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Tuesday, September 18, 2012

MARKETWATCH: Buffett style fashions Berkshire’s foreign deals

By Sue Chang, MarketWatch

Reuters
By Sue Chang, MarketWatch 
Warren Buffett has invested only a small portion of Berkshire Hathaway’s vast portfolio outside of the U.S., including Tesco, the U.K.-based retail chain.
 
SAN FRANCISCO (MarketWatch) — Three cheers for the red, white and Buffett. Few investors embody the patriotic spirit of the American heartland as much as Warren Buffett, with his folksy, down-to-earth wit, Nebraska roots and buy-American ideals. But that hasn’t kept the 82-year-old billionaire from bargain-hunting on distant shores.
   

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Yet even with his considerable investment acumen and resources, the chairman of conglomerate Berkshire Hathaway Inc. BRK.A -0.24%   BRK.B -0.20%  has essentially played it safe by putting most of his international holdings in developed countries that have withstood both the euro-zone debt crisis and the global economic slowdown comparatively better than their peers. 

Among Berkshire’s major stakes at the end of 2011 were four non-U.S. companies: South Korea’s Posco PKX -2.38% KR:005490 -1.18% ; France’s Sanofi S.A. SNY -0.30% FR:SAN -0.79% ; Germany’s Munich Re MURGY +0.31% DE:MUV2 +0.12%  and the United Kingdom’s Tesco PLC TSCDY +0.30% UK:TSCO -0.07%  . 

These stocks account for a fraction of Berkshire’s investment portfolio, but like their U.S. counterparts, they are all bellwethers for their respective markets. And while they don’t exactly fit the mold of what Buffett would describe as “wide-moat” companies — low-cost producers or businesses with powerful brands — they do boast strong competitive advantages. 

“They are not necessary in the top tier of the wide moat category,” said Paul Larson, chief equity strategist at Morningstar. But, he adds, “They all have something going for them.” Read more: Let Buffett's 'moat' protect your portfolio.

‘Buyer of choice’

As Buffett’s biographer, Alice Schroeder, relates in “The Snowball: Warren Buffett and the Business of Life,” Buffett started looking for investments in a country with a market that was “overlooked and undervalued” in 2004. He found