Warren Buffett (Trades, Portfolio) has been an active investor for over seven decades in one way or another, and during this time he has made hundreds of investments. Some of these holdings, such as Coca-Cola (KO, Financial) and IBM (IBM, Financial), are well known, but stock holdings from his early career have received less attention.
Buffett’s early investments are, in my opinion, more interesting than current holdings because they display his deep-value orientation. Also, as he flew under the radar for the first few decades of his investing career, he was able to invest in lesser-known small-caps and special situations, the likes of which he would never be able to buy today.
One such situation was Philadelphia and Reading Coal and Iron, an “anthracite producer that had excess cash, a tax loss carryforward and a declining business.” This holding is discussed in Buffett’s 2001 letter to Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) shareholders and Alice Schroeder's "The Snowball."
Philadelphia and Reading was reportedly Buffett’s biggest position at one point and went on to be bought by Graham-Newman as a control position. The company was what Berkshire Hathaway would later become. It was operating in a declining industry, but using its cash to expand into other businesses such as the Union Underwear Company, which sold underwear under the Fruit of the Loom brand. They also bought Acme Boot Manufacturing Co. Buffett described the situation in his 2001 letter:
“This faith was rewarded when P&R purchased the Union Underwear Company from Jack Goldfarb for $15 million. Union (though it was then only a licensee of the name) produced Fruit of the Loom underwear. The company possessed $5 million in cash and $2.5 million of which P&R used for the purchase and was earning about $3 million pre-tax, earnings that could be sheltered by the tax position of P&R. And, oh yes: Fully $9 million of the remaining $12.5 million due was satisfied by non-interest-bearing notes, payable from 50% of any earnings Union had in excess of $1 million. (Those were the days; I get goosebumps just thinking about such deals.)”
Interestingly, the company’s transformation was orchestrated by Howard A. Newman, the son of Jerome Newman who ran Graham-Newman with Benjamin Graham:
“Mr. Newman was catapulted to the top post of the coal-mining company, the Philadelphia and Reading Corporation, at the age of 34 after Graham-Newman bought a significant interest in the company. It had already moved into manufacturing clothing. Mr. Newman added boots, optical equipment and other products, and eventually sold the coal business.” -- New York Times, Howard Newman's obituary.
Union went on to buy the licensor of the Fruit of the Loom name and, along with P&R, was merged into Northwest Industries. Fruit went on to achieve annual pre-tax earnings exceeding $200 million, according to Buffett’s 2001 letter.
In 1996, John Holland, the CEO who had steered the company through its most bountiful years, retired. Unfortunately, the following management team did not have the same level of business acumen and “loaded the company with debt, in part to make a series of acquisitions that proved disappointing.” While bad news for the company, this was an excellent opportunity for Buffett.
Buffett has a history of getting reinvolved with businesses he has worked with or invested in the past. The remained of the P&R business was no exception:
“Before John's return, deliveries were chaotic, costs soared and relations with key customers deteriorated. While correcting these problems, John also reduced employment from a bloated 40,000 to 23,000. In short, he hass been restoring the old Fruit of the Loom, albeit in a much more competitive environment.”
The company ultimately fell into bankruptcy, and Buffett made his move. Berkshire made a proposal to creditors insisting that if a deal went ahead, Holland would remain with the company. Advising Buffett on the deal was none other than Newman. Berkshire ultimately acquired Fruit of the Loom and the assets of Acme Boot.
Zero to hero
The story of Buffett and P&R is interesting for many different reasons, not least because it shows his acumen for picking top quality managers to orchestrate turnarounds. It is also possible; this scenario introduced Buffett (in some shape or form) to the idea of mobile capital, something he went on to use at Berkshire. When Newman became P&R's CEO in 1955, he deloped capital from the slowing coal business into other operations, returning the company to growth. Buffett used the same principle nearly a decade later when he bought Berkshire in 1965.
If Newman had remained at the head of P&R, who knows what he could have accomplished, but his departure resulted in a $200 million opportunity for Buffett. Buffett could see the value in Fruit of the Loom, and he pounced when it came up for sale. That is how he was able to make $200 million out of a bankrupt coal miner.
Disclosure: The author owns no stocks mentioned.
