Motley Fool Hidden Gems Investing - Price Matters

Episode Date: March 21, 2022

After six years Warren Buffett finally pulled the trigger. Berkshire-Hathaway is buying insurance company Alleghany for $11.6 billion. (0:20) Jason Moser analyzes: - The reaction from investors - Berkshire-Hathaway's increased exposure to the insurance industry - Potential for another acquisition in the next few years - Buffett's patience and relentless focus on price, and what it can teach all investors (12:30) Rick Munarriz talks with Carnival Cruise Line CEO Arnold Donald about how his company is preparing for the post-pandemic world. Stocks discussed: BRK, Y, CCL, DIS, AMC Host: Chris Hill Guests: Jason Moser, Rick Munarriz, Arnold Donald Engineer: Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. One CEO is preparing for the post-pandemic world, and another CEO just made one of his biggest acquisitions ever. Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior Analyst, Jason Moser. Thanks for being here. Jason Moser. Hey, thanks for having me. Warren Buffett just went deeper into the insurance industry. Berkshire Hathaway is buying insurance company Allegheny for just over $11.5 billion. This is an all-cash deal. Shares of Allegheny up more than 20%, which is understandable given the buyout price. Shares of Berkshire Hathaway are up about 2% and hitting a new all-time high. It had

hit an all-time high last week. This is on top of that. Based on the reaction from investors, this seems like a good deal, but you worked in the insurance industry once upon a time. What do you think of this deal? Yeah. It seems like it's an okay deal, I guess. Allegheny is an interesting business in that it's very similar to another insurer that we like to talk about here in Markel. Actually, Allegheny, I was thinking about this all the way back to 2010. You may remember we had that Real Money portfolio series we ran on Fool.com, that rising stars, real money portfolio thing. And I had brought Allegheny over to the watch list of the portfolio that I was running at the time, because it piqued my interest,

because it was so much like Markel. And so, I think that the difference between Allegheny and Markel, and ultimately the real reason why I just couldn't get behind buying the stock at the time, is just Allegheny is a very conservatively run. And that's not a bad thing. I mean, I mean, it just really didn't seem like it had the growth prospects that other companies could have. Now, if you look at how Allegheny and Markel have performed over the last, what, let me see here, the 10-year chart for both of these companies, I mean, Markel is up 240% well outperforming Allegheny, Allegheny around 155%, so it's not like it's been a bad investment,

but it's trailed the market. I think part of that is just because it is so conservatively run. I think that could be one of the reasons why Buffett really actually likes it. It seems like it's right in line with his style of thinking. I think that with Allegheny, the neat thing about this business jumping into the Berkshire fold is that it is heavily exposed on the reinsurance side. This is really an investment in reinsurance more than anything else because if the business itself breaks down, you've got the business of insurance and then it's got the Allegheny capital, which is like that Markel Ventures, but the insurance part of the business is close to 70%.

Most of that is reinsurance. It's a reinsurance play from that angle. I understand from that perspective why Buffett and family would like to bring this into their family. When we talk about Berkshire Hathaway, obviously, there are the investments in the portfolio, and that's where companies like Apple come into play. Then there are the businesses that Berkshire Hathaway runs. In terms of that portfolio of businesses, obviously, this increases the exposure to the industry of insurance. Is there any downside to that? It's one of those questions that I have to ask. Obviously, I assume Buffett and his team know what they're doing, and they're not going to take undue risk, but it just struck me

the second I read this story, like, oh, it's another insurance company. Yeah, I mean, that's a good question, because I think most people, when they hear Berkshire Hathaway, most investors, probably most investors, their minds immediately go to Geico and insurance, right? I mean, we kind of think of Berkshire Hathaway as this insurance company first and foremost. And that's a fair thought. I mean, if you look at the breakdown of the company's revenue. Around 27% of revenue in 2021 was thanks to insurance. Manufacturing is still a very big part of Berkshire Hathaway. Around 25% of revenue came from manufacturing and then it has all of these other little pieces of the business as well. As far as earnings though, interestingly,

