Buffett's Shareholder Letter Synopsis

Warren Buffett's eagerly anticipated annual letter to shareholders was released this morning. Here are the highlights:

Book value increased 19.8% last year, gaining $21.8 billion in net worth, and is at $84,487 per share. In the last 45 years, Berkshire never had a five-year period during which its book value didn't outperform the S&P 500.

The company had net income of $8.06 billion, or $5,193 per share in 2009, which is about $155 million a week. It has $156.6 billion in cash and securities, or approximately $100,000/share.

The letter included a primer on Berkshire's approach to business, for the benefit of the 60,000 new shareholders due to the acquisition of Burlington Northern Santa Fe (BNSF). It contained details on Berkhire's four separate business segments:

1. Insurance, which had a float of $62 billion at the end of the year, and earned an underwriting profit of over $1.5 billion in 2009.
2. Regulated utility business, which earned Berkshire over1 billion for the year. In the future, the newly acquired BNSF railroad business is going to be a part of this segment. Berkshire is committed to providing the country with reliable electricity and railroad systems, despite the capital intensive nature of this business and its heavy demand for continuing capital expenditures.
3. Manufacturing, Service and Retailing, with over $60 billion in revenue and net income of $1.1 billion for the year. The diverse businesses Berkshire owns in this segment distribute groceries, sell chocolate, furniture, jewelry, paint, shoes, cutting tools, ice cream and more. Most of these operations suffered from the recession, but Buffett singles out NetJets, which sells fractional ownership of jets, as particularly problematic. NetJets has been losing money and without Berkshire guaranteeing its debt, would be out of business. Buffett assigned Dave Sokol as its new CEO, with the task of turning NetJets around.
4. Financial Products: Berkshire owns Clayton Homes, a manufactured home builder, an industry that has been in shambles partly because mortgage rates kept low by the government do not apply to low cost manufactured homes. Berkshire also has furniture and trailer leasing operations that have been hit hard by the economic downturn. All in all, this business segment earned $781million pre-tax last year.

Another part of Berkshire are its investments: Berkshire has common stock investments worth $59 billion, with a cost basis of $34.6 billion. In the cases of Conoco Phillips, Kraft, Sanofi Aventis and US Bancorp, the market value of its holdings is below Berkshire's cost.

In addition Berkshire owns $26 billion of non traded stocks, in companies like GE, Goldman Sachs and others. These holdings pay Berkshire $2.1 billion in annual dividends and interest.

The much maligned derivatives contracts Berkshire holds has shown unrealized gains of $3.5 billion in 2009.

Regarding the BNSF acquisition, Buffett says outright that he and Charlie Munger believe the Berkshire shares they used to buy BNSF were worth more than their market value (second paragraph, page 17).

This is a rare statement. I can only remember one other time that Buffett, in his 45 years at the helm, has said Berkshire shares were undervalued, and that was in 2000, in what turned out to be a major bottom for the stock.