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By Greggory Warren, CFA and Jeremy Glaser | 05-06-2017 04:00 PM

What We Learned, and Didn’t, at the Berkshire Meeting

Hints that Buffett could retire one day and a lack of clarity around the future of BNSF were highlights of the 2017 meeting, says Morningstar’s Gregg Warren.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here with senior stock analyst Gregg Warren. He just finished asking Warren Buffett and Charlie Munger questions on the panel at the annual meeting. We're going to see what his takeaways were. Gregg, thanks for joining me. 

Gregg Warren: Thanks for having me.

Glaser: Let's start with succession planning. There seemed to be a hint that Warren Buffett might give over the reins while he's still alive. Do you think that's a true possibility?

Warren: Yeah, that was really kind of interesting because it was tucked away in an answer to another question. It did take me off-guard a little bit because our expectation was that Warren would keep running the show until he wasn't around any longer. The fact that he's willing to potentially step aside sooner and allow his successor to take over speaks, at least to me, volumes about the quality of the team he has underneath him. Greg Abel is still our top pick for the capital allocating chief role, and with Todd and Ted sort of in place there as kind of co-CIOs, and having Ajit help out as well. I think there's a very, very good team there. I think Warren feels comfortable enough to that, to start speaking on those terms. 

Glaser: You asked a few questions about the future of BNSF, the railroad, both in terms of what's happening with coal and what's happening with the Panama Canal expansion. Anything that they said that kind of soothes your worries about what's happening with this sector?

Warren: I wasn't entirely happy with the answers I got. I was expecting more details about perhaps where they thought coal might be going from a buying perspective. We all know it's in secular decline, but just to get sort of a hint on how much it could be impacted longer term. The same with the Panama Canal impact on intermodal. I mean there's definitely going to be an impact there. Again, this forum is a bit more difficult to sort of get into nitty-gritty details on stuff, but he seems to be comforted with the notion that they'll continue to have growth. The rail will continue to do business. It still has a positive economic comparison to say, trucking, and other attributes, so from that perspective, I think the future's still good. It may just be a bit bumpy in the midterm. 

Glaser: Lot a questions about 3G and how their kind of ruthless cost-cutting maybe cuts against Berkshire culture. We've heard these questions a lot. Anything new, nuance there? Or they just going to keep giving that same answer?

Warren: I think Charlie kind of closed the door on that a little bit, as far as saying there's no moral issue there. I personally, I don't have a big problem with 3G. I covered packaged food companies for almost a decade before I covered asset managers and Berkshire and there's a lot of bloat there and there's a lot of stuff that could be cut out. There's a lot of useless spending on a lot of different things. 

Yeah, letting people go never helps, but if you're trying to run an efficient business and your primary customers are companies like Walmart and Target, that have huge buying power and want prices as low as possible, you can't do that running large organizations with large numbers of people.

Glaser: Going into the meeting you said that airlines would be a topic of conversation, and they were. You brought it up. Do you think that [Buffett] is going to potentially make a play to buy an entire airline? Do you think he really wants to own the industry? Did you get any sense if this is really where he wants to be?

Warren: Yeah. It's still a hard one for me there. I get the sense more that this was Ted's idea. They're making a bet on the industry. They're not necessarily making an individual bet on one particular company. The expectation is that the industry's going to look better over time, than maybe it has historically. I have concerns because I just think that fuel prices are a big problem for the industry and if we get into a large upturn in oil prices, it could really sort of spell problems for all of them. 

Glaser: All in then, anything in the meeting that changes your opinion of Berkshire, makes you rethink your thesis at all or just kind of confirmation of where you are? 

Warren: Nah. I think [Buffett] confirmed a few of the things because we're looking again at the model again right now. We're sort of incorporating changes in corporate tax rates longer-term. It seems like they're going through sort of the same mechanics, but I think at best though we're looking at maybe a mid-single-digit, high-single-digit increase in the fair value. We've published that more recently. It's not necessarily built on the fundamentals of the business, which we still think are great. It's just sort of the impact that kind of impact's going to have on different parts of the balance sheet.  

Glaser: One last question for you: Buffett mentioned there's a possibility that after he goes, the stock could actually pop on this hope that [Berkshire Hathaway] would get split up and maybe the market would at least temporarily think the parts are worth more than the whole. Do you think this is rational? Is Berkshire too big? Would it make sense to break it up?

Warren: Well, I think there's two parts to that question. The first one is, I don't think it's going to go up. I think with Buffett gone, there's going to be more selling pressure on the shares; it's part of the reason I brought up the question about the Class A shares and whether or not they had a pipeline of a potential sellers because that stock is highly illiquid and if a lot of shares hit the market right after he passes away or he moves on, I think it can put a lot of selling pressure on the company overall. 

That said, I think the longer-term hope for a lot of investors, first and foremost, is the company offers a dividend once he's no longer running the show. Now that may happen sooner, based on some of the comments he made today, but I think the other longer-term thing is this company could pretty easily be broken up if it needed to be. But we'd have to get five, 10, maybe even 15 years down the road before we got to that level. I mean, there's plenty of stuff the new management team could do. Just reducing the amount of cash that's kept on the balance will make returns look better. 

Glaser: Gregg, thanks for talking to me today. 

Warren: Thanks for having me. 

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

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