the insurance side of the business is only about 20% of the earnings, the operating earnings out of the business. It's actually getting most of its operating earnings from the manufacturing side. So this gives them a little bit more exposure to the insurance business. It's not something that I think tilts the scale too heavily. And given that Allegheny historically has been so conservatively run, I think that's probably something that gives Berkshire Hathaway a little bit more peace of mind there. But insurance, it's an interesting business for sure. It is one of those things we talk about a lot because it's something that everybody needs. You don't have an option in many cases. Then when you think about how insurance works and then you look into the

reinsurance side of the business, there's just a lot of opportunity there, but it does come with a lot of risk, and it's risk that is difficult to predict at times. Scale matters. I think the bigger you are in the insurance business, the better off you are. It's like having a well diversified portfolio. Given their track record in the space, given their experience in the space, they are clearly very good at what they do. They know the insurance business inside and out, which is another thing to keep in mind there. It feels like this isn't anything that really tilts the scales in such a way that should concern investors, I don't think. This is the first acquisition Berkshire Hathaway has made in six years.

In terms of raw numbers, this is, I believe, a top five acquisition just in terms of money spent. But when you think about the cash on hand that Berkshire Hathaway has amassed over the last six years, someone asked me earlier today, is this Buffett getting out his elephant gun? And I said, it doesn't feel like it, even though it's a large acquisition relative to the cash that they have on hand. It doesn't seem as big. I'm tempted to say it's not going to be another six years before they make another acquisition, but I don't know. The patience that Buffett and his team have exercised is pretty admirable. Yeah, I do agree. He's not one to just go pay any price just to do something. He

and Charlie Munger are very good at sitting on their hands and waiting for the right opportunities. It feels like they're getting Allegheny for a good price. It's a business that historically is hovered around book value, which is a good metric to gauge insurance companies. They're paying, I think, around 1.25 times book value is the acquisition price here. But you're right, you're looking at a business here in Berkshire Hathaway with something like $150 billion in cash on the balance sheet to do with whatever they like. In the context of that, he's not firing off that elephant gun, so to speak. But I think that ultimately what he sees is a business that he's admired for a long time. He said that. It's a business that he feels like he's getting at a

fair price. It's not something where he's buying back his own stock. Allegheny is going to continue to be able to operate independently as part of the Berkshire Hathaway family. That's the model, but that they employed there and it works out very nicely for them. The acquisition to me, it's like, oh, okay, yeah, I see. I get it. It's not something where I feel like, oh, wow, this is just, I feel like there are other bigger opportunities out there that would be more of an attention getter. Maybe he does want one last real shot at something like that, who knows? It's always worth mentioning. He and Charlie obviously are not getting any younger, But by the same token, even beyond their time, I suspect we would see Todd and Ted take some

interest there, or rather Greg Abel, who would take over as CEO, is possibly finding some acquisitions that might be a little bit more in line with their comfort zone. I think one of the things with Warren and Charlie is that they know themselves as investors, they know circles of competence and they don't often want to step too far outside of it. They like really taking advantage of those opportunities within that circle. I think it'd be fair to say that future leadership would have a different circle, or at least an expanded circle, just times change. Perhaps there's something there. I don't think this is the last deal we'll see them make, but you just never know, I guess. Last thing, and then I'll let you go. I'm glad

you mentioned the book value because Berkshire Hathaway went out of their way in announcing this deal to signal to their shareholders and the world, hey, we're not paying a lot for this thing. We're paying less than 1.3 times book value. And you talked about how in this industry scale matters. And I think herein is the lesson for all of us as investors. And it's something you've talked about before. Price matters. The price that you pay for something matters. This is one of those things where I don't own shares of Berkshire Hathaway. I'm not invested in the insurance business in any way, shape, or form. Yet, I look at this deal and I'm able to take that lesson from it. Particularly when the market has been as volatile as it's been,

it's a nice reminder that, yeah, if you're patient and you focus on the price you're paying for something, that's going to reward you in the long run. Oh, yeah. I think that'll continue to be the case here. When you look at the valuations today, even with all of the volatility, we still have a lot of valuations out there that are still lofty. We're still in that 10, 20, 30 times sales environment in some cases here as we move more towards this tech-weighted economy. I'm certain they aren't so comfortable with that. They are getting, I think, a very reputable business, a good company with good leadership, and they're getting a good price for it. This is not something where they're paying too much. It's a little bit of a premium for a business that

has a pretty consistent track record. I think this is really actually probably the best outcome for Allegheny shareholders, given the history. I talked about those returns earlier on. It's not like you've lost money being invested in Allegheny, you've made money, but it's trailed the market. It's not the best performing insurer out there. Given the nature of leadership there, I think you can expect them to continue on with that strategy, sort of the conservative view. Now, maybe there's more opportunity as this company grows in that Allegheny Capital side. I think that's always something that's worth keeping an eye on because we've seen Markel through the years really build out that Markel Venture side of the business.

