In this podcast, Motley Fool senior analyst Jason Moser and host Deidre Woollard discuss:
- The value of solid insurance underwriting.
- Why Berkshire Hathaway sees a future in catering to truck drivers.
- Finding the secret sauce in consumer businesses.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on August 07, 2023.
Deidre Woollard: Berkshire is back and Campbell's keeps it saucy. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with me, Motley Fool analyst Jason Moser. How are you today Jason?
Jason Moser: Doing great. How about you?
Deidre Woollard: I'm doing great, Jason. It was a Berkshire weekend.
Jason Moser: Yes.
Deidre Woollard: It wasn't the Berkshire weekend because that's in the spring. That's when everyone goes to Omaha. But we did get the second-quarter results always on a Saturday. Always pretty low-key. You just get the basics there. A lot of basics, but this was strong. This was a nice boost in net income up to nearly 36 billion. Last quarter wasn't so great. Buffett's back. Buffett's never gone, Buffett's back.
Jason Moser: I think it's fair to say he went through a little bit of a low over the last several years, particularly the last few years. As we've seen, Tech take over so much of the conversation in regard to investing and now it's AI and it's easy to forget about that old, boring business model of Berkshire Hathaway. But listen, money is money. They certainly do a very good job of making it over long stretches of time. I mean in regard to the actual business. I think there are benefiting from this interest rate environment. We saw insurance underwriting, they record 74% increase benefiting from those higher interest rates along with lower catastrophic losses. They did see a little weakness in railroad, which is again to be expected. But I think when you look at the business overall, this is just the quintessential long-term buy-to-hold investment. I would say this is probably as close to buy and hold as you can get. For those who are wondering what the difference is, I just like to say buy-to-hold because I think buy and hold implies you just by its set it and forget it. You always need to keep track of what you own and understand what's going on with them.
With Berkshire Hathaway, I don't think it requires quite as much micromanagement, but when you look back to how the stock has performed over the last decade, it's up 205% versus the market's 165%. If you go back to the 1965, it's recorded a compounded 19.8%. It's up 19.8% annually versus 9.9% for the S&P 500. Generally speaking, you've got some ebbs and flows with this business. But when you look at it through that longer-term lens, his strategy is a bit more clear and obviously it's working very well.
Deidre Woollard: Yeah. You never want to sell based on one earnings report if as long as you know that thesis is solid and with Berkshire it always is. One of the things I thought was interesting about this is that you mentioned strong underwriting with Geico, made a big difference here. We've seen this with companies like Kinsale Capital's strong underwriting insurance is, it seems to me to be a bit of an art and a science, but definitely pays off.
Jason Moser: It is. It is a very difficult business. I think we've seen over the last few years new businesses coming in to try to disrupt the insurance industry. I think Lemonade stands out as one and I'm not criticizing Lemonade because I think there is potential with a business like that. But I think what Lemonade demonstrated is that insurance is really hard. Writing that book is really difficult. You have to have some understanding of the markets and the risk. The actuarial that go into it. It is just a very difficult business and they have long history of doing it very well. It's one of those things that if you have a philosophy, if you have a process in place and it's working, you stick with it, you keep it going, you can do it very well, but insurance is just a really difficult business to do well.
Deidre Woollard: Yeah, absolutely. To do well over time. Well, there was talk from analysts over the weekend that Berkshire sitting on a lot of cash. Over 147 billion. Some analysts are saying, well, that means Buffett's not seeing opportunities, the market is overheated. Do you agree with that?
Jason Moser: I think in his world, it makes a lot a lot of sense. You can see there are a lot of quality businesses out there. And I mean, this is, this is an exercise I think we all go through every quarter as we learned of Berkshire's cash hoard than we dreamed. What's the ideal Berkshire Hathaway acquisition this quarter? I think there are a lot of businesses out there that he would love to own. I do think that they are not at valuations that really worked for him though. He is patient if nothing else. For him, most a continues to buy treasuries. He's not concerned with that Fitch downgrade whatsoever. He's holding close to $100 billion in treasuries today and has expressed its intent to keep buying them because essentially, I mean, that's pretty much risk-free money that he can keep on bringing in for the business. In when you have a cash pile, that large scale really does make a big difference. But yeah, I think valuations are just in a tough place right now. They seem high relative to the uncertainty that persists in the market and the economy right now. Then you add that I think what certain to be a bunkers election year coming up next year. Any which way you cut it. I think it's going to be nutty. [laughs] There's going to be a lot of uncertainty that really comes from that. How they say measure twice, cut once. I think he's probably measuring even more than twice here before he makes any cuts at all. I think he's just being very thoughtful about how he puts his capital to work, which to me makes a lot of sense and is in its current state.
