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Tax Changes Unlikely to Have Big Impact on Berkshire

In his first-half wrap-up, Morningstar’s Andy Bischof explores Buffett and Munger’s take on tax reform, airlines and Wells Fargo.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We're here at the halfway point of the Berkshire Hathaway annual meeting, and I'm joined by Andy Bischof, he's a senior equity analyst, for his take. Andy, thanks for joining me.

Andy Bischof: Hey, it's great to be here.

Glaser: Let's start by talking about tax reform. That came up twice during the meeting, and there's a big question about what impact it would have on the utilities. You cover this space. What do you see tax reform doing for the utilities, particularly Berkshire Hathaway Energy?

Bischof: Yeah, I mean, particularly for utilities in the regulated side, all that benefit goes back to the consumer. So there's really not much benefit for Berkshire Hathaway Energy. In terms of tax credits, what we've seen historically is a very strong push into wind generation, and those economics have come down. So we think going forward we will see continued investment in those areas, just because the economics, as well as you have renewable portfolio standards that are driving growth.

Glaser: Another question, and this one came from Gregg Warren who we'll talk to later, was on airlines and if the industry really has changed. When you listened to him talk about that, were you convinced that these are going to be good investments for Berkshire?

Bischof: You know, not having covered airlines myself, but I do agree that they do tend to be no-moat companies, so I guess I tend to disagree there. They do seem to be price-takers, highly competitive environments. Very little barriers to entry.

Glaser: Let's talk about intrinsic value. There's a question I was almost maybe surprised that he actually answered about how they felt they were compounding intrinsic value over the last 10 years and over the next 10 years. He said it was going to be very dependent on interest rates. Can you explain his thinking behind how interest rates impact intrinsic value?

Bischof: Yeah, we think very similar. When you look at a discounted cash flow, interest rates are a direct discount of your future value. So it's very direct.

Glaser: So when rates are going to be lower, for it to stay lower for longer, that makes it harder for Berkshire to compound over time?

Bischof: Right, exactly, and I think the other thing is there's just a lot more competition out there for current investments. So you take higher interest rates and more competition, and I think it speaks to his concern of having that same performance the last 10 years going forward.

Glaser: Finally let's talk about Wells Fargo. We knew going in that this was going to be one of the big stories. Were you surprised at how quickly he threw management under the bus maybe a little bit, or blamed the CEO for these problems?

Bischof: I'm a little surprised, because he really hasn't been out there talking about it up until today. There has been a significant misalignment of incentives, and he compared and contrasted that to his own company of how such a system would be highlighted, and through their hotline procedures.

Glaser: Well Andy, thanks for your take on the first have of the meeting.

Bischof: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.