I think that would be something really to keep an eye on there because it's a philosophy that very much lines up with Berkshire Hathaway's. But yeah, it does feel like they saw a business that that they believe in. They were able to come to a price that they felt like was fair. It does feel like this is a win-win for Allegheny and Berkshire. Jason Moser, thanks for being here. Thank you. What makes for a good investment? Obviously, Warren Buffett thinks he's made a good investment by buying an insurance business. What about building a roller coaster on a cruise ship? Is that a good investment?

Our man Rick Munarriz talked with Carnival Cruise Line CEO Arnold Donald about how his company is preparing for the post-pandemic world. A lot of companies in the consumer leisure industries have taken advantage of the pandemic law to roll out features that they probably wouldn't have been able to complete during normal times when they were fully operating uh multiplex operator amc for example or they introduced reserve seating and made private rentals a bigger part of its strategy disney world ramped up its mobile ordering platform and recently introduced a premium product for access to expedited queues the cruise industry has had an unfortunately long break but what was carnival

able to do uh that it probably wouldn't have been able to do otherwise in that lull look we're really excited about getting so many of our ships sailing again as you mentioned we have more than 50% of our ships sailing. Hopefully by 23, we'll have ships, all of the ships sailing back on itineraries that people love along the way to ensure that people are at great success in terms of meeting their aspirations

of joyful vacation experience and awesome memories. We have done a number of things to enhance the experiences on the ships. First of all, we as a corporation have removed our less efficient vessels because we do have a real focus on efficiency and sustainability. And so we've moved on almost now 22 ships we plan to exit that were our least efficient vessels. So the POS gave us the opportunity to accelerate that.

And then we doubled down on the great features that people love with new ships. So we have a number of new ships coming in. The specific features and Princess, our Princess line, you're probably familiar with Princess Medallion. It's our breakthrough experience that allows you to basically, with a little disc, it opens your door. It's touchless payments, which is great in this particular environment. A lot of things are touchless with it. You can order whatever you want. It'll come to you wherever you are on the ship.

It's a great frictionless travel, highly customized field experience for guests. We've been able to put Medallion across the Princess Fleet during this pause. So almost every Princess ship sailing again will have Princess Medallion available to its guests. In our other brands, we have exciting things like our new Mardi Gras ship and the Carnival brand with the first roller coaster at sea. It's a fantastic individual experience. But beyond that, it's a ship that features unbelievable options in terms of dining, entertainment, et cetera. And we've replicated that kind of an experience across, you know, our global fleet with our RBS ship, you know, coming in with P&O in the UK. And so new ships, new features, all around one common theme, though, which is frictionless travel,

allowing people to have the joyous memories that they want to have, to pull people together, families and others together, and really live the human spirit, you know, that is cruising. People have a great time. Guest promoter scores are through the roof, and we're going to continue to innovate. You recently revealed details of Carnival Celebration, which is a new ship that's going to debut out of Miami in November, I believe. It's going to be your second ship running on liquefied natural gas, or LNG. What kind of impact will this have on operating costs,

or is this more about a shift to eco-friendly green cruising? You know, Rick, it's more than just two. We actually will have six ships by the end of this year, LNG. It'll be two in the Carnival fleet with Mardi Gras and then Celebration. And we're excited. Obviously, Mardi Gras has been a huge success. We're excited about both. So LNG is a step. We know it's not the ultimate answer, but it helps us on our path to reduce our carbon emissions. LNG is about 20 percent more carbon efficient, emission efficient than other fossil fuels. It's the cleanest burning fossil fuel. So we see it as a step in the direction, as we can see on our march for 40 percent reduction in carbon intensity by 2030. and ultimately hoping to get to carbon neutral by 2050. And frankly, we'd like to achieve zero emissions by 2050. And so that's our aspiration.

