Warren Buffett’s Kraft Heinz Bet Dragged Down Berkshire Hathaway in 2018
Conglomerate swung to a $25.4 billion loss in the fourth quarter due to an unexpected write-down at Kraft Heinz and unrealized investment losses
The world’s most famous investor had one of his worst years ever in 2018.
Warren Buffett’s Berkshire Hathaway Inc. BRK.B -1.67% said Saturday it swung to a $25.4 billion loss in the fourth quarter due to an unexpected write-down at Kraft Heinz Co. KHC -27.46% and unrealized investment losses.
But Berkshire posted operating earnings of $5.7 billion, up from $3.3 billion a year earlier, due to increased earnings from Berkshire’s railroads, energy business and other segments. For the year, Berkshire posted $24.8 billion in operating earnings. That was a record high, Mr. Buffett said in his annual letter to shareholders, which was also released Saturday.
Mr. Buffett in his letter offered no hints about who will eventually succeed him as CEO. But he praised deputies Ajit Jain and Greg Abel, saying that decisions to elevate the two men last year into more prominent roles were overdue.
Messrs. Jain and Abel were promoted in early 2018 to vice chairmen and now oversee many of Berkshire’s day-to-day operations. One of the two men is expected to succeed Mr. Buffett as chief executive.
“Berkshire is now far better managed than when I alone was supervising operations,” Mr. Buffett wrote.
Mr. Buffett’s annual shareholder letters are widely read on and off Wall Street for his musings on markets, investing and the economy. This year’s letter was shorter than usual and stuck mostly to discussing Berkshire’s business.
As usual, Mr. Buffett struck an upbeat tone about the U.S. economy and said the country will thrive regardless of which political party is in charge. A longtime Democrat, Mr. Buffett said the success of the American economy over time benefits everyone.
“It is beyond arrogance for American businesses or individuals to boast that they have ‘done it alone,’” Mr. Buffett wrote. In addition, he said, “Americans will be both more prosperous and safer if all nations thrive.”
Berkshire reported net earnings of $4 billion in 2018, down from $44.94 billion in 2017. Berkshire’s 2017 earnings soared in the fourth quarter of 2017 due to changes in the U.S. tax law that lowered Berkshire’s deferred tax obligations for stock investments that it currently holds.
Berkshire’s earnings are unusually volatile because it holds large equity stakes in companies including Wells Fargo & Co. and Apple Inc. An accounting rule that went into effect last year requires Berkshire to include unrealized investment gains or losses in its net income.
Kraft Heinz contributed a $2.7 billion loss to Berkshire in 2018, compared with adding $2.9 billion to its earnings in 2017. Kraft Heinz on Thursday wrote down the value of some of its biggest brands, disclosed an investigation by federal securities regulators and slashed its dividend.
The company’s book value per share rose 0.4% in 2018, the company said, compared with a minus 4.4% total return in the S&P 500, including dividends.
Mr. Buffett has traditionally encouraged shareholders to pay attention to Berkshire’s book value over its market value, but he said in the letter that market value is now the more relevant metric.
Berkshire hasn’t notably outperformed the S&P 500 in recent years. Berkshire hasn’t done a major deal in three years, and Mr. Buffett has struggled to find reasonably priced large companies to buy. As Berkshire continues to grow and accumulate cash, Mr. Buffett is under pressure to make ever-larger deals to move the needle on its earnings. Berkshire’s largest acquisition in 2018 was the $2.5 billion purchase of a New York medical malpractice insurer.
Berkshire’s cash pile, which is mostly invested in Treasury bills, grew to almost $112 billion at year-end, marking the sixth straight quarter above $100 billion.
Mr. Buffett offered no specific guidance on how he may use his growing pile of cash, and he said Berkshire is likely to invest more in stocks than acquisitions in 2019. “Many stocks have offered far more for our money than we could obtain by purchasing businesses in their entirety,” he wrote. “We continue, nevertheless, to hope for an elephant-sized acquisition.”
