Berkshire Hathaway a Steal at $59,600 a Share? Nortel’s Growth Prospects

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Berkshire Hathaway (BRK/A or (BRK/B)

Jim: This company isn’t a household name, Mike, but the guy who runs it needs no introduction: Warren Buffett.

Mike: Yes, and let me make a full disclosure.

Jim: You and Warren are pals?

Mike: Not exactly. Back in 1977, Buffett bought an afternoon newspaper in Buffalo, N.Y., then called the Buffalo Evening News ...

Jim: Which Berkshire Hathaway still owns.

Mike: ... and as his first official act he attempted to put the Buffalo morning newspaper out of business. I happened to be working at that paper at the time.

Jim: So you’re saying Buffett’s largess hasn’t rubbed off on you?

Mike: Let’s just say that my colleagues and I had a different name for the man everyone else calls the “Oracle of Omaha.”

Jim: Uh-huh. Well, for those not totally familiar with the 69-year-old Buffett, he’s the renowned stock picker from Nebraska who’s one of the nation’s richest men. For decades he used Berkshire mainly as a vehicle for making billion-dollar investments in big companies and then held the stocks for years. For patient investors, the payoff was spectacular.

Mike: To put a finer point on it, he’s the classic value investor. He looks for companies trading at less than their real value, buys them at a discount and then waits for the rest of the world to discover what he knew all the time. It’s a stark contrast to the popular method of investing in growth stocks, which is a bet on a company’s prospects with little regard to its current price.

Jim: Buffett’s record still boggles the mind. As BusinessWeek noted recently, if you had put $10,000 in Berkshire stock when Buffett took control of the company in 1965, you’d now have $51 million, versus just $500,000 if you’d put it in the bellwether Standard & Poor’s 500 index.

Mike: All well and good, but I remind you, Jim, that timing is everything. Because if you had put $10,000 into Berkshire, say, this past March, you’d now have about, uh, $8,000.

Jim: Right, even the mighty Buffett has taken his lumps this year, and we’ll get to that in a moment. There’s a couple of things we should note first, however.

Mike: That Berkshire isn’t just a trading vehicle?

Jim: Exactly. Even though it still owns huge positions in such companies as Gillette, Coca-Cola, American Express and others, it also has for many years owned a variety of operating companies.

Mike: Yeah, the Buffalo News.

Jim: Let it go, Mike. It also owns the Dairy Queen chain, a variety of shoe companies, furniture companies and even See’s Candies.

Mike: Not to mention some major insurance companies.

Jim: Right, Berkshire owns the Geico property-and-casualty insurer, as well as a big reinsurance outfit called General Re. It also just announced plans to lead the buyout of utility MidAmerican Energy Holdings Co., Buffett’s first foray in the energy industry. Put it all together, and it sounds like quite a machine.

Mike: What else did you want to note?

Jim: That investors can buy either of two classes of Berkshire’s stock. For years there was only the Class A stock, which became the most expensive stock in the country because Warren never bothered to split it. So right now it trades around $59,000 a share.

Mike: Right, this is a stock whose daily move is often $400 or $500--which is more than what 90% of stocks trade for, on average.

Jim: But a few years ago some mutual funds started mimicking Berkshire’s holdings for investors who wanted to invest much less than 60 grand. That rubbed Warren the wrong way, so he created a new Class B stock that trades for a lot less, around $1,900 a share today.

Mike: And that basically mirrors movements in the Class A shares.

Jim: So, whether we’re talking A or B, what has gone wrong with Berkshire this year?

Mike: Mainly that many of Warren’s big holdings, like Coke and Gillette, have gone south. I have a fair amount of sympathy for Buffett--not that he needs my sympathy--but he holds a lot of stocks that I’ve backed in our prior conversations, Jim, and they’re not doing well.

Jim: So you’re saying that you and Warren Buffett are in the same boat?

Mike: I’ll stipulate that his boat is bigger than mine.

