UncleLongHair

Berkshire + Burlington = Hypocrisy, Expediency and Full Dose of Ego?

I agree that the deal is out of character. Buffett broke his 3 cardinal rules: don't issue stock, don't issue debt, and don't split the stock. He broke all 3 rules in the same deal.

He obviously stretched into the acquisition, and paid a pretty price as well. This is a big departure from his previous deals in almost every way.

However, I don't think this is simply hubris or some unfulfilled childish infatuation with trains. Berkshire has for a long time needed major operating businesses to go with the insurance and investments, for numerous reasons. One is simply to maximize the earnings potential of the company, but I think this deal goes beyond that.

I think that succession and hence Berkshire's long-term health factored into this deal in a few ways. I have long been of the opinion that it would be a big mistake for Buffett to leave Berkshire to his successor with billions of cash requiring investment. A single bad investment made by his successor could undo decades of careful building. He also does not want to give his successor a bunch of hard problems to address such as betting the company on whether or not to provide hurricane reinsurance. Finally, he probably has quite a short list of possible successors, and knows their skill sets.

I think the Burlington deal addresses all of these questions. It transforms Berkshire into a huge operating company full of businesses that are generally easy to run. It provides an enormous sponge to absorb Berkshire's cash -- Burlington requires billions of cap ex every year for maintenance and growth. Burlington is also related to Bekrshire's energy businesses, and I suspect that Buffett's successor will come from there (i.e. David Sokol).

So with a single deal, Buffett has transformed Berkshire into a more secure, easier to run company, with indefatigable earnings power. The opportunity to do this during a market trough, I believe, explains Buffett's willingness to stretch into it.

Why I Bought Abbott Laboratories Despite Health Care Reform

>>> It is no secret that our dear leader, a friend of the common worker, whose presidential campaign was paid for by unions, has been repaying his socialist backers <<<

At this point I stopped reading. Is this an investment idea or a political OpEd piece?

Berkshire + Burlington = Hypocrisy, Expediency and Full Dose of Ego?

> Just a few short months ago Buffet was all doom and gloom
> saying our economy was in financial chaos and we were on the
> road to ruin.

He wrote an op-ed piece in October 2008 telling everyone to buy American stocks, and he put his money where his mouth was. This turned out to be a mistake as he bought just before the worst of the disaster.

There are no quotes from Buffett about "doom and gloom and financial chaos". You are making that up.

Wesco Trades at a Discount, But Is It Better than Berkshire?

You forgot to mention what I consider to be the most interesting thing about the current situation at WSC, which is their investment in Goldman Sachs. That investment, made during the depths of the crisis, looks to be a home run, with preferred stock paying a 10% coupon plus warrants with a strike price of $115. Goldman's current stock price is about $170, putting the warrants way in the money.

WSC is much more exposed to the Goldman investment than Berkshire, as about 11% of its investment portfolio is the Goldman preferred, forgetting about the warrants. The warrants are probably worth at least 50% the value of the preferred, depending on how you value them. With a 5 year period they have a lot of time value left.

WSC as it is today is fairly uninteresting and has nowhere near the earnings power of Berkshire. However there is no reason for it to trade at a discount to book, it should trade at a small premium as it has for most of its recent history.

Will Steak n Shake Become the Next Mini Berkshire Hathaway?

At WEST, book value per share went from $8.48 in 2004 (the year before Biglari took over) to $6.36 at the end of 2008, a decline of 25% over 4 years. This included doubling his money with the FRN investment. Without that, losses would have been more than 50%.

WEST closed nearly 50% of its locations in the past 5 years, and its top and bottom lines have shrunk accordingly.

Biglari originally paid as much as $15-17 for SNS and at one point was down over 80% on this investment, and is now down around 25-30% from those buys.

Biglari is also showing a loss in his smaller positions such as JACK and ITEX.

Before Biglari can be called "the next Buffett", he needs to demonstrate that he can make money for his investors.

Unlike Buffett, Biglari does not pay bargain prices for his investments, and does not develop them to make them more valuable. He does pay himself a salary of nearly $1 million though -- nearly 10x Buffett, though he controls a company about 1/500th as large. Doesn't sound very Buffett-like to me.

Wesco Trades at a Discount, But Is It Better than Berkshire?

Something which differentiates Wesco from Berkshire is that I think it is primarily a book value story. Wesco does not have much earnings power relative to its asset base, which is dominated by investments and cash. The operating subs are almost ancillary to its net worth and intrinsic value. The warrants from the Goldman investment produce no income but will likely have a significant positive impact on book value.

Owning Berkshire, you have very little exposure to Wesco, as Wesco's market value is about 1.5% of Berkshire's. If 10% of your portfolio is in Berkshire, then 0.15% of it is in Wesco. I think that buying Wesco below book is at least as interesting as owning Berkshire at 1.4-1.5x book, perhaps moreso. Wesco is basically a slightly leveraged portfolio of blue chip stocks hand-picked by Munger.

