By Jonathan Weil

Warren Buffett has built so much trust and respect among investors that they have tended to look past Berkshire Hathaway's peculiarities. It is an open question whether Greg Abel, his successor as chief executive, will enjoy the same deferential treatment.

Kraft Heinz, a longtime Berkshire holding that now plans to break itself up after years of poor returns, could become an early test case. Berkshire valued its 27% stake in Kraft Heinz at $13.5 billion on its March 31 balance sheet. That was 37% higher than the market value, based on the public share price at the time. Since then, the market value of the stake has fallen to $9.4 billion from $9.9 billion. It has lagged behind Berkshire's carrying value since early 2023.

Under a quirk of the accounting rules, Berkshire doesn't use Kraft Heinz's stock price to value the shares. Instead it adjusts the carrying amount based on its proportionate share of Kraft Heinz's earnings, using what is called the equity method. Buffett could have written down the investment this year but opted not to, concluding that the decline in value was temporary.

It could be argued that a breakup of Kraft Heinz may create shareholder value, especially if buyers can be found for one or more of its parts. Yet the shares are up just 10% since The Wall Street Journal first reported on July 11 that Kraft Heinz was considering the move, suggesting that investors aren't exactly awed by the plan. The stock is still down 12% over the last 12 months.

Similarly, Berkshire valued its 28% stake in Occidental Petroleum at $17.2 billion as of March 31. That was 31% more than the shares' $13.1 billion market value. Today those shares are worth $11.5 billion, using the quoted stock price. Together the market values of the Kraft Heinz and Occidental stakes are now $9.8 billion less than their carrying amounts on Berkshire's latest balance sheet, a significant sum even for Buffett.

At other public companies, such oddities might draw scrutiny from investors who see them as red flags. But at Berkshire, it is the sort of idiosyncrasy that investors shrug off. The differences in value are a small percentage of Berkshire's total equity, and Buffett has long preached that investment gains and losses are generally meaningless in understanding Berkshire's results or evaluating its operating businesses.

But would investors be so acquiescent if Abel was the one decreeing that the plunges in market value were only temporary and the stock prices would recover? That is harder to say. It is the sort of call that Buffett can get away with, but that others may not so easily.

For all of Buffett's successes, it is worth recounting what an extremely unusual company Berkshire is. It is a conglomerate with often impenetrable numbers, long after most others fell from grace.

Berkshire's operations span so many industries -- from insurance and railroads to utilities, energy, manufacturing and retail -- that they defy straightforward analysis. Berkshire doesn't hold quarterly earnings calls or issue financial guidance, though many investors see this as a virtue. It is common for subsidiaries with billions of dollars in revenue to get only brief mentions in the annual report.

Berkshire's financial statements, especially for the insurance businesses, to a great degree are based on estimates and subjective judgments that aren't fully visible to investors. This makes management's credibility paramount to valuing the company. It doesn't help when that same management is using above-market valuations for publicly traded stocks that anyone can look up, even if those values adhere to the accounting rules. Whether investors will give Abel as much leeway as Buffett in this regard remains to be seen.

The same could be said about some of Berkshire's governance. Its board includes Buffett's son, Howard Buffett, and daughter, Susan Buffett. At many public companies the family ties would signal weak governance. But because of Buffett's reputation and investment track record, Berkshire has usually gotten a pass.

Berkshire also has amassed $348 billion of cash and Treasury bills, about 30% of its total assets. Shareholders have shown immense patience while wondering what Buffett has in store. One thing he hasn't done much over the past year is buy back Berkshire stock. Share buybacks were zero during the second half of 2024 and the first quarter of 2025, signaling that Buffett believed the stock was richly valued.

This all adds up to quite the setup for Abel to be walking into when he succeeds Buffett as CEO on Jan. 1. There has perhaps never been a harder act to follow. As things stand, Buffett will remain as chairman. Abel has been Berkshire's vice chairman for non-insurance operations since 2018 and before that was CEO of Berkshire Hathaway Energy, where he remains chairman.

Maintaining trust and respect will be everything for Abel, as it has been for Buffett. No matter how strongly Buffett endorses him, there is only so much halo he can transfer over.

Write to Jonathan Weil at jonathan.weil@wsj.com

(END) Dow Jones Newswires

July 23, 2025 05:30 ET (09:30 GMT)

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