Buffett on a Bargain Hunt
Warren Buffett’s Berkshire Hathaway Inc. is on a $20-billion buying spree that some investors say has only just begun.
So far this year, Buffett has joined with Lehman Bros. Holdings to provide $2 billion in financing to energy concern Williams Cos., invested $100 million in telecommunications specialist Level 3 Communications Inc. and bought two gas pipelines--one from Williams for $450 million and one from Dynegy Inc. for $1.88 billion in cash and debt.
After spending $4.24 billion this year and more than $15.4 billion over the last two years, Buffett still has as much as $40 billion in cash and short-term investments available for acquisitions.
He said in his annual letter to shareholders in March that he wants to make acquisitions in the $5-billion-to-$20-billion range.
“Absent a major catastrophe, this should be Berkshire’s best year ever,” said Keith Trauner, an analyst at Fairholme Capital Management, which manages $33 million and owns Berkshire shares.
The stock market rout has created investment opportunities for Berkshire and also is helping the company’s insurance businesses maintain price increases instituted since the Sept. 11 terrorist attacks, which cost Berkshire $2.28 billion and the insurance industry about $58 billion.
Berkshire’s second-quarter earnings excluding investment gains or losses probably rose to $550 a share from $231 a year ago, according to a survey of analysts by Thomson First Call. The company is expected to report earnings after the market closes today.
“He’s buying great assets from companies whose holding companies are in distress,” said Fairholme’s Trauner. Kern River, the pipeline Buffett’s MidAmerican Energy unit bought from Williams, “is a great asset,” Trauner said, considering how much it would cost in time and money to lay a new pipeline.
Buffett, in his letter to investors, decried what he said was a lack of investment opportunities, saying Berkshire’s size as well as market conditions such as outsized valuations make it impossible to replicate the company’s past successes.
“Two conditions at Berkshire are far different from what they once were: Then we could often buy businesses and securities at much lower valuations than now prevail; and more important, we were working with far less money than we now have,” he said.
The Oracle of Omaha also said he needed to find “elephants,” or large undervalued companies, to make significant gains.
“You could see him buying some elephants,” said Greg Lapin, an analyst at Citigroup Asset Management, which manages $409 billion and owns Berkshire shares.
Buffett missed an opportunity a few years ago to buy pharmaceutical stocks before they rallied, Lapin said. “He didn’t take advantage then but he might be interested in a basket of pharmaceutical stocks today,” he said.
Times have changed since the March 9 letter, investors say. The Standard & Poor’s 500 index has lost more than 26% and the Dow Jones industrial average has lost 22%.
Shares of Berkshire have lost more than 6% this year and rose $110 to $71,000 in trading on the New York Stock Exchange. They’ve outperformed the S&P; 500 by 22% since March 9.
“This is the ideal market for Warren Buffett,” said Guy Spier, a money manager at Aquamarine Fund, which has 27% of its $30 million in Berkshire stock. “With the Dow cheaper, opportunities are likely to be better. If the Dow were down to 10 times earnings, he would be in even better shape.”
Buffett, who turns 72 this month, declined a request for an interview on possible acquisition targets. At his company’s 2001 annual meeting, he said asbestos litigation is a “cancer” that will keep stifling U.S. businesses. He also said Berkshire may buy companies forced into bankruptcy.
“He’s looking for things that are out of favor,” said Bill Batcheller, a money manager at National City Corp., which manages $70 billion and owns Berkshire shares.
Among the out-of-favor industries Buffett might be targeting are the asbestos, energy, insurance and pharmaceutical industries, investors said.
“Two years ago most people thought Buffett lost his touch,” Trauner said. “Sound balance sheets never go out of style. They can go out of favor but never out of style.”