Deidre Woollard: Yeah, and I've heard this called a sensitive bull market or a tentative bull market. There's definitely a feeling right now that this bull market is like on coat legs.
Jason Moser: Again, it goes back to a lot of conflicting data. We've been talking for several quarters now, recession. It's not really materialized, so to speak, but you hear people talk about rolling recession and it's been a very awkward time over the last several years, which it's difficult to make decisions when uncertainty is so high.
Deidre Woollard: Yeah, and one of the things I think contributes to uncertainty right now is real estate and what's happening with loans coming due in office and things like that. I always look at Berkshire's real estate holdings. Nothing much to see on the manufactured and site-built home home loan side, about 97% of those are current. I'm not too worried about that. But I'm also interested in and not worried by it. But the largest commercial real estate loan they have, that's just Seritage Growth Properties. That's the rate that Eddie Lampert created that holds a lot of those former Sears properties. They were going to renovate those that was going to be the future of the company. It's actually the other way now where they're just, it seems like they're unloading them. Berkshire invested heavily here. Unpaid balance of around 550 million. They've repaid about 1.05 billion since 2021. We're going to hear earnings from them tomorrow, which I'm interested in. But I feel like this actually, I was unsure for a while, but I think it's working out the company speeding up, selling off those assets. They're paying things off. They're paying ahead of time. This turn out to be a smart move even though it looked a little iffy at times.
Jason Moser: You got to call him Warren Soprano, you don't want to be skipping payments with this guy.
Deidre Woollard: Definitely.
Jason Moser: The deal that relationship dates back to 2018, I believe. Clearly, Seritage along with everyone has gone through and anomalous stretch here over the last three years, particularly in real estate. As we see how companies are addressing this going back to office definitely feels like the narrative is bringing more people back and that should be good for that real estate market. But it does also look like they came to an agreement to extend through July 2025, this agreement, this arrangement that they have, so it's bought Seritage some time. But by the same token, I think they realize the priority. When you talk about lien holders, again this is a gentleman and a company that through Seritage, a lot of much-needed financial aid. To me it would be that number one priority is making Buffett and Berkshire hole there. If Seritage sees things improving in that real estate space, particularly commercial real estate then all the better?
Deidre Woollard: Yeah. Berkshire's always tucking in a few companies under its wing. They did that with a natural gas facility in Maryland and also with Pilot Travel Centers. Was a Berkshire investment for a while, now a Berkshire subsidiary. This is the company that operates trucking centers around 850 of them in North America. They're spending about billion dollars to renovate some of their centers. It seems like a very Buffett business to be reliable. You've got a consistent income stream. They also put in a new CEO who's long-term Buffett guy Adam Wright's seems very capable. Buffett's never exciting, but there's some interest in making this business bigger.
Jason Moser: Well, yeah. I mean, this is something where they initially invested back in 2017 with a minority investment. I mean, you're right, this is just the typical Buffett-style investment as easy business to understand. I mean, they're selling stuff to people, consumers, and truckers. I mean, it's a family-founded and led business, which clearly is something that he appreciates. It serves as really a backbone to our nation's infrastructure and trucking and I don't think that's poised to change anytime soon. I mean, as we see the electrification of our fleets around the country progress, that's great. That also is something that's going to take a lot of time. I mean, that's something that will take a long time to really implement at scale. As it stands right now, I mean, this really seems like a very sensible Berkshire-style investment.
Deidre Woollard: Truckers still need to eat and sleep even if their trucks are going longer. I don't think autonomous trucking is going to happen tomorrow.
Jason Moser: No. Definitely not.
Deidre Woollard: No. So we know about the biggest Berkshire investments. There's Amex, there's Apple, of course, very famously Apple, Bank of America, Coca-Cola, and Chevron. But they're adding to another company, I found surprising, which is Kraft Heinz. Stocks down around 40% in the past five years, their recent earnings only expecting sales growth of 4-6%, you do get a good dividend here. Is that what Buffett says here, or does he feel like it's hard to speculate what he's thinking, but why Kraft Heinz?
Jason Moser: Well, I mean, obviously the initial investment in they own, I think around 26, a little bit more than 26% of the company today. He went into this one. I think his opinion probably has changed on the business a little bit. He went into this investment thinking that portfolio brands was probably a little bit stronger than it is. I think you said as much. I mean, he said that there were some brands in there that maybe weren't as resilient or as strong as he originally anticipated, but that's not all of them. It is still a portfolio with a number of strong brands, not now to your point, and it is a business that's not recording really very impressive growth. I mean, if you look at the five-year compound annual growth rate there, on the revenue side, just 0.7%. Now three year is a little bit better at 2.7%, so that could indicate maybe things are improving a little bit. It is cash flow positive, the coverage ratio is no issue there. They can cover the debt that they owe. The dividend should be safe for the time being and so I do think you're right there. The dividend is at least something that gives him more comfort in being patient. I would encourage anyone listening.