Berkshire repurchased a bit over $400 million of its stock in the fourth quarter, down from $928 million in buybacks in the third quarter. Investors were hoping Berkshire would spend a significant chunk of its cash buying back shares.
Some of Berkshire’s 60-odd subsidiaries completed acquisitions, but those deals tend to be small. Berkshire spent $1 billion on bolt-on acquisitions in 2018, the company said, down from $2.7 billion the prior year.
Roche Nears Deal to Buy Spark Therapeutics for Close to $5 Billion
Biotech deal would represent a big premium, given Spark had a market value of just under $2 billion as of Friday’s close
Roche Holding AG RHHBY 0.51% is nearing a deal to buy Philadelphia biotechnology company Spark Therapeutics Inc., according to people familiar with the matter, as the Swiss drugmaker seeks to expand its presence treating hemophilia.
A deal for Spark could be announced Monday—if not sooner—at a price tag of nearly $5 billion, some of the people said. That would represent a big premium, given Spark had a market value of just under $2 billion as of Friday’s close. As always, the deal could still fall apart before the companies manage to make it official.
There was at least one other bidder for Spark as of Friday, some of the people said, though it isn’t clear who.
Therapies that replace a defective gene with a healthy one are an emerging class of treatment pioneered by companies including Spark. It was founded in 2013 out of gene-therapy research at Children’s Hospital of Philadelphia.
Doctors and patients have been looking forward for years to gene therapies treating intractable inherited diseases, but development of the therapies has proven more challenging than initially thought, including the death in 1999 of a young man who received an experimental gene therapy.
Yet development of the therapies appeared to turn a corner in recent years, and big companies like Pfizer Inc. and Novartis AG have been making moves to offer such treatments. Pfizer has partnered with Spark on development of a hemophilia B treatment. Last year, Novartis paid $8.7 billion for gene-therapy developer AveXis.
In 2017, Spark’s Luxturna, which treats a condition that can cause blindness, was the first gene therapy for an inherited disease to receive Food and Drug Administration approval. Spark is also developing gene therapies to treat the inherited blood disorder hemophilia.
The company generated just $64.7 million in revenue last year and a net loss of $78.8 million. Even though that represents dramatic improvement from the prior year on both counts, it underscores how much Roche is having to pay up to secure the acquisition.
Hemophilia is a new and emerging category for Roche. In 2017, the U.S. Food and Drug Administration approved the company’s hemophilia A treatment Hemlibra, which analysts expect will have billions of dollars in yearly sales.
In January, the company described Hemlibra as one of its biggest growth drivers, with sales surpassing CHF100 million ($100 million) in the fourth quarter alone.
If Spark’s hemophilia gene therapies pan out, Roche would be able to expand its offerings in the area, helping it compete with market rivals like Takeda Pharmaceutical Co. Ltd. and Sanofi SA .
Among the challenges confronting companies like Roche seeking to sell the new gene therapies is gaining reimbursement. Spark has said it plans to sell Luxturna in the U.S. at a cost of $850,000 a patient, but it wants to offer partial refunds if patients don’t meet recovery targets.
Roche is among a number of big drug companies hungry for biotechs that can help restock their pipelines and portfolios. There have been a raft of such deals already this year, including Bristol-Myers Squibb Co.’s roughly $74 billion planned purchase of Celgene Corp. and Eli Lilly & Co.’s agreement to pay $8 billion for cancer specialist Loxo Oncology Inc.
Weekly Market Update: US/China trade talks push towards the finish line; Central Bank Hawks have reason to hibernate
Stocks spent much of the week on a continued upswing, largely on lingering hopes for a breakthrough in US-China trade talks. By week's end, reports had circulated that the two sides were drafting a six-point MOU related to key structural issues after reaching a consensus on main topics in principal. Some of those expectations were tempered by subsequent reports suggesting the two sides remained far apart on intellectual property and other important structural differences, but there was enough movement -- namely China’s commitment to purchase $1.2T in US goods -- to discuss the planning of a potential summit in late March. The Yuan moved up after Chinese officials reiterated that the currency would not be used as a pawn in the trade debate. Ultimately President Trump at an Oval Office meeting on Friday reiterated openness to extending the March 1 China tariff deadline should progress continue to be made after the Chinese Vice Premier Liu announced his delegation would be staying in DC for two additional days of trade talks.
