This Has Been a Huge Win for Buffett

Since Warren Buffett released his annual letter to Berkshire Hathaway (NYSE: BRK-B  ) (NYSE: BRK-A  ) shareholders earlier this month, I've spent some time dissecting the world-famous CEO's unsurprisingly eloquent words of wisdom.

First, I explored the value of Buffett's relatively hidden series of bolt-on acquisitions. After all, while it may seem crazy that any company could quietly spend $2.3 billion to absorb 26 distinct, profitable businesses into its existing operations in a single year, Berkshire managed to do just that in 2012.

Next, I noted Buffett's propensity for outperforming the broader market over the long haul, thanks (in Buffett's words) not just to Berkshire's "outstanding businesses, a cadre of terrific operating managers, and a shareholder-oriented culture," but also largely to the company's incredible ability to effectively function as a defensive stock.

Let's talk about the big boys
Now, we're going to take a look at an excerpt from Buffett's letter in which he highlights the strengths of some of Berkshire's larger "outstanding businesses":

Last year I told you that BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy -- our five most profitable non-insurance companies -- were likely to earn more than $10 billion pre-tax in 2012. They delivered. Despite tepid U.S. growth and weakening economies throughout much of the world, our "powerhouse five" had aggregate earnings of $10.1 billion, about $600 million more than in 2011. Of this group, only MidAmerican, then earning $393 million pre-tax, was owned by Berkshire eight years ago.

Buffett goes on to note the $9.7 billion gain in annual earnings delivered to Berkshire by the five companies was "accompanied by only minor dilution," thanks to the fact that three of the five businesses were acquired on an all-cash basis. The fifth, of course, was Burlington Northern, of which 70% was paid for in cash with the remainder covered by newly issued Berkshire shares, which increased the amount outstanding by 6.1%. 

Sure enough, here's yet another example that Buffett knew what the heck he was doing when he acquired five huge, solidly profitable companies to the benefit of Berkshire shareholders with little dilution. Of course, that's not to mention Buffett has also been actively working to reverse at least some of that dilution, most notably through the company's recent substantial share buybacks.

Even still, let's put things in perspective by digging a little deeper to see just how effective these acquisitions have been. In addition to owning 89.8% of MidAmerican, here's the skinny on Buffett's remaining aforementioned purchases, circa the end of 2011:

  • May, 2006: Purchased an 80% stake in Iscar for $4 billion in cash.
  • December 2007: Acquired 64% of Marmon Holdings for $4.8 billion in cash.
  • November, 2009: Acquired the remaining stake of BNSF for $26.3 billion in cash and stock.
  • March, 2011: Acquired Lubrizol for $9 billion in cash, at the same time assuming $700 million of its debt.
  • In "early" 2011: Acquired an additional 16% of Marmon for approximately $1.5 billion, bring Berkshire's stake to 80%.

When we consider the fact that Berkshire's slice of net earnings from MidAmerican last year totaled more than $1.3 billion, that leaves nearly $8.4 billion in 2012 earnings achieved as a direct result of Buffett's spending $46.3 billion over the past seven years for its stakes in Iscar, Marmon, BNSF, and Lubrizol -- not a bad recurring return on investment by any measure, thanks to Buffett's supreme demonstrations of patience and a long-term outlook. What's more, Buffett later wrote that "unless the U.S. economy tanks -- which we don't expect -- our powerhouse five should again deliver higher earnings in 2013."

As an aside, it's also important to note that Berkshire yet again raised its stake in Marmon late in the fourth quarter of 2012, bringing it to 90%. Additionally, according to its most recent 10-K, Berkshire will purchase the remaining 10% sometime in 2014 with a price to be determined from an existing formula based on Marmon's future earnings.

Of course, any one of Berkshire's "powerhouse five" could easily be considered a fantastic business in its own right. After all, that is why Buffett bought each of them in the first place. However, Berkshire's comprehensive value becomes much more apparent when you combine those businesses with its world-class insurance operations, which not only provided a $1.6 billion underwriting profit in 2012, but the float from which also gave Buffett more than $73 billion in free money to invest. 

As we look at Berkshire from a broader standpoint, this also goes to show just how relentless and effective Buffett's efforts have been to diversify his company's income streams. In addition, considering the fact that Buffett still has a cash pile of least $15 billion pegged for acquisitions (even after putting $12 billion to work last month for a 50% stake in Heinz (UNKNOWN: HNZ.DL  ) ), you can bet it won't be long before he adds another elephant to the ranks of his powerhouse brands.

Foolish final thoughts
In the end, I'm reminded of a comment last year from a friend of mine when he joked that Berkshire was his favorite "mutual fund." There's certainly some truth to the statement, but I think even that doesn't do justice to the depth of Berkshire's enviable moat. 

As Buffett wrote in his 2011 shareholder letter, "When you look at Berkshire, you are looking across corporate America." Thanks to his unparalleled good judgment, though, it might be more accurate to rephrase that statement as "When you look at Berkshire, you are looking across [the best of] corporate America" (addition mine).

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