Investors to hunt clues in Buffett's annual letter

OMAHA, Neb. — When Warren Buffett's annual letter is released Saturday, investors will again be looking for clues about Berkshire Hathaway's next big investment and any insights on who will run the company after the 80-year-old billionaire is gone.

Buffett's letter and the 2010 annual report for his Omaha-based company will be posted online at www.berkshirehathaway.com on Saturday morning.

"The most important thing we'll be looking for him to address is the evolution of the operations at Berkshire," said Glenn Tongue, a managing partner at T2Partners investment firm.

Berkshire is likely to report a solidly profitable year in 2010 because the acquisition of Burlington Northern Santa Fe railroad early in the year provided a big boost as freight traffic increased and Berkshire's insurance units didn't report any major losses through the first three quarters of the year.

The three analysts surveyed by FactSet are expecting Berkshire to report earnings per Class A share of $1,690 in the fourth quarter and $6,644 per share for all of 2010.

A year ago, Berkshire reported $3.056 billion in net income, or $1,969 per Class A share, in the fourth quarter thanks to an unrealized $1 billion gain on derivative contracts and investments.

Berkshire's derivative contracts are likely to affect the company's bottom line again because their value has to be estimated every quarter even though they won't mature for more than a decade.

Buffett has said he believes the derivatives, which are tied to the value of stock market indexes and credit default swaps, will be profitable over their lifetime, partly because Berkshire has received more than $6 billion in derivative premiums it can invest.

Stifel Nicolaus analyst Meyer Shields said he would like Buffett to disclose additional details about the derivatives because it's difficult to predict how they will affect Berkshire's earnings in any given quarter.

"It's sort-of ludicrous to ever say I'm going to criticize Warren Buffett. But I think the disclosure on the derivatives is not terribly helpful," Shields said.

The improving economy will likely limit the acquisition opportunities Buffett sees in 2011, but Berkshire will likely have the resources ready to complete a deal if he finds the right one.

Berkshire has been benefiting from loans it made to several companies in the depths of the financial crisis in late 2008 and early 2009. Companies such as Goldman Sachs, GE, and Harley-Davidson have been paying at least 10 percent interest on nearly $9 billion Berkshire loaned them, so those companies are eager to repay the loans.

Last fall, Buffett announced the hiring of Todd Combs to manage between $2 billion and $3 billion of Berkshire's investment portfolio, which revived speculation about Buffett's successor. Combs left his job managing the Castle Point Capital hedge fund to join Berkshire in January.

Buffett has said that after he is gone, Berkshire's investment duties will likely be split among three or more different managers who would report to the next CEO. Those investment managers will be in charge of Berkshire's stock portfolio and its other investments.

The next Berkshire CEO will be one of three internal managers within the company that Buffett has refused to publicly identify. Berkshire's board knows who to choose for the jobs once Buffett can no longer do the job.

Tongue said Combs' hiring may prompt the disclosure of a few additional details about the plan for Berkshire's future. But he said the succession plan won't affect the value of Berkshire today.

"The value of the business is not determined by him showing up at work every day," Tongue said. "When Mr. Buffett stops running Berkshire Hathaway people are not going to stop drinking Coca-Cola. They're not going to stop moving coal via rail. And that's where the value in Berkshire is."

Berkshire owns roughly 80 subsidiaries, including clothing, furniture, jewelry and corporate jet firms, but its insurance and utility businesses typically account for more than half of the company's net income. It also has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co.