Tough Times Bode Well for Buffett’s Firm
The rich may not always get richer, but it’s certainly true for Warren Buffett lately.
Some Wall Street analysts are picking Buffett’s holding company, Berkshire Hathaway Inc., to prosper in a weak economy and in the aftermath of the Sept. 11 terrorist attacks.
Boosted by analysts’ recommendations, Berkshire shares have climbed to their highest level in more than two years. That has lifted the value of Buffett’s stake in the firm. His wealth, estimated at more than $30 billion, placed him second on Forbes magazine’s latest list of America’s richest people, after Microsoft Corp.’s Bill Gates.
A big factor in analysts’ thumbs-up for the stock is the expected rebound of Berkshire’s insurance units along with the rest of the reinsurance and property-casualty industry.
But that’s not the whole story: Berkshire also is benefiting from its image as a financially strong company and from the 71-year-old Buffett’s reputation as a brilliant business opportunist in tough times, analysts said.
“Berkshire is engineered for disaster,” said Morgan Stanley Dean Witter analyst Alice Schroeder, who last week upgraded the shares to “strong buy” from “outperform.” Buffett, Schroeder noted, passes up business opportunities during good times so he will have plenty of cash on hand when times get tough and the real bargains appear.
Indeed, Buffett’s acquisitions during the economic turmoil of the 1970s and early ‘80s set the firm up for its fabulous stock performance over the two decades that followed, with gains regularly topping 30% annually, Schroeder said.
She estimated that Berkshire has as much as $25 billion in excess capital that can be used for acquisitions or other opportunities. With the firm’s liquidity, and Buffett’s ability to make quick decisions, she said, Berkshire often is “acquirer of first resort” for companies looking to sell.
Reuters reported Monday that Berkshire entered the bidding for clothing maker Fruit of the Loom, which has been in bankruptcy since 1999.
Omaha-based Berkshire, which owns insurers Geico Corp. and General Re, has rallied with other insurance stocks since late September, after the shares initially tumbled following the terrorist attacks.
Despite higher losses tied to the attacks, the industry is expected to benefit in 2002 and beyond from big rate increases. Companies engaged in reinsurance offer catastrophe coverage to primary insurers.
Weaker insurers are expected to either withdraw from the reinsurance business or be acquired, reducing capacity and setting the stage for higher rates and fatter profits for such dominant carriers as General Re, analysts said.
In a recent new “buy” recommendation, analyst William Fiala at brokerage Edward Jones in St. Louis said he considers Berkshire shares fairly valued at current levels but that the prospect of rising insurance rates could significantly boost the company’s profitability and valuation.
Berkshire’s Class A shares rose as high as $74,950 on the New York Stock Exchange last week, up 22% from their post-attacks low Sept. 19. The shares eased $200 to $74,600 on Tuesday.
The company’s Class B shares, nicknamed Baby Berkshires, eased $11 to $2,489 on Tuesday. At $2,500 on Monday, the stock was at its highest level since May 1999.
Insurance aside, Berkshire holds an estimated $20-billion portfolio of stocks that includes giant stakes in such blue-chip firms as American Express Co., Coca-Cola Co., Gillette Co. and Washington Post Co.
It also owns more than a dozen operating companies outright, including Benjamin Moore Paints, Dairy Queen, See’s Candies, Executive Jet, Dexter Shoes and Nebraska Furniture Mart.
With the stock market and economy depressed and the nation on a wartime footing, Berkshire’s diversification “plays into the hands of people who want more defensive investments,” said analyst John M. Roberts of Hilliard Lyons in Louisville, Ky.
