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By Greggory Warren, CFA and Jeremy Glaser | 04-25-2017 10:00 AM

Expect an Eventful Berkshire Hathaway Annual Meeting

Morningstar analyst Gregg Warren expects 3G Capital, Wells Fargo, Apple, and airlines to be among the major topics this weekend.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We're getting ready for the 2017 Berkshire Hathaway annual meeting. I'm here today with Gregg Warren, he is a senior stock analyst who covers Berkshire for Morningstar. He'll also be on a panel of analysts asking questions of Warren Buffett and Charlie Munger at the meeting. We're going to talk about what some hot topics are going to be this year.

Gregg, thanks for joining me.

Gregg Warren: Thanks for having me.

Glaser: So, it seems like going into every meeting there's one or two kind of big things that are on everybody's mind. Into 2017 what do you expect to be dominating the conversation?

Warren: I think as we look forward to this year's meeting, there seems to be the more obvious things that have popped up. It's been a topic in past years and it really sort of revolves around Berkshire's relationship with 3G Capital. Back in 2013, it really kind of popped up when they bankrolled the purchase of Heinz with 3G Capital. 2015 it rose again when they were bankrolling the Tim Hortons combination with Burger King as well as the acquisition, or I should say the merger of Kraft with Heinz.

So, I think, this year, we're going to see 3G sort of pop its head up again. The failed attempt on Kraft Heinz's as a part to buy Unilever earlier this year is really I think going to be a big topic of conversation. It's going to not only raise questions about that relationship and what Berkshire gets from it and what Berkshire shareholders should expect from it longer term, but I think it also sort of begs questions about Kraft Heinz. Have they sort of reached a pinnacle on how much margin improvement they can bring out of the business and do they need additional acquisitions to keep that story going.

Glaser: It's not going to be the only topic. Wells Fargo has had a, let's call it an eventful year. You suspect that also will be something people are going to want to talk about.

Warren: Yeah. I think Wells Fargo is sort of Buffett's favorite holding, and he has been petitioning the Fed for almost a year now to allow Berkshire to maintain more than a 10% stake. It gets more difficult once they get past that 10% threshold. They sort of have to act in a very passive manner. We get the sense that there may have been additional restrictions that are going to be put on Berkshire if they maintain that stake above that level. As you know, earlier this month Berkshire walked away from that pursuit of that sort of dispensation from the Fed. They've agreed to sell down the stake below 10%. The question longer term is, does this mean that Wells Fargo is going to be a perpetually declining stake within Berkshire's portfolio, because as Wells Fargo buys back stock every year, they are going to have to adjust down their portfolio or look to see whether or not they have to adjust down their holdings to get below that threshold.

Glaser: If Wells Fargo maybe will take a diminished stake, Apple has been taking a larger stake. What do you think says about Berkshire?

Warren: Yeah. I think, Apple--and even if you go back a few years to sort of IBM--I think they've raised some serious questions about the size of Berkshire's portfolio and whether or not they're somewhat handicapped now where they can only buy the largest of the large caps. Because if you think about it, for a company like Apple, they bought a $7 billion stake. That seems enormous. But Apple's market cap is $700 billion-plus. So, it really only amounted to about 1% of the company's outstanding shares. So, it's not as likely to, say, move the shares overall than if they were to try to take a $7 billion in a much smaller firm. So, I think that this raises some questions about the challenges that the investment portfolio has and more so what Todd and Ted are going to have longer term as they look to sort of populate the portfolio with meaningful enough positions to be impactful but at the same time also tapping into companies that may be able to grow at a faster rate than say your mega-caps.

Glaser: Outside of those names though they've been buying stakes in airlines. What kind of questions do you think are going to come up around these kinds of the investments?

Warren: Yeah, the airlines kind of caught us off guard a little bit. Buffett's never been a big fan and suddenly they were piling into four different airlines within the past six months. And it just seems counterintuitive. I know that there's talk about the consolidation of the industry. They are a little bit more rational now. But it begs sort of the question is, are there comparisons here--and I know a lot of investors are worried sort of voice these--but when they bought BNSF nearly a decade ago, they went out and bought a handful of railroads beforehand before they finally bought up all of BNSF. So, there is some hope here that they buy one of the airlines on some investors' parts.

But my big concern with the airlines is, they are really sort of pegged to commodity prices, to oil prices, fuel prices overall. With your standard railroad, not only do they have sort of the track right away sort of empowering a wide economic moat, there's few of the railroad domestically and even within North America when you count the Canadian railroads. But from a pricing perspective, they have contracts in place that will move up and down the charges relative to where fuel prices go. Airlines, fuel prices go up, you can only raise ticket prices if everybody else raises ticket prices and vice versa. When oil prices fall significantly, if you wait too long, your competitors are going to undercut you by dropping prices on tickets overall. It's very, very sort of competitive in that realm. So, we're kind of curious to see if questions get asked along those lines.

Glaser: Gregg, it sounds like it's going to be a pretty eventful meeting then?

Warren: Yeah, yeah, yeah. We think it's going to be pretty eventful this year. There's already a line of different topics that have come up within the past few months that are likely to make the meeting more interesting. And we also think that in the next couple of weeks you could see some more things breaking.

Glaser: Gregg, thanks for joining me.

Warren: Thanks for having me.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

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