That's what we're moving towards. So this is a step in the right direction. We've had a lot of success to date. We've reduced our intensity by over 25% over the past several years. And our goal is to ultimately be at 40% reduction, as I mentioned, by 2030. You mentioned the roller coaster on Mardi Gras, Carnival Mardi Gras. When I was a kid, back in my first cruise in the 1980s, I went with my parents. We went on the QE2 transatlantic from England to New York. And the big feature there was there's a swimming pool,

but it's underneath, very cold, very, very wavy, and obviously ocean water, not very pleasant. The features have evolved a long way since then. So I was looking at the Mardi Gras with the roller coaster, 800 feet long, topping off at 40 miles per hour. What comes next in terms of onboard diversions? And I know you can't comment on things that may be in the works, but what do you think is possible on a cruise ship,

say five years from now, that is not available right now? Well, as you mentioned, Boat is the first roller coaster at sea. It's a guest hit, people love it. I've ridden it myself and I have to tell you, it is a thrill. It is absolute engineering marvel and and it's a thrill ride for sure it's a lot of fun but boat like all the other features on

our ships especially you mentioned the carnival brand where we're both just on on the mighty grips um the the the brand itself is about social it's about fun you know thunderstruck it's it's about fun and um and boat represents another example of fun on on a carnival ship and the idea is just to engage guests in a way where they're having fun and they're realizing the socialization that they chose Carnival, which is why they chose the Carnival brand in the first place. They're realizing the socialization that they aspire to. So we have a host of features, and it can be anything from a comedy club to a roller coaster. But eventually, there'll be metaverse type activities on board the ships. Ocean or Princess Medallion is an example of a

first step towards that. There's so many. You can have your own avatar on board. The avatar follows you wherever you go. You can engage in other activities through the Princess Medallion experience. And so you'll see more of those kinds of things. But in the end, this is a hospitality business. We want people to achieve what they want. In the case of Carnival, it's fun and joyful social exchange. And we want them to do it in a way where it's frictionless, so it's hassle-free. And for them, it feels customized for their individual taste. So that's what all the movement and all the little features on the ships are intended to do, to create that general atmosphere, that frictionless experience, and then the highly individualized custom feel to it.

so you feel like the vacation, as it should be, was designed for you. Great, thanks. Hopefully, we all respect the railings when we get into the metaverse, we don't get so immersed that we don't take things that are not safe. But yeah, I love the direction that the cruise industry and Carnival in particular are going in, so that's great. One of the more exciting aspects of the leisure industry for investors is that many companies are making more with less. I mentioned AMC and Disney before, I'll mention them again. AMC Theaters, for example, they're nowhere near 2019 as far far as ticket sales, but concession sales per patron are up sharply. Universal Orlando and

Disney World are coming off of record or near record quarters, despite not being at full strength and with international travel restrictions limiting the amount of guests that they're even getting. Most of the leading hotel operator stocks hit new highs back in February, despite being limited at capacities as guests are accepting higher rates. Folks are willing to spend more when it comes to escapism. Are you seeing that for the cruising industry? Absolutely. We have definitely seen an increase in onboard spending. The reality is we're going to be celebrating our 50th birthday for the Carnival brand this month. And in that 50 years, there's only been one year as a corporation, not just for the Carnival brand. And there's only been one year

where we haven't seen an increase in onboard spending. So every year it goes up. And for us, is simple. We try not to sell anything. People are on vacation. They have some time. They're willing to spend a little bit of money. We just have to understand what they want and make it available to them. And if we do that, then they buy it. So we try not to sell anything, but just make things available that people want. And what we've seen in the return from the pause is that the sales or onboard activity is through the roof in terms of spending. And onboard for us also increase excursions etc and so while we've seen increases in the past these increases have been extraordinary um whether it can sustain itself at that pace we'll have to see

but we're certainly excited about what we're seeing today and we have every expectation that it will continue to increase over time based on some innovations we talked about earlier and just based on the general mood of people who are anxious to go out and experience the world. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, but don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow. Thank you.