No. of Recommendations: 13
First thanks to nola622 for the Davis clip (post 15614)which I enjoyed. At the end, there was a link to another youtube interview referenced in the above title. (Actually a youtube search reviews many links with this title. But below is the one I'm referring to.)
It was a 2006 Charlie Rose interview with Warren, just over 42 minutes. I rewatched it and think it has a lot to offer. It covers many subjects from the beginning of Warren's first partnership to early acquisitions to investing excess cash to succession. With penetrating questions, Rose probes Warren's thinking on many subjects. It's a good review for old timers like myself and for newer investors who may not have studied the earlier years of BRK and WEB's thinking at the time.
https://www.youtube.com/watch?v=WOwJV1RlwSQOne topic of particular interest was Warren's criteria for making a major acquisition. (22:50) This was at a time when BRK had about $44 billion of cash, with WEB reserving circa $10 billion for catastrophic events. These were:
1. A business I can understand.
2. An enduring competitive advantage.
3. A management I like and trust.
4. A reasonable price - not the most important but still important.
I doubt these have changed. And that they also apply to large equity investments. But now we're dealing with 10X the cash.
So, as an exercise, I tried applying them to XOM - a subject I've talked about before.
o Business I understand. Warren knows that O&G are commodity businesses which means they don't control prices. Also that O&G are depletion businesses that require a lot of cash flow reinvestment. Not his choice of business types. XOM has managed through oil price cycles for 140+ years. They' reduced the share of operating cash flow going into dividends and capex from 60% in 2019 to 50% in 2025 to a forecast 40% by 2030. That should mean something.
o Enduring competitive advantage. XOM dwells on this in their investor presentations. They cite scale, industry leading integration of operations, efficiency, technology, and people. These are hard to prove. However results since 2017 when Woods became CEO have exceeded major competitors and has matched the S&P 500 at 14.5% (5 year). In turn, competition is now moving in the same directions - albeit after some chased renewable resources. Will they catch up? Will the O&G industry turn down after 2030? XOM has been successful for over 140 years, so they must be doing some things right. Will this endure?
o Management he likes and trusts. XOM has become very open in explaining their strategies and reasoning. This a change under Woods - before they were very reticent to forecast future plans and results. Since these "open" plans were laid out in some detail in early 2018, they've met or exceeded every goal. Does WEB like and trust them now? Is BRK even looking at XOM?
o Reasonable price. XOM now sells for basically a 15 P/E with a 3.55% forward dividend and an 8.0% total yield including buybacks. They're anticipating 8-10% annual earnings growth to 2030. Excluding capex made but not yet producing cash flow, XOM is now earning 17% ROCE on remaining assets. Current capex is estimated to yield circa 30% IRR. Is this a reasonable price given the foregoing?
I can't answer what Buffett thinks about the above questions? I just hope he's thinking about them.
In summary, the criteria in the interview have helped me maybe better think about what Buffett is coming from re XOM. How might he view Google using the same criteria? Chubb? Any other candidates?
*****
I think the above interview is worth a watch.
