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Photograph of Christopher Goodney / Bloomberg
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Bill Ackman of Pershing Square Holdings is generally considered an activist investor, but there does not seem to be much "active" about his new involvement in
Berkshire Hathaway
.
Berkshire Hathaway may be led by the world's most famous investor, but the company itself is "misunderstood," Ackman said in a letter to
Pershing Square Holdings
Investors released last Thursday the reason why his company bought more than 3.5 million shares in the second quarter, worth $ 701 million today. The share of Berkshire Hathaway (BRK.B) rose 0.5% Friday morning to $ 199.35, while
S & P 500
gained 0.8% to 2,870.72, and the
Dow Jones Industrial Average
rose 135.27 points, or 0.5%, to 25,714.66.
Ackman is a passionate Berkshire chairman of the board, Warren Buffett, and has followed the company for decades. In fact, it has even been called "Baby Buffett" in the past. But Ackman thinks that even with Buffett's fame, investors do not know how to value Berkshire.
"The media often describe Berkshire as an investment fund, giving many the impression that Berkshire's shareholder returns depend on Warren Buffett's extraordinary stock selection capacity," he writes. "If this representation of Berkshire better reflected the reality of its beginnings, it no longer reflected the current reality of society. Today, Berkshire is a $ 500 billion market capitalization holding company; about half of its value lies in its insurance subsidiaries and the rest in controlling interests in widely diversified operating companies. "
Ackman says that these insurance subsidiaries are efficient and reliable. GEICO's direct selling model keeps costs low, and the company's reinsurance business, such as National Indemnity and General Re, has established intelligent risk pricing, resulting in a single underwriting loss over the past 15 years. "These are extraordinary results, especially when compared to the vast majority of insurance companies who are losing money in their insurance business and who are only profitable when investment returns are taken into account." He writes.
In addition, Berkshire may invest the proceeds of these activities in publicly traded equities, while its peers invest primarily in fixed income securities.
Ackman has criticized Berkshire, but thinks that the defects are being corrected. "Burlington Northern's current operating profit margins are nearly 500 points below the average for its North American counterparts," he writes. Ackman expects new managers such as Ajit Jain and Greg Abel to improve their operations, further aligning their margins with their competitors.
"If Berkshire can improve its operations and intelligently deploy a significant portion of its capital surplus over time, we estimate that the company's earnings per share should grow at a mid-teens compound annual compound rate in the medium term," he said. he.
Analysts expect Berkshire to increase earnings per share by 2% this year.
Write to Avi Salzman at [email protected]
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