Billionaire Warren Buffett will explain in his annual letter Saturday how the current economic turmoil affected his company over the past year, and the revered investor will likely point out a few lessons of the recession.
Buffett's Berkshire Hathaway Inc. shareholder letters are one of the best-read business documents released each year, and many companies use quotes from Buffett's writings in their own reports.
Investors will be interested to learn more about long-term derivatives Berkshire holds that are tied to the value of stock market indexes, and to read Buffett's views on the economy. Buffett usually devotes several pages of his letter to his view on a business or social issue.
Berkshire's Class A shares remain the most expensive U.S. stock, but they have declined significantly since setting a high of $151,650 in December 2007. That came after an exceptionally profitable quarter that was helped by a $2 billion investment gain.
On Monday, Berkshire's Class A stock hit a new five-year low at $73,500 before recovering to close at $75,600, down 1.8 percent from Friday.
The two analysts surveyed by Thomson Reuters on average expect Berkshire to report Saturday a 2008 profit of $5,534.50 per share.
Fox-Pitt Kelton analyst Gary Ransom upgraded Berkshire shares Monday because he said he believes Buffett's company will be able to take advantage of bargains in the stock market and elsewhere.
Berkshire said it had $33.4 billion cash or cash equivalents on hand at the end of September.
Ransom said in the research note he expects Berkshire to put its cash to work "in acquisitions or in higher-yielding investments in 2009." So Ransom upgraded his rating of Berkshire shares to "outperform" from "in line."
Buffett has promised to disclose more details about the derivatives Berkshire holds and how their value is determined in his letter.
In the third quarter, unrealized investment losses of about $1 billion weighed on results, but Berkshire still posted $1.06 billion net income in November.
Berkshire recorded a $1.26 billion pretax loss on its long-term derivative contracts in the third quarter because the value of the markets the contracts are tied to declined.
Morningstar analyst Bill Bergman said it's important for Buffett to provide more information because so many investors are uneasy about derivatives.
"We need to learn more about that, and I think we will," Bergman said.
Buffett has predicted the company's derivative contracts will ultimately be profitable partly because all the premiums were paid up front, allowing Berkshire to invest that money.
But the profitability of Berkshire's derivatives won't be fully known until the contracts start maturing a decade from now.
"The biggest problem in the derivatives business is counterparty risk, and Berkshire has no counterparty risk," said Fuller, who works with Midway Capital Research & Management in Chicago.
Fuller said he's also looking to learn more about all the investments Berkshire made in 2008 because it seemed to be in exceptionally active year for the Omaha-based company.
The deals Berkshire completed in 2008 included:
_ Acquiring 64 percent of Marmon Holdings Inc. for more than $4.5 billion. The industrial conglomerate added $247 million in pretax earnings in Berkshire's most-recent quarter.
_ Last fall, Berkshire invested $5 billion in Goldman Sachs and $3 billion in General Electric, and both companies promised to pay Berkshire a 10 percent annual dividend.
_ Berkshire also bought a chunk of Wrigley by helping finance Mars Inc.'s acquisition of the chewing-gum giant. Berkshire received a $2.1 billion minority equity interest in the Wrigley subsidiary and took on $4.4 billion of subordinated debt as part of the deal.
Berkshire owns a diverse mix of more than 60 companies, including insurance, furniture, carpet, jewelry, restaurants and utility businesses. And it has major investments in such companies as Wells Fargo & Co. and Coca-Cola Co.
Bergman said he'll be interested to read about how the recession affected Berkshire's operating companies over the past year. Several of Berkshire's businesses, including Shaw Industries carpet and Acme Brick, have suffered over the past two years because of the problems in the housing industry.
"Their take on the economy has always been a good one," Bergman said.
Berkshire's insurance group, which includes Geico, reinsurance giant General Re and several other firms, should receive a $224 million boost in the fourth quarter because Florida was spared major hurricane damage in 2008.
Berkshire accepted the $224 million from Florida last year in exchange for agreeing to loan the state up to $4 billion if a major hurricane struck before the contract expired Dec. 31.
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