Go back to Berkshire's most recent annual letter. You could just google Berkshire letters, that'll take you right to it. Read in that letter, there's a section in that letter called the secret sauce and I'll read an excerpt from that. It says in August 1994, yes, 1994, Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion. Then a very meaningful Summit Berkshire, the cash dividend we received from Coke in 1994 was $75 million. By 2022 the dividend had increased to $704 million. Growth occurred every year just as certain as birthdays. All Charlie and I were required to do was cash coax quarterly dividend checks. We expect that those checks are highly likely to grow and then he closes, I would say that I'd imagine if Heinz demonstrates down the road here that it's a bit more impaired, if we do see that growth is really not where he thought it would be, then he may revisit it. I think as it stands right now, that dividend gives them a little bit of a reason to be patient, but I'd say this is also one that's probably on his list to keep an eye on.
Deidre Woollard: He loves great brands and I would not bet against the mac and cheese. You teed me up because you said sauce and I think of you as our sauce guy and on Friday you talked about Mustard Skittles. Today we're going to talk about another flavors, spaghetti sauce. Campbell announced they're buying Sovos Brands, which if you haven't heard of, yeah, me neither, but that's the company behind the Rao's, which I have heard of and Michelangelos, which is those Frozen Italian dinners and also Noosa yogurt. One of those things is not like the other. They're paying 2.3 billion. It seems like it's going to round out some of their prepared meals segments that goes in there. Meals and Beverages segment. Do you like the deal and do you like the sauce?
Jason Moser: Well, yeah, the deal I think makes sense. I mean, you made a point in our discussion beforehand that it really does seem like this is more about getting the Rao's Brand. I mean, the Michelangelo and the, what is it?
Deidre Woollard: Noosa yogurt.
Jason Moser: Those are freebies, I guess. I mean hopefully they do well, but I don't know. That's really what Campbell wanted from this deal. I mean, if you look at the company itself is very recent IPO from August 2021, $23 per share in cash that represents a total enterprise value of around $2.7 billion. Now Campbell is going to issue some debt to get this done, that's not a problem. The coverage ratio there today is at seven and that essentially is just telling you the net interest expense versus the operating income the company is bringing in. Pretty reliable business there in Campbells and the consumer goods that they're sending so I think they can afford this with no problem. The trouble that i mean with Campbell, this consumer goods company's growth starts slowing down. Then you have to figure out how to go from there. What's the next act? I mean, if you look at the track record, that has not been a very good investment. I mean, from a 3, 5,10 year timeline, it's not an investment that's beaten the market.
I mean, I think investors have made a little money from it, but it's nothing to write home about. But generally speaking, it does make sense if they're looking to expand their portfolio and figure out a way to stock growth. We see it all the time, then it really just boils down to the price that they're paying and in this case, it seems at least fair. But yeah, I mean, if you look at the penetration of Rao's sauce, I found in the 10K, the household penetration of Rao's sauce has increased from 1.3% in the 52 weeks ended January 3rd, 2016 to 11.9% in the 52 weeks ended December 25th, 2022. Clearly Rao's Brand is growing a little bit. I mean, it's not impressive growth by any means, but it's gaining some share. And I think that's encouraging. Plugging it into the Campbell's business model there would likely give them exceptionally greater distribution there, which could have a nice impact and in perhaps with the other brands as well. It makes a lot of sense from that perspective.
Deidre Woollard: Yeah, it's a little more expensive than some of the other brands that you might see on the shelf, I think which is an interesting move for Campbell's to see if they're going to keep that price premium.
Jason Moser: I think so. I mean, I can't speak to the sauce. I don't actually know that I've ever had it personally. I'm a little bit of a sauce snob, maybe Deidre.
Deidre Woollard: I suspected you might be.
Jason Moser: I want to go ahead admit this. I make my own sauce, and I am a Cento San Marzano tomato guy. I mean, I feel like you need to tell him I'm going to make pizza or pasta. I mean, to me, I would much rather just start with those tomatoes and season it, however I like it. I find that those can sauces are just too sweet for me, it feels like they add a lot of sugar to them that just takes away from the flavor of the sauces. But you can't be the convenience. They're certainly very convenient. It's not like they're bad. I think you said if it had my druthers, I would make my own, but if I'm calling the pinch, maybe you'll have to give that Rao's sauce a try.
Deidre Woollard: It sounds like you're inviting me over to dinner. Well, thank you for your time today, Jason.
Jason Moser: Thank you.
Deidre Woollard: As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.
