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Warren E Buffett 2015 Case Solution
In 2015, Berkshire Hathaway, led by Warren E. Buffett, announced the purchase of Precision Castparts Company for $37.2 billion, causing a 1.1% drop in market share for the company. Despite the criticism, Buffett believed it was a wise move for the prominent manufacturer, which began as a small textile business in 1889 and has since focused on insurance and railroads. One of the keys to Buffett's success is his ability to find undervalued stocks that are overlooked by the market, a concept he learned from his mentor Benjamin Graham. Through this case study, we can gain insights into Buffett's investment philosophy and approach to valuing potential acquisition targets. Additionally, it raises questions about the viability of long-term investments. By analyzing Buffett's thought process, we can better understand the core beliefs that have made him a successful investor and the factors that led him to make a purchase that was widely criticized.
Following questions are answered in this case study solution:
Who is Warren E. Buffett? How would you describe the business of Berkshire Hathaway?
How well has Berkshire Hathaway performed? Over the long term? Recently?
What is your assessment of Berkshire Hathaway’s investments in Buffett’s Big Four: American Express, Coca- Cola, Gillette, and Wells Fargo?
Prepare to describe the elements of Buffett’s investment philosophy. How might this philosophy differ from that of other investment styles, such as a very active day trader, chart watcher, or someone who passively invests in index funds?
From Buffet’s perspective, what is intrinsic value? Why is it accorded such importance? How is it estimated? What are the alternatives to intrinsic value? Why does Buffett reject them?
Critically assess Buffett’s investment philosophy. Be prepared to identify points where you agree and disagree with him.
What is the possible meaning of the changes in stock price for Berkshire Hathaway on the day of the acquisition announcement? Specially, what does the $4 billion loss in Berkshire Hathaway’s market value of equity imply about the intrinsic value of Precision Castparts (PCP)?
Should Berkshire Hathaway’s shareholders endorse the acquisition of PCP?
Case Study Questions Answers
1. Who is Warren E. Buffett? How would you describe the business of Berkshire Hathaway?
Warren E. Buffett serves in many capacities at Berkshire Hathaway Inc., including those of chairman and chief executive officer. According to Forbes magazine, Mr. Buffet is one of the wealthiest persons in the world. This ranking includes Mr. Buffet. Over the past forty-eight years, Warren E. Buffett has held the positions of chief executive officer and chairman of the board of Berkshire Hathaway Inc. Mr. Buffett has been successful in increasing the compound annual growth in value of the firm by an amount equal to or more than 21.6%. In 1889, Berkshire Hathaway was first founded as a textile enterprise. In 1955, they started to see a fall as a result of inflation, rising levels of competition and changes in technology. In 1965, a group of investors led by Buffett purchased the firm in the aim of recovering its failing fortunes. They invested in two Omaha-based insurance carriers after gathering sufficient funds. Throughout the 1970s, they began diversifying their assets and finally departed the textile sector in 1985. The organisation considers itself "a holding company that includes subsidiaries operating in a range of various commercial operations" in its 2014 annual report. It is active in a wide variety of markets, including banking and financial products, utilities and energy, manufacturing, service and retail, and train transportation, to name just a few of these categories. In addition, Berkshire Hathaway has just completed the acquisition of Precision Castparts Corporation, which is widely regarded as one of the most important manufacturers of airplane components. All of the outstanding shares of PCP stock were purchased for a total of $235 in cash, which represents a premium of 21.1% in comparison to the stock's most recent pricing on the market. Berkshire Hathaway Company has few rivals, resulting in a monopoly with widespread brand recognition.
2. How well has Berkshire Hathaway performed? Over the long term? Recently?
Berkshire Hathaway generated a sizable cash flow as a result of its business activities. Exhibit 2 shows the company's financial sheet showing a 36.2% increase in current assets and a 43.79% increase in shareholders' equity between fiscal years 2011 and 2014. Its extensive stock portfolio is another asset of the company. Exhibit 3 shows that the cost of a single share of Class A stock has rocketed from $100 in 1979 to well over $250,000 today. The value of all outstanding shares of common stock as of the end of 2015 was $117,470,000,000. As a consequence of these findings, it is evident that Berkshire Hathaway is a company worthy of serious attention from any potential investor. After Berkshire Hathaway's acquisition of the company, the market value of Class A shares declined by 1.1% at market opening, resulting in a reduction of $4.05 billion in value. Despite this decline, the company has continued to achieve success. Presently, a Class A share is priced at $333,200, which is an improvement from its 2015 low. Investors have also experienced a positive change in aggregate equity, with a significant increase of +43.3%. As of the second quarter, Berkshire Hathaway has $64.56 billion in cash and equivalents, and $46.54 billion in short-term assets, such as U.S. Treasury notes, bringing the total to $111.1 billion, which is up from $108.6 billion in the previous quarter. An individual's initial investment of $100 in the company in 1976 would have grown to $305,714 after accounting for inflation and dividends, as shown in Exhibit 1.3. In comparison, investing the same amount of money in the S&P 500 over the same time period would only result in a total of $1,999 after the 100 years had passed. The price of a single Class, A share of Berkshire Hathaway, has fluctuated widely over the past year, from $279,794 to $335,900, and is currently sitting at $300,531.
3. What is your assessment of Berkshire Hathaway’s investments in Buffett’s Big Four: American Express, Coca- Cola, Gillette, and Wells Fargo?
All total, the Berkshires spent $3.832 billion on their Big 4 investments, and their current worth is $24.681 billion. Berkshire's investment in the Big Four has returned $20.84 billion so far. Buffet makes investment decisions based on a thorough examination of a company's underlying fundamentals. Buffet considers the wants and needs of customers as well as the current and future direction of the economy. It's clear that the return on money put into the "big 4" has been rising over time. Warren Buffet has earned a reputation for making wise bets. The businesses in which Berkshire Hathaway has invested have all done quite well. All of the Big Four businesses are expected to maintain their presence in the market for the foreseeable future and generate a significant amount of profit for Buffet's company.
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