Oil prices continued upward to levels not seen since November even though US domestic production reached 12M bpd for the first time. The Greenback edged lower, which coincided with a further breakout in gold prices. Apr gold futures crossed $1,340 for the first time since May 2018 before backing off late in the week. Global Treasury yields largely stayed suppressed, with the US 10-year ending back below 2.65% and the Bund staying below 10 bps. Wednesday’s FOMC minutes and a slew of Fed speakers that followed affirmed the 'patient' narrative has been adopted by a consensus and many view the balance sheet unwind coming to an end sometime this year. Central bankers had little reason to feel hawkish as continued sluggish economic readings were turned in by key European and Asian economies while the US data softened notably, as well. For the week the S&P rose 0.6%, the Dow added 0.6% and the NASDAQ gained 0.7%.
The focus was on more quarterly earnings in corporate news for this President’s Day-shortened week. Walmart’s holiday quarter came in ahead of expectations on both top and bottom line, as well as on same store sales, despite the poor Dec sales data released by the Commerce Dept last week. Avis Budget lifted on an earnings beat, helping Hertz shares, noting lower fleet costs and improved pricing. Domino’s dropped on disappointing same store sales and margins hit by inflationary pressures. Kraft Heinz fell precipitously after announcing a weak earnings report that included news of an SEC investigation and a dividend cut. Stamps.com market cap was nearly halved after it said it would discontinue its exclusive partnership with USPS.
Closing Stock Market SummaryThe S&P 500 gained 0.6% on Friday in a broad-based rally while U.S.-China trade talks showed signs of progress. The benchmark index also increased 0.6% this week.
The Dow Jones Industrial Average (+0.7%), the Nasdaq Composite (+0.9%), and the Russell 2000 (+0.9%) extended their weekly gains to 0.6%, 0.7%, and 1.3%, respectively.
Nine of the 11 S&P 500 sectors finished higher with information technology (+1.3%), communication services (+1.1%), and health care (+0.9%) leading the advance. Conversely, the financials (-0.2%) and consumer staples (-0.3%) sectors finished in the red.
Stocks traded for most of the session with modest gains, as technology stocks led the advance. Stocks, however, came off their session highs in late afternoon trading following some U.S.-China trade updates.
The Chinese delegation will stay in Washington an extra two days to continue negotiating, but the two sides have reportedly agreed on two things: (1) an unspecified agreement regarding currency manipulation and (2) a commitment from China to purchase $1.2 trillion of U.S. goods. President Trump said he will likely meet with China's President Xi at Mar-a-Lago in March.
The market climbed right back to where it was before the trade news, finishing near its best levels of the day.
Separately, remarks from Federal Reserve officials on Friday provided little surprises and were not market-moving. The Fed speakers maintained a dovish-minded stance on the central bank's monetary policy and balance sheet normalization efforts.
Kraft Heinz (KHC 34.95, -13.23) was a story stock, plunging 27.5%, after the company missed earnings expectations, slashed its dividend, and announced that it has received a subpoena from the SEC, inquiring about the company's accounting practices.
U.S. Treasuries closed on a higher note, pushing yields lower across the curve. The 2-yr yield decreased five basis points to 2.48%, and the 10-yr yield decreased three basis points to 2.66%. The U.S. Dollar Index declined 0.1% to 96.55. WTI crude rose 0.5% to $57.25/bbl.
Investors did not receive any economic data on Friday.
Looking ahead, investors will receive Wholesale Inventories for December on Monday. In addition, Warren Buffet will release his widely-read annual letter Saturday morning, along with Berkshire Hathaway's earnings report.
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