Warren Buffett’s investment in the faltering UK retail giant, Tesco, cost his Berkshire Hathaway company dearly in the third quarter, with the company taking a huge multi million dollar write off.
Berkshire Hathaway was forced to write down the losses from the Tesco holding after the retailer’s shares halved on profit problems, write downs, management changes and fading sales growth. But Berkshire didn’t provide for losses on falls in the prices of two other big holdings in Coca Cola and IBM.
But the Tesco blip couldn’t disguise solid contributions from the rest of the Buffett empire, especially the core insurance operations, energy and railways.
Net income slipped to $US4.62 billion, from $US5.05 billion, but operating profits rose 29% to $US4.72 billion, from $US3.66 billion.
During the quarter, Berkshire wrote off $US678 million on its investment in Tesco. Buffett has been reducing Berkshire’s Tesco stake from more than 4% to below 3%.
Much of the drop in profit came from a $US107 million loss on Berkshire’s investments and derivatives, compared with a year-earlier $US1.39 billion gain.
Some of those gains last year came from positive movements in hedges Berkshire Hathaway has written against major stockmarket indexes, such as the S&P 500. This quarter they were not so favourable.
The September 2013 quarter also included big gains on investments that Buffett made during the 2008 financial crisis, including in General Electric and Goldman Sachs as well as bonds related to candy maker Mars Inc’s purchase of rival Wrigley.
Last month, Mr Buffett called the Tesco investment “a huge mistake” and started selling down the holding. Other underperformers for Berkshire have included IBM and Coca Cola where the two companies have reported more weak results and seen their share prices fall.
That however has not undermined Buffet or Berskshire’s standing with investors large and small.
On Friday Berkshire shares closed at a record $US214,970 for the A class shares. Its Class B shares ended the day up 0.2% at $143.61, also a record close.
That saw the company’s market value soar past $US350 billion by the close on Saturday morning, our time.
The Financial Times pointed out that While Mr Buffett’s reputation is built on his success as a stockpicker, Berkshire’s investment portfolio now accounts for only about one-third of the company’s value.
It owns 82 companies, such as railways (Burlington Northern) power companies, (NV Energy, acquired late last year), See’s Candy, (a long time holding), real estate brokers and kit home manufacturers, car company and other industrial parts makers in the US and Israel, insurance (reinsurance, and Geico, the second biggest car insurer in the US), and even newspapers (in Buffalo and a string of small US midwestern cities).
The book value of Berkshire’s operating businesses and investments together increased to $US144,542 per share, up 7.1% so far this year.
Book value at the end of the third quarter was 77.9% than five years earlier. The S&P 500 total return index was up 107.3% over the same period, so he has underperformed by his standard of book value beating the performance of the S&P 500.
Berkshire last month agreed to buy Van Tuyl Group, America’s largest privately – owned car dealership group. Analysts said the purchase could help Berkshire grow in related businesses, including car insurer Geico.
