According to reports from several news agencies, BYD (BYDDY) passed Tesla (TSLA) in the first half of 2022, producing 641,000 new energy vehicles compared to 564,000 for Tesla.
Before you Tesla fanatics get all bent out of shape, it’s important to note that approximately 50% of BYD’s sales were plug-in hybrids -- these count as zero emzero-emissionChina’s laws -- so Tesla is technically still ahead of BYD when it comes to EVs.
Of course, BYD fans such as Warren Buffett will point out that its sales are almost entirely within China, while Tesla sells worldwide. In Q1 2022, Tesla’s revenue in China was approximately 25% of its $18.8 billion overall. That suggests Tesla’s China unit sales were about 141,000 [564,000 * 25%]. That puts it behind BYD’s 323,519 battery EVs.
In 2022, BYD expects to produce 1.5 million EVs. It’s just another reason to own Berkshire Hathaway (BRK.B).
Buffett Owns Almost 8%
The story of Warren Buffett’s involvement is a long one. The Oracle of Omaha invested $208 million in BYD back in 2008. Today, its investment is Berkshire’s 8th-largest position, accounting for 2.8% of its overall equity portfolio.
The investment company owns 7.7% of BYD. The stake is valued at $8.9 billion, achieving compound annual growth of 33.5%, 3.7x the S&P 500 over the same 13 years.
More importantly, Buffett’s investment looks to be in the early stages of an even more significant growth burst. By buying Berkshire stock, you get a big chunk of BYD, a play on the electrification of transportation, and most importantly, a diversified portfolio of income and capital gains-producing investments.
Regardless of when Warren Buffett passes away, Berkshire’s assets are top-notch.
Elon Musk didn’t think much of BYD. In 2011, he derided the company’s products.
“‘Have you seen their car?’ Musk asked derisively in a Bloomberg interview. ‘I don't think they have a great product. I don't think it's particularly attractive, the technology is not very strong,’ he continued, adding that the company was in deep trouble in China and focused on staying in business there,” Yahoo News reported at the end of June.
Musk might be the world’s wealthiest person, but Buffett knows about investing. BYD had grown its revenue from $3.2 billion in 2008, when Buffett invested, to $32 billion in 2021.
And now it’s got both legitimate EV and electric battery businesses. Ironically, it will soon begin supplying its lithium phosphate batteries to several global automakers, including Tesla.
The Rest of Berkshire Generates Plenty of Cash Flow
BYD’s stock is up 15% year-to-date. That’s almost 57% better than Tesla. Over the past year, BYD stock is up 40% compared to 6% for Musk’s company.
Who’s laughing now? Of all the companies held by the Berkshire equity portfolio, BYD likely has one of the best performances over the past year.
However, the portfolio accounts for one-third of Berkshire’s $970 billion total assets. Its net debt of $81 billion is just 13% of its $608 billion market cap. In 2021, Berkshire was estimated to have received approximately $3.8 billion in dividends from its equity portfolio.
On pg. six of Berkshire’s 2021 shareholder letter, Berkshire wrote the following about its Apple (AAPL) dividends:
“It’s important to understand that only dividends from Apple are counted in the GAAP earnings Berkshire reports – and last year, Apple paid us $785 million of those. Yet our “share” of Apple’s earnings amounted to a staggering $5.6 billion,” Buffett wrote.
“Much of what the company retained was used to repurchase Apple shares, an act we applaud.”
As Buffett likes to say, every share repurchased gives Berkshire a slightly larger piece of the buy without investing a cent. As for Berkshire’s share repurchases -- it bought back $3.2 billion of its stock in Q1 2022, down from $6.58 billion in Q1 2021 -- it uses some of the $23.1 billion in free cash flow generated over the trailing 12 months to pay for its shares.
Over the past three fiscal years, Berkshire has generated almost $76 billion in free cash flow. That will continue to come in handy as stocks and businesses suffer from high inflation.
Berkshire’s share price trades at 1.2x book value at the moment, the lowest multiple since 2012. Yet it continues to generate vast amounts of cash.
Buffett Buys Another Insurance Company
Berkshire announced on March 21 that it would acquire Alleghany (Y) for $11.6 billion. The deal’s expected to close by the end of the year. It was Buffett’s biggest acquisition since 2016.
Alleghany operates wholesale specialty, property and casualty, and reinsurance businesses. It’s what you would consider a tiny version of Berkshire.
Alleghany Capital owns various non-financial businesses in addition to its operating insurance businesses. In 2021, Alleghany Capital generated $292 million net income from $3.7 billion in annual revenue. It also has an equity portfolio worth $3.2 billion at the end of March, $60 million of which was invested in Berkshire itself.
I could see Buffett using Alleghany Capital to continue to grow its non-insurance businesses, perhaps even spinning off the company into an independent, publicly-traded investment business.
This is a very familiar investment for Buffett.
There are so many reasons to buy BRK.B stock. Thanks to Elon Musk downplaying BYD more than a decade ago, he’s now competing with this so-called maker of terrible products.
It’s just another reason to buy Berkshire Hathaway--as if you needed one.
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