I was fortunate to wash myself in the purest waters of value investing a few weeks ago at Berkshire Hathaway's (NYSE: BRKa) (NYSE: BRKb) annual meeting in Omaha.
I'd never attended before, so it was a tremendous thrill to meet Warren Buffett and Charlie Munger and let their wisdom massage my inner contrarian in person. One of the more interesting questions at the press conference got me to thinking: Was Fitch correct to put Berkshire's AAA rating on negative watch?
It's been a bumpy few months for Berkshire. Gen Re, its huge reinsurance business, finds itself entangled in AIG's (NYSE: AIG) recent accounting mess. Fitch, a second-tier corporate credit rating agency, says it may downgrade Berkshire's perfect AAA rating. Why? Fitch cites the AIG situation and Buffett's age (he's 74). On the latter point, Fitch figures Berkshire might have trouble carrying on Buffett's philosophy after he's gone.
I think it's a bunch of hooey.
The acerbic-tongued Munger got right to the heart of the matter when he told members of the press: "I can hardly think of any company less likely to fail than Berkshire."
Sure, we don't know exactly how Berkshire will be run after Buffett dies (although it will certainly remain focused on value), but that's really irrelevant given what a credit rating is: a person or company's ability to repay what it owes. I feel very confident that Berkshire won't start writing bad checks the day after Buffett passes.
"We are more concerned about liability and meeting our obligations than any other company," Buffett said. "We will never run Berkshire so that there is a danger that our checks won't clear." That's AAA talk if I've ever heard it. Trust his comments. Buffett and Munger are in no way prone to the sort of bluster shrieked by so many less-than-upstanding executives.
There are only seven U.S. companies that both Moody's and S&P, the top credit raters, have blessed with their highest ratings. In addition to Berkshire, these companies are Automatic Data Processing (NYSE: ADP), ExxonMobil (NYSE: XOM), General Electric (NYSE: GE), Johnson & Johnson (NYSE: JNJ), Pfizer (NYSE: PFE), and United Parcel Service (NYSE: UPS). (Pfizer is one of the stocks I've recommended in my Inside Value newsletter.) I'd argue that Berkshire's AAA rating is more bulletproof than the rest. A $46.7 billion war chest keeps me confident as I write that.
I'd also argue that Buffett has put Berkshire on a path to do extremely well in his absence. As biographer Roger Lowenstein pointed out in Buffett: The Making of an American Capitalist, Buffett views Berkshire as a canvas, a work of art he's dutifully and lovingly constructed over the past 40 years. We may not know all the behind-the-scenes details, but it's an incredibly safe bet that Buffett has instilled the proper mind-set about investing and business in his successors. He doesn't want his precious company to wither once it's under the stewardship of others.
Give Fitch credit for doing its job: keeping abreast of Berkshire's status (or, as Buffett put it, looking for "any chink in Berkshire's armor"). Nonetheless, Buffett has worked hard to make his company, to some extent, "Buffett-proof." What do I mean? He's assembled a world-class collection of CEOs at Berkshire's subsidiaries. (Check out The Warren Buffett CEO, a brilliant collection of interviews with them, if you don't believe me.) Those subsidiaries generate tremendous profits. Cash inflows are growing. As for the investing side of Berkshire's business, Buffett has a very able batter in the on-deck circle: Lou Simpson, who handles investments for Berkshire's GEICO division.
Berkshire's primary business is insurance. Following the Sept. 11 attacks, Buffett gave a mea culpa, admitting that Berkshire had failed to recognize and factor into its insurance pricing the risk of terrorist attacks. Since then, Berkshire has adjusted. "We've gotten rid of all our nuclear, biological, and chemical (NBC) exposure," Buffett said at the annual meeting. He added later: "If we didn't exclude NBC, we would run the risk of extinction as a company."
Munger, as usual, was also blunt: "We worry more about the downside. It's Armageddon around here every day. We don't like losing money."
Coming from the Berkshire brain trust, that's incredibly reassuring. Future tragedies might inflict catastrophic damage on a broad swath of companies and industries, but Berkshire has dug a wide moat between it and danger.
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analyst Philip Durell owns shares of Berkshire Hathaway. The Motley Fool has a
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