Buffett's celebration tempered by 50th anniversary stock slump

AUG 5, 20155:20 PM

[NEW YORK] Berkshire Hathaway Inc shares traded near record highs at the beginning of Warren Buffett's 50th year running the company. More recently, the stock has begun to sag.

Shares have slumped 5.2 per cent since Dec 31 and are headed for their first annual decline since 2011, even as Buffett pulled off one of the biggest coups of his career last month. By backing HJ Heinz's merger with Kraft Foods Group Inc, he now holds a stake valued at about US$26 billion, more than twice what he paid.

There's less to celebrate about some other Berkshire investments and businesses. Mr Buffett's railroad has had to spend heavily to come back from service delays in 2014. His reinsurance business, a main source of funding for the company, is facing increased competition. And some of his biggest equity investments - like International Business Machines Corp and American Express Co - have lagged the market.

"We're talking about a large, diversified portfolio of companies," said Jim Shanahan, an analyst at Edward Jones. "Some will underperform and some will outperform." Over the past five decades, Buffett has built Berkshire into a sprawling operation and amassed one of the best investing records in history. Through 2014, the company's share price averaged annual gains that were more than double the Standard & Poor's 500 Index. The equity benchmark is up 1.7 percent this year.

Berkshire's dozens of subsidiaries include insurers, manufacturers, retailers, electric utilities and the railroad, BNSF. Mr Buffett also oversees a stock portfolio valued at more than US$100 billion.

The diversity of those investments could help the company post operating earnings per share of US$3,038 when results are released on Friday, according to the estimates of three analysts surveyed by Bloomberg. That's a 15 per cent increase from a year earlier.

Mr Buffett's favoured yardstick - book value - could have risen by about 2 percent to around US$150,000 a share during the second quarter, according to an estimate from Cliff Gallant, an analyst at Nomura Holdings Inc. The billionaire Berkshire chairman and chief executive officer has said the metric is a good, though understated, proxy for the company's true worth. Berkshire's Class A shares closed at US$214,150 on Tuesday.

Book value per share will get a boost in the current quarter as Berkshire records a gain on the bet on Kraft and Heinz, said Mr Gallant. The food companies completed their merger in July to create Kraft Heinz Co.

'He's Executing' "It seems like he's executing," Mr Gallant said of Mr Buffett. "The stock price doesn't always follow that." Berkshire faces challenges.

Carloads at Buffett's railroad slipped 0.1 per cent in the second quarter from a year earlier. While that's a narrower decline than at its Western US competitor Union Pacific Corp, some costs have been climbing at BNSF. Buffett pledged to spend US$6 billion on upgrades in 2015 following delays last year that were tied to a surge in oil shipments and harsh winter weather.

"Outlays of this magnitude are largely unheard of among railroads," he wrote in his annual letter to shareholders in February. "Our huge investments will soon lead to a system with greater capacity and much better service. Improved profits should follow." Mr Buffett has been less sanguine about the future of Berkshire's reinsurance operations. For decades, he's used the premiums held by these businesses until paying claims, called "float," to fund his stock picks and takeovers. In May, he said the prospects for that business had "turned for the worse" as hedge funds and other investors piled into the industry, driving down the price of coverage.

To counteract that trend, Berkshire has begun to focus on underwriting policies directly for businesses. The company's reinsurance chief, Ajit Jain, has been overseeing the effort even as he hunts for new deals. In June, Insurance Australia Group Ltd. agreed to cede a fifth of its premiums and risk to Berkshire, as part of a decade-long tie-up. IAG had more than A$9 billion (S$9.14 billion) in premium revenue in 2014.

Mr Buffett has less control over the companies in his stock portfolio - and some of them have been struggling.

He invested almost US$11 billion to amass a stake in IBM in 2011. Since then, the computer-services provider has worked to transform itself into a seller of cloud-computing technology and data analytics. Revenue has slipped for 13 straight quarters. IBM shares now trade below the price that Mr Buffett paid to acquire them.

AmEx, another of Berkshire's largest stock investments, has plunged about 19 per cent this year. It is nearing the end of a partnership with retailer Costco Wholesale Corp, a relationship that accounted for 20 per cent of worldwide loans and 8 per cent of customer spending.

Berkshire's cash pile has been growing in recent quarters and stood at a record US$63.7 billion at the end of March. While that money is earning almost nothing, long-term shareholders will wait for Mr Buffett to make his next big investment, said Meyer Shields, an analyst at Keefe Bruyette and Woods.

"I don't think they or their investor base care if it takes another five years for things to be attractively valued," he said. "Berkshire is very disciplined in terms of what it's going to pay."

BLOOMBERG