By Josh P. Hamilton
Bloomberg News
Sunday, July 6, 2008
It must be a bear market because even billionaire Warren E. Buffett's Berkshire Hathaway has slumped more than 20 percent since December.
The decline exceeds the drop of the Standard & Poor's 500-stock index and marks the worst first half for the investment and holding company since 1990. Price competition has driven down revenue at Berkshire's insurance units, which account for about half of its income.
Berkshire is "close to getting more fairly priced," said Charles Hamilton, an analyst at FTN Midwest Securities who has a "neutral" rating on Berkshire. "I wouldn't say it presents a buying opportunity right now."
After reporting record company earnings of $13.2 billion last year, the 77-year-old Buffett told shareholders in February that profit margins from insurance will drop.
"That party is over," Buffett wrote in his annual letter to shareholders in February. "It is a certainty that insurance industry profit margins, including ours, will fall significantly in 2008."
Berkshire also has been hurt by the declines of Wells Fargo, American Express and U.S. Bancorp, three of the company's 10 biggest equity holdings at the end of March. Wells Fargo, Berkshire's second-largest holding, dropped 18 percent in the second quarter, while American Express and U.S. Bancorp slipped 14 percent.
Berkshire shares closed at $116,700 in New York Stock Exchange composite trading Thursday, down 21.8 percent from their all-time closing high of $149,200, on Dec. 10. That exceeds the 16.7 percent slide of the S&P 500 in the same period. Berkshire spokeswoman Jackie Wilson didn't respond to a request for comment.
The slide hasn't deterred Buffett devotees, who think Berkshire's decline represents a buying opportunity.
"I'd put a new client in Berkshire right now," said Frank Betz, a partner at Carret Zane Capital Management, which oversees $800 million, including Berkshire shares. "It's probably the highest-quality collection of individual companies that's ever been assembled. Long slides are not in the Berkshire Hathaway lexicon."
Berkshire bulls are betting with history on their side: the shares advanced in 17 of the past 20 years. The last annual decline was 3.8 percent in 2002. The record earnings last year came as Buffett booked a $3.5 billion profit on a $500 million investment in the oil producer PetroChina and insurance units made money selling coverage against storms that never came.
The decline in financial shares may provide Buffett an opportunity to boost holdings, said Whitney Tilson, a principal at T2 Partners, a hedge fund that counts Berkshire among its investments.
"Where Buffett makes his money is taking advantage of weak, chaotic markets," Tilson said. "The odds that Buffett could do a large, transformative deal have gone up substantially."
Buffett built Berkshire over four decades from a failing maker of men's suit linings to a $180 billion company. He plows revenue into companies whose management he trusts and whose business models he deems superior. The billionaire's Berkshire stake makes him the world's richest person, according to Forbes magazine.
With Berkshire's $35 billion in cash, Buffett can scoop up bargains on beaten-down securities and make acquisitions while near-frozen credit markets curb purchases by leveraged-buyout firms, Tilson said.
Buffett entered the bond insurance business in December as the largest companies in the industry, MBIA and Ambac Financial Group, struggled to maintain their credit ratings. CIT Group, a lender that lost 84 percent of its market value in 12 months, said last week that a Berkshire subsidiary agreed to pay $300 million for its portfolio of loans backing factory-built homes.
Tilson calculates the so-called intrinsic value of Berkshire's assets and operations at $157,000 a share. The stock reached intrinsic value in 11 of the past 12 years, Tilson said.
This year's decline emerged as commercial property rates dropped from their peaks after Hurricane Katrina in 2005. Property and casualty prices in the United States fell 14 percent in the first quarter from the first quarter of 2007, according to a survey by the Council of Insurance Agents and Brokers.
For Berkshire, which owns National Indemnity, General Re and Geico, first-quarter earnings from underwriting insurance policies fell 70 percent, to $181 million. Pretax underwriting profit at Berkshire Hathaway Reinsurance Group, which sells catastrophe coverage, dropped 95 percent.
Buffett said the United States is mired in "stagflation," a period of slowing economic growth and accelerating inflation.
"We're right in the middle of it," Buffett said in a June 25 interview. "I think the 'flation' part will heat up, and I think the 'stag' part will get worse."
An economic recovery isn't "going to be tomorrow, it's not going to be next month, and may not even be next year," he said.
Tilson and Carret Zane's Betz said they'll wait. Berkshire has gained 26-fold since 1988 in NYSE trading -- a return more than three times as great as the S&P 500.
"I sleep well," Tilson said. "It's not going to double overnight, but we think it will in five years, which is a 15 percent compounded annual rate. It's the stock you want to own."
Erik Holm in New York contributed to this report.
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