Jim: The bottom line is that, since mid-March, Berkshire’s stock has tumbled 20%, though it’s shown some renewed life lately. We should note, by the by, that Berkshire announced Friday that its operating earnings--those from the businesses it owns--fell in the third quarter from a year earlier, mostly because a couple of ill-tempered hurricanes cost its insurance business. But its investment gains more than made up for that, so overall earnings were up by about 15%. So here we are, Michael: Would you buy into Warren’s empire now?

Mike: I would. This stock is trading at a discount to its real value--it’s almost the exact kind of stock Buffett looks for. But I must say, one question embedded in the stock is what happens if something happens to Warren Buffett--say he gets abducted by aliens tomorrow.

Jim: You mean, could his successors maintain his track record?

Mike: Actually, I was thinking more in terms of this company getting split up.

Jim: Really, breaking it into pieces? How?

Mike: I’m not exactly sure how, but I don’t see how a company this diverse can keep running without the man who put it all together. And I believe Berkshire’s pieces could be worth vastly more than the stock is selling for right now.

Jim: Yeah, there’s lots of talk on Wall Street that the true value of Berkshire is around $90,000 per Class A share.

Mike: So you’d buy it, too?

Jim: I would, mainly because I see Coke, Gillette and the others coming back to life in the near future and giving Berkshire’s stock a major lift. Also, his insurance business is generally healthy, and now Buffett’s even talking about making another billion-dollar acquisition, though he’s not naming names. So why not buy the stock ...

Mike: When it’s underperforming.

Jim: ... right, and take advantage of it.

Nortel Networks (NT)

Mike: There’s a rather arresting TV commercial out now, Jim, that portrays a button-down, silver-haired captain of industry getting ready to address his sales force. And suddenly he launches into a reading of “Come Together,” the old Beatles song.

Jim: Geez, is there any famous rock song that hasn’t been incorporated into a TV commercial yet?

Mike: The guilty party in this case is Nortel Networks, which is trying to get across its radical change in direction, that is, bringing people and their data together by transforming itself from a stodgy telephone company to a leading-edge data-technology company.

Jim: It’s working. Nortel used to be called Northern Telecom, and it was essentially the Ma Bell of Canada.

Mike: That’s right. The sleeping giant of the North. Now it’s trying to also supply the key technology for transmitting data over the Internet, most of it optical-switching technology.

Jim: Meaning?

Mike: Technology that transmits data over those hair-thin fiber-optic lines.

Jim: And the word is that Nortel’s technology is at the forefront of the industry. That is saying something, because it’s competing against giants like Cisco Systems.

Mike: And Lucent Technologies. The question is whether Nortel and its technology will survive or get squished by these guys. Yet I think, either way, this is a good stock.

Jim: I, too, like Nortel as a company but I’m down on the stock right now.

Mike: Why?

Jim: Mainly because it’s already tripled in price in just the last 12 months, adjusting for a split this summer. So now it’s trading for 75 times its expected ’99 earnings per share, and that’s just too rich.

Mike: Pennies. It’s a tech company with real tech.

Jim: Look, I know Cisco and Lucent trade at high P/E multiples, too, because all these companies have tremendous growth prospects. But I worry about Nortel’s new Internet technology losing its edge to Cisco and the others. And if you buy in at this price, you could be waiting a while to see a healthy return on your investment.

Mike: Well, it’s true that Nortel has not done everything right. Last year it bought an Internet networking company called Bay Networks in the Silicon Valley for $6.9 billion. Bay itself was the product of two other companies that merged into what turned out to be rather a dysfunctional family.

Jim: Nortel took a lot of flak for that deal.

Mike: That’s right, and it had trouble absorbing Bay into its system. But Nortel has gotten through that, and now it’s a strong rival in this field with Bay in the fold.

Jim: No argument here. In fact, it’s a lot of Bay’s technology that is putting Nortel in the forefront of Internet transmission systems. Nortel also has very little debt, which gives it the leverage to buy even more companies. But I’m sorry, the stock is just too expensive right now.

*You can e-mail staff writer James Peltz at james.peltz@latimes .com) and staff writer Michael Hiltzik at michael.hiltzik@latimes.com or write them at Business Section, Times Mirror Square, Los Angeles, CA 90053.You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

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Berkshire Hathaway A, Monday: $59,600

Nortel Networks, Monday: $75.00