I have two questions about these investments.
- Are these turnaround trades? (They appear so)
- Why is Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) trading turnarounds?
Remember the big loss on Tesco (TESO, Financial) last year –Â $700 million or more? I guess times have changed when your company can create $55 million a day in net income from operations, taking just 10 days to erase the loss of a poor investment.
Yet, if you look at Berkshire’s book value performance in the last three and five years, you’ll see a mediocre record. If he was managing money, he may have liquidated by now. Then again, he didn’t have $60 billion to allocate back in the '50s and '60s.
Personally, I think he’s scared to make a mistake that he’s not willing to take a shot like he did with Coca-Cola (KO, Financial) or Geico back then, but it’s different when you have an empire to protect rather than build.
BRK.A on a per share basis the stock has outpaced the S&P the market by more than 2 to 1 in the last decade. But you should not be invested in Berkshire for their stock picks. And, you should not be following them based on quarterly filings. I don’t care what Monish Pabrai said about Berkshire's past performance, it’s not a good predictor of future results.
Clearly, Warren Buffett is looking for things he knows, but he’s 85 now… he should (and does) know A LOT. Smartest financial guy in the room of top financial guys will always be Buffett more than likely.
But when investors see QSR and then AXTA go into the portfolio after the TESO, it should make you wonder where he’s going? Alas, these could be investments made by Berkshires money managers - Todd Combs and Ted Weschler. I wonder if either would get fired if the performance wanes over a long period?
#1 - Restaurant Brands International (QSR, Financial)
QSR is the new symbol for Restaurant Brands International. The new home for Burger King (BKW, Financial), which merged with Tim Hortons (THI, Financial) of Canada to skirt a few percentage points on taxes. But that’s not going to help BK justify it’s market value of nearly $20 billion while it only earns $400 million EBITA.
The old guard of the fast food industry is dying and being replaced by fast casual places like Chipotle (CMG, Financial), Panera Bread (PNRA, Financial) and Shake Shack (SHAK)Â –Â that all serve way better food. CMG and PNRA could have been bought for a huge discount to future earnings just five years ago. These would have been a better investment.
Look, managing money is really hard. I get it. You just can’t think that what used to be a great company can turn around … I remember something Buffett said about these types of situations -– “turnarounds rarely turn.” Why take a shot on QSR? It doesn’t make sense when there are so many better quality quick serve restaurants.
Key statistics
- $1.20 billion in revenue
- $150 million in net income
- $1.8 billion in cash
- $10.3 billion in debt
- (6.07%) return on equity
Bill Ackman (Trades, Portfolio) also owns a big chunk of this stock with over 38 million shares on the books, representing a much larger impact on his portfolio (9% or so). Of course, 3G Capital owns the lion's share of the business with 248 million shares. 3G has been a good partner for Berkshire with the Heinz / Kraft Deal. The $327 million position is good for 0.30% of the BRK portfolio, so fear not, shareholders, even if it doesn’t live up to the standards of prior long-term investments (I don’t believe it will) Buffett’s money managers haven’t risked that much.
#2 - Axalta Coating Systems Ltd (AXTA)
Axalta Coating Systems is a manufacturer, marketer and distributor of performance coatings systems (Specialty Chemicals) with 12,600 employees and a $7 billion market capitalizations. Yet, after being spun off from Dupont (DD, Financial), bought by Carlyle, and auctioned back to the public (loaded with $3.7 billion in debt) the company has made a little forward progress, but nothing to warrant an 8.7% stake when you’re Warren Buffett (Trades, Portfolio).
This one is equally as frustrating and it seems like another turnaround situation. Here’s a quote directly from Buffett on turnarounds.
"Our conclusion is that, with few exceptions, when a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”
Look for this to be true even in Buffett’s case this time and every time.
Key statistics
- $4.39 billion in revenue
- $27 million in net income
- $382 million in cash
- $3.70 billion in debt
- 2.99% return on equity
Guru Investor George Soros (Trades, Portfolio) (another great investor) owns 556,709 shares of AXTA. Buffett is buying the Berkshire Stake through a private placement from Carlyle. Again, it’s only a small $640 million of the $100 billion portfolio, so even if it doesn’t work out, that equates to about 12 days of operating net profit.
My opinion is to stay away from these stocks outside of owning BRK.A and let the big capital invest for AXTA and QSR a turnaround. You may feel differently.
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