Berkshire

Berkshire Hathaway, Inc was a small textile company. Its chairman and CEO of the company is Warren Buffett, the world’s third richest man. He invested his partnership in invests in Berkshire Hathaway at the price of $8.6 million (The Essential Buffett, p27). It took him over 35years to grow its book value from $19 per share to $37,987 per share with a rate of 24 percent compounded annually (The Essential Buffett, p44). Buffett started purchasing other businesses, which were primarily insurance companies, with profits from the declining original textile business. In 1985, the original textile business was shut down and Berkshire Hathaway started the insurance business.

Now, Berkshire Hathaway is primarily an insurance company, which holds 73 businesses. According to Robert G. Hagstrom, the company owns an investment portfolio that consists of a newspaper, a candy company, an ice cream/hamburger chain, several furniture stores, a carpet manufacture, a paint company, a building-products company, a company that private jets to businesses on a time-share basis, a jewelry store, an encyclopedia publisher, a vacuum cleaner business, a public utility, a couple of shoe companies, and a company that manufactures and distributes uniforms.

Over 217,000 employees work for the 73 businesses with the annual revenues of $98.539 billion in 2006 (Yahoo finance, 2007). However, only 19 employees work at home office located in Omaha. One of the companies that Berkshire Hathaway holds is GIECO (Government Employees Insurance Company). In 1994, GIECO was wholly owned by Berkshire Hathaway. Its market share was increased from 2.7 percent to 4.1 percent with additional $590 million in cash from operating earnings in spite of decline in insurance industry (The Essential Buffett, p30). Another major company under Berkshire Hathaway is Nebraska Furniture Mart. It is a large furniture store, which holds NFM Mega Mart and Homemakers Furniture.

Warren Buffett utilizes a constant strategy to manage these companies including Berkshire Hathaway by holding shares for a long time. Berkshire Hathaway does not pay any dividends to the shareholders but reinvests surplus instead to maximize the value of the company. Under this strategy, each company is growing constantly and some of them such as GIECO and Nebraska Furniture Mart are the major layer in the industry.

The Balance Sheet of Berkshire Hathaway shows significant liquidity and a strong capital base, reflecting the very strong financial condition of the company. Berkshire’s shareholders equity was $108.4 billion and consolidated cash and invested assets was approximately $126.1 billion at December 31, 2006. The company’s liabilities totaled 3.7 billion at December 31, 2006. The net earnings of Berkshire Hathaway were $11.015 billion in 2006 and the income taxes for the year were $5.505 billion. The invested assets of the company are predominately held within its insurance business and the company believes it is capable of covering its contractual obligations. The market value of Berkshire Hathaway as of March 17, 2006 was approximately 136 billion.

Currently the company is holding a large amount of cash and the end of 2006 an amount of 43.743 billion. The company also carries very little debt. They are looking to find a new business to buy and to put this cash to use. Warren Buffett defends the fact that Berkshire Hathaway carries $40 billion in cash by mentioning flexibility. Buffett believes (and his record bears him out) that he can deploy the cash effectively over time to increase shareholder returns - the past eight years have just not been the right time to aggressively deploy the cash. And Buffett wants to remain flexible to take advantage of favorable prices and opportunities while maintaining a "safety net" for the highly volatile insurance business - something he can't do if he pays the company's capital back to shareholders.

The company is not highly leveraged. It currently has around a .3:1 debt to equity ratio, and this is one of the highest ratios that the company has held in the last 5 years. Buffet says “we use debt sparingly and, when we do borrow, we attempt to structure our loans on a long term fixed rate basis. We will reject interesting opportunities rather than over leverage our balance sheet….this is the only behavior that leaves us comfortable.”

Profitability (Exhibit 1)

Berkshire Hathaway Inc. reported annual 2006 earnings of $7,144.00 per share on 03/1/2007. ( Exhibit 2)

Growth (Exhibit 3)

The greatest majority of Berkshire’s revenue is generated through the insurance business. This has been a consistent trend throughout the past 5 years. This is followed with manufacturing, service, and retailing combined to make the second