By Andrew Frye
Oct. 2 (Bloomberg) -- Warren Buffett’s eventual successor at Berkshire Hathaway Inc. won’t be able to strike deals as profitable as those arranged by the billionaire investor, said Meyer Shields, an analyst at Stifel Nicolaus & Co.
“We expect the ‘Buffett Premium’ to wane as the inevitable transition approaches,” Shields said in a note today. “Buffett’s knowledge and skills are replaceable, but since his iconic status isn’t, the economic attractiveness of Berkshire’s future investment opportunities will likely decline.”
Buffett, 79, built Berkshire into a $150 billion company over four decades by investing in out-of-favor firms. The companies he finances often tout his investment as seals of approval. After the Lehman Brothers Holdings Inc. failure locked credit markets last year, Buffett made private deals to inject $8 billion in Goldman Sachs Group Inc. and General Electric Co. Berkshire gets a 10 percent yield on the investments.
“When Berkshire bought preferred shares from Goldman Sachs and GE, it’s very likely that the imprimatur of the world’s most famous investor conveyed a level of confidence that itself contributed to the deals’ very generous terms,” Shields said. “Thanks to its solid cash position, Berkshire should always be a competitive acquirer, but the economic impact of Buffett’s ‘halo’ will probably fade.”
Stock Slide
Berkshire slipped $1,450, or 1.5 percent, to $98,400 at 10:28 a.m. in New York Stock Exchange composite trading. The stock, which has bettered the Standard & Poor’s 500 Index in 14 of the last 20 years, has dropped 34 percent from a high of $149,200 on Dec. 10, 2007.
Buffett is monitoring candidates to succeed him as CEO and has said that picking one is the most important job for Omaha, Nebraska-based Berkshire’s board. The potential successors all work for Berkshire, which owns businesses ranging from insurance to energy and candymaking, and had $24.5 billion of cash at the end of June. Buffett is also the chairman of the firm’s board.
Last month, Berkshire, in partnership with Leucadia National Corp., committed to spend as much as $490 million on real estate-related assets from Capmark Financial Group Inc.
“We expect continued acquisition activity in all of Berkshire’s business areas,” Shields said. “Its current strong cash position and the returns on recent investments” may spur further deals for depressed assets, said Shields, who initiated coverage of the stock with a “hold” rating.
Stable Base
Equity analysts have given less attention to Berkshire than companies with similar market valuation, in part because of the relatively stable base of shareholders led by Buffett, who owns about a third of the stock. Three analysts tracked by Bloomberg recommend buying Berkshire stock, while Shields is the third to issue a hold rating. Berkshire employs more than 200,000 people and has a market value almost as high as GE’s. More than 14 analysts cover GE.
Berkshire often makes a quarter to half its profit on insurance operations that include car coverage specialist Geico Corp. and reinsurer General Re Corp. Buffett uses the “float,” or accumulated premium, that his insurance businesses generate to invest before paying claims.
Shrinking reinsurance premium and increasing auto insurance claims are limiting profits at the underwriting units, while low yields curb investment income, Shields said. In other businesses, lower consumer spending “should suppress” revenue and profits into 2010, said Shields.
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