concession to the reality of running such a behemoth of a company. The much-heralded outperformance of Berkshire Hathaway against the S&P 500 Index has narrowed, and that unpleasant trend is "certain to continue," Buffett wrote. Of course, there is a marked irony in the fact that as Berkshire's edge over the S&P is eroded, 2010 marks the year that Berkshire Hathaway became folded within the S&P 500 index composites family.

Indeed, the marathon market race between Buffett's Berkshire Hathaway and the S&P 500 Index brings us to our first Berkshire Hathaway factoid.

Since the Berkshire Hathaway performance edge is shrinking by Buffett's own admission, it's high time to reflect on the company's best-ever season.

Best-Ever Berkshire Year: 1977: no contest -- a 39.3% relative outperformance of the S&P by Berkshire Hathaway

Worst-Ever Berkshire Years: 1967 and 1999, when Berkshire underperformed the S&P by 19.9% and 20.5%, respectively

Number of Losing Years Versus the S&P 500 for Berkshire Since 1965: 6 -- and 2009 was one of them

Smallest Margin of Relative Underperformance During One of Those Losing Years: 6.7% -- which was the 2009 performance shortfall.

Total Book Value Gain for Berkshire Over the Last 45 Years: 434,057%

The year of 2009 was a notable victory for the S&P 500 over Buffett. Berkshire Hathaway's focus on U.S. cyclical stocks was one of the firm's biggest portfolio handicaps.

Berkshire Hathaway refers to this group of companies as its manufacturing, service and retailing operations, and only one operating subsidiary among all of the companies in the group did not suffer during 2009's recession. That subsidiary was grocery distributor McLane, which booked a record pre-tax earnings of $344 million in 2009. Even when Americans are depressed about their stock portfolios, they apparently still like to eat.

McLane has been employing its 3,242 trailers; 2,309 tractors and 55 distribution centers to deliver groceries to the likes of Wal-Mart ( WMT), to the sum of $31.2 billion in annual sales.

It wasn't just record pre-tax earnings that caught Buffett's attention during his annual recap of Berkshire Hathaway performance.

Nine of the Berkshire Hathaway operating subsidiaries improved profits even amid lower sales in 2009.

The comeback profit players of the year were:
  • Paint company Benjamin Moore
  • Jeweler Borsheims
  • Shoe company H.H. Brown
  • Agricultural equipment company CBT
  • Dairy Queen
  • Nebraska Furniture Mart
  • Kitchen tool seller Pampered Chef
  • Candy maker See's
  • Star Furniture
  • Given Berkshire Hathaway's high exposure to the U.S. economic headwinds, it was no surprise that in 2009 the Berkshire focus on residential and commercial construction suffered mightily.

    There was no mincing of words or numbers from Buffett about the bleakness of the construction sector. Every one of those businesses lost money in 2009.

    The pre-tax earnings of Shaw Industries, Johns Mainville, Acme Brick and MiTek, combined, were $227 million -- not even fit to be shelved on a Wal-Mart aisle by McLane -- an 82.5% decline from $1.295 billion in 2006 pre-tax earnings for the group.

    Many of the construction companies housed within the layers of Berkshire Hathaway exist under the radar. On the other hand, NetJets is not only tracked by aviation radar, but under constant scrutiny from the radar of the financial press.

    How bad has Buffett's bet on NetJets been? It continued to be the No. 1 drag on Berkshire's performance in 2009.

    What's more, in the eleven years since Buffett transitioned fractional jet ownership pioneer NetJets from a personal, guilty corporate pleasure to a portfolio holding, NetJets has lost an aggregate $157 million on a pre-tax basis.

    Buffett at least found a subtle way to keep up his good cheer when discussing the poor condition of NetJets -- by throwing in a few puns to soften the bumpy flight path.

    Buffett noted in the annual letter that NetJets' debt has "soared" from $102 million at the time of its purchase by Berkshire Hathaway to $1.9 billion as of April 2009. Buffett apologized to all Berkshire shareholders for letting NetJets "descend" into this condition.

    There is a silver-lining in NetJets' clouds, also. Since MidAmerican Energy CEO Dave Sokol took over NetJets, the company's debt has been reduced by $1.4 billion, and after a $711 million loss in 2009, NetJets has turned profitable in 2010.

    MidAmerican Energy's CEO has earned his wings in resurrecting NetJets, yet MidAmerican Energy has also been busy building engines and propellers far from the corporate elite air strips.

    Buffett's old school American capitalism has never been synonymous with high-technology, but Buffett has gone green into alternative energy through MidAmerican.

    In the past three years, Berkshire's Iowa and Western utilities -- which accounted for more than half of utility earnings in 2009 -- have earned $2.5 billion, yet spent $3 billion on wind generation facilities.

    One last point: Investors who have assailed Buffett for never paying dividends on his stock have been about as successful as Don Quixote taking shield and sword against Spanish windmills. And Buffett proudly noted that in the 10 years that Berkshire has owned MidAmerican, the utility has never paid a dividend -- those earnings, it would seem, are literally blowing in the wind.

    Aside from NetJets and Dairy Queen, many of the operating subsidiaries of Berkshire Hathaway are not household names -- even the ones in the homebuilding business.

    But let's not forget that Buffett does own some pretty big stakes in some pretty big publicly traded companies.

    Here are the publicly traded stocks in which Buffett has at least a $2 billion market stake at the end of 2009:
  • Coca-Cola (KO): $11.4 billion
  • Wells Fargo (WFC): $9 billion
  • American Express (AXP): $6.1 billion
  • Procter & Gamble (PG): $5 billion
  • Kraft (KFT): $3.5 billion
  • Wal-Mart (WMT): $2.1 billion
  • And the only non-brand name in the billion-plus Berkshire club: Korean steel producer POSCO ( symbol): $2 billion

    -- Reported by Eric Rosenbaum in New York.

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