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.