UncleLongHair

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.

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.

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.

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.

What Mohnish Pabrai Didn't Know Hurt Him Badly

The questions about Pabrai don't stop with Delta and Pinnacle though. Here is a list of some recent investments, and his returns since he reported them:

HNR -13%
FFH +36%
CCRT -83%
TX +25%
CRYP -43%
PNCL -83%
MDC -23%
SGU -41%
USAP -6%
LEA -62%
SHLD -28%
ATSG -88%
DFC -99%

BRKA/BRKB isn't listed here which he exited at a decent gain.

So this isn't a case of one or two investments going bad, nor of them declining just a little. 4 out of 14 declined more than 80%. His motto is "heads I win, tails I lose a little", which clearly isn't panning out.

Maybe these will all turn out to be TSO investments that rise from the ashes. It is probably too early to pass any judgments.