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Will Warren Buffett Get His ‘Elephant’ in 2020?

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  • Berkshire Hathaway released its 2019 annual report over the weekend. The filing also had the annual shareholder letter from Chairman Warren Buffett. Over the years, the letter has offered insights into Buffett’s investment philosophy.
  • Last year, Buffett talked about an “elephant-sized acquisition” and the lack of such opportunities. This year, he said that such opportunities are “rare.”
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Warren Buffett’s annual letter

Over the weekend, Berkshire Hathaway (NYSE:BRK.B)(NYSE:BRK.A) filed its 2019 annual report. Along with the financials, markets look for Chairman Warren Buffett’s letter. This year, Buffett talked about a lot of things. However, he stayed clear of any political comments. Last year, he apparently took a dig at President Trump. He also talked about an “elephant-sized acquisition.” He said, “The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects.”

Meanwhile, he has been frugal with Berkshire Hathaway’s cash in his hunt for the “elephant.”

Berkshire Hathaway’s annual report

In this year’s annual letter, Buffett talked about the features that Berkshire Hathaway looks for in a business. He said, “First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.” However, he added that such outright acquisition opportunities are “rare.” Buffett has been deploying money in shares of publicly-traded companies in the absence of acquisition opportunities.

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Warren Buffett’s last “elephant”

The last major acquisition that Berkshire Hathaway completed was Precision Castparts in 2016. Notably, Buffett termed that acquisition as “expensive.” Meanwhile, the Boeing 737 crisis impacted Precision Castparts. The company produces components for aircraft manufacturers. Last year, Precision Castparts reported revenues of $10.3 billion—up 0.7% from 2018. In 2015, as a standalone company, Precision Castparts reported revenues of $10.0 billion. The company’s revenues have been stagnant over the last five years. Precision Castparts’ sales might fall in 2020 based on Berkshire Hathaway’s 2019 annual report.

Berkshire Hathaway faces fierce competition

Meanwhile, according to Refinitiv data, US domestic merger and acquisition activity increased last year. So, deals are available in markets. However, staying true to his value investing principles, not many deals make sense for Warren Buffett. Also, due to the continued supply of easy money, Berkshire Hathaway faces a lot of competition from private equity companies. Last year, Apollo Global Management outbid Buffett to acquire Tech Data. Can Buffett find the elusive “elephant” in 2020? The possibility looks tough given the current dynamics, but we’ll have to wait and see.

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