Warren Buffett's Berkshire buys Dominion Energy natural gas assets in $10 billion deal; Stocks to Avoid: Livongo; Flying home today; Pics from our three final climbs

By Whitney Tilson

Monday, July 6, 2020
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1) It’s good to see Warren Buffett finally putting some of Berkshire Hathaway’s (BRK-B) cash hoard to work: Warren Buffett’s Berkshire buys Dominion Energy natural gas assets in $10 billion deal. Excerpt:

  • The conglomerate is spending $4 billion to buy the natural gas transmission and storage assets of Dominion Energy. 
  • Including the assumption of debt, the deal totals almost $10 billion.
  • It’s the first major purchase from Berkshire since the coronavirus pandemic and subsequent market collapse in March. 
  • For Berkshire, the move greatly increases its footprint in the natural gas business.
  • With the purchase, Berkshire Hathaway Energy will carry 18% of all interstate natural gas transmission in the United States, up from 8% currently.

2) Livongo Health (LVGO) is the latest in our “Stocks to Avoid” series (note: these are not short selling recommendations).

Livongo’s mission statement is empowering people with chronic conditions to live better and healthier lives. The company has pioneered a new category of health care it calls Applied Health Signals. Its service platform is designed to help users better cope with diabetes, hypertension, weight management, and behavioral conditions.

These are some of the most serious health conditions faced by millions of Americans. So, with its promise to provide a better solution for dealing with these diseases, Livongo won backing to become a public company in July 2019.

LVGO shares closed at $38 on their first day of trading, giving Livongo a market value above $3.7 billion.

The coronavirus pandemic has ignited increased demand for health care stocks, and Livongo shares are up nearly 300% since mid-March. But the excitement is likely more hype than reality…

Livongo’s diabetes solution is a cellular-connected interactive blood glucose meter. It comes with unlimited testing strips and allows for personalized reminders to test regularly. The company also offers live, 24/7 monitoring services for an additional charge.

Hypertension and weight management solutions are similarly designed. Livongo’s blood pressure monitor and weight scales connect to a mobile app, which monitors progress and provides advice.

It’s unclear how any of these products apply to COVID-19 patients. The virus typically produces cold- and flu-like symptoms that go away on their own. And when complications arise, they require hospitalization and significant medical intervention.

But both these scenarios play out in weeks, not months or years. COVID-19 doesn’t behave like the chronic disabilities Livongo targets.

And then there’s the matter of the company’s financials. In May, management said it expected around $300 million in revenues this year. That means that given its current $7.1 billion market cap, Livongo trades at more than 24 times forward revenues.

For 2019, Livongo reported a loss of $55 million. That figure improved to a loss of $5.6 million in the first quarter of 2020, and management celebrated its first-ever positive earnings before interest, taxes, depreciation, and amortization (“EBITDA”) period.

But getting to that adjusted $3.8 million EBITDA number required financial gymnastics that included adding back $8 billion in stock-based compensation. Even if we took it at face value and annualized these earnings to $15 million, Livongo is still valued at 475 times EBITDA.

Wall Street analysts predict the company will earn $0.60 per share in 2024. That means the stock trades for nearly 121 times earnings three and a half years out. Livongo’s business could flourish and become a significant next-generation health care provider… But for investors, making money in this stock might prove a lot more difficult.

3) Paul and I weren’t able to get a permit to climb Mt. Whitney and Mt. Russell – I plan to come back and tackle them in September – so I ended my trip two days early and am on a flight home right now (sniff!). We ended our 22 days together (only three rest days, which is three too many in my book!) by climbing Temple Crag on Thursday (pic No. 1 is on the approach, pic No. 2 shows the route), Crystal Crag on Friday (pic No. 3 – that’s Mammoth Mountain ski area behind me), and Fairview Dome back in Yosemite on Saturday (pic No. 4 – the fourth of the “Fifty Classic Climbs of North America” that I’ve done this trip)…

Best regards,

Whitney

Whitney Tilson

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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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