I am wondering if the Burlington deal will affect Wesco in any way. It does not appear that Wesco owned any stock in Burlington before the deal. It is conceivable that some of Wesco's cash will go towards the cash portion of the deal, which would be accretive to Wesco, but that is only a guess.

U.S. Housing Has Bottomed

Well if you are defining a recovery as housing prices returning to the level they were during the worst housing bubble in 50+ years, then you may have to wait a long while indeed for a recovery.

The housing industry is a major driver of the economy, and the type of "recovery" that is required to start economic activity is a clearing of the housing inventory overhang and an increase in the number of transactions. These will allow lenders to lend, builders to build, etc. It isn't important that we see beachfront condos selling for $1M+ before we have an economic recovery.

Higher housing prices are probably in the cards over the mid term anyway due to inflation.

Brookfield Asset Management: Cashed Up and Ready to Buy

BAM netted $1.1 billion in profit from the sale of Falconbridge (after taxes) so I don't think it is fair to say they sold it cheap. This was sold in 2005 before the big manic run-up before the 2008 market crash but there was plenty of appreciation. These proceeds funded some of the hydro deals which ended up being very profitable as well.

The recent sale of hydro assets was just a partial sale, a 50% interest in certain assets. They still own a majority of them. This just seems like an example of "selling high to buy low". Obviously, there are numerous opportunities today for that money. I think it will be interesting to see what they do.

A Reasonable Look at Steak N' Shake CEO's Raise

What do California IOU's have to do with overpaying a CEO?

Biglari now makes about 10x what his hero Buffett does -- and that is only considering one of his many jobs. Introduces quite a gap between "talk the talk" and "walk the walk".

ACME United Corp. Singular Research's Annual "Best of the Uncovereds" Conference Presentation

Thanks for providing this transcript. I've been following Acme for years and think they are a great little company, high growth, high ROE, entrenched in their markets and constantly finding new ones. Yet the stock never seems to move...

Q2 Canadian REIT Earnings: More Downsides Than Upsides

BAM and BPO are not REITs. I don't know why they are often considered as such. Especially BAM, which owns assets including hydro power plants and timberlands. Neither of them pay out all of their earnings in a dividend like a REIT.

Fannie and Freddie: The Heat Is On

You have a bunch of hedge fund managers claiming that it is very likely that FNM and/or FRE get bailed out by the end of Q3. What significance does that date have? Oh yeah that is the date at which their portfolios are marked to market for their performance bonuses.

KHD Humboldt Wedag: An Undervalued Winner

Thanks for the write-up. I am also long on KHD.

The two concerns that seem to spook people are 1) KHD is in a cyclical business near the peak of its cycle, and 2) plants are being overbuilt in regions that don't have the economy to support them and demand will hit a wall (really just a variation on #1).

I don't accept this at face valuek, though I can't completely dismiss it because growth rates of 50-100%+ are not sustainable for any significant duration. The cement supply business (i.e. Cemex) is indeed cyclical, though it has never seen growth rates like this. The cement *engineering* business (i.e. KHD) may be different, but we don't really have enough data to know.

Anyay I wonder if you can comment on this.

On the flip side, the company has been making noises about acquisitions for several quarters now. Last quarter they said they almost closed something but it fell through at the last minute. This quarter they said they have hired an "experienced professional" tasked specifically with finding a deal and have initially earmarked $100m in US Dollars for investment purposes. Note that not all of the cash on their balance sheet is available for deals, since it is offset by deferred revenue liabilities.

I also think that Michael Smith has assembled a great management team. When MFC Bancorp initially took over KHD, he assumed all the executive positions, but one by one handed them off to other people, and the team he has put together really impresses me.

If you want to read some very colorful history of Michael Smith, read about his background at Mercer International and his former business partner Jimmy Lee. Lee still runs Mercer and Smith has been making activist shareholder noises with letters to the board.

Steak n Shake: Watching and Waiting as Biglari Names Himself CEO

Biglari was not that far on margin with the FRN investment -- there was some margin for a short while, but cash from insurance proceeds were on the way so he effectively only borrowed against that.

I do however agree with most of the rest of User 71887's post. Aside from performance at the Lion Fund, Biglari's single most positive action was the investment in FRN, and it isn't clear what portion of that was luck vs. skill. Aside from that, all he has provided is coining a lot of phrases from Buffett and talking about a strategic plan. Now he's got two large resturant companies without operational management, and probably has his hands full.

Changing Tides at Steak n Shake

The CEO of Biglari's other restaurant company, Western Sizzlin', also just departed. So how he's got two restaurant companies without a CEO. I hope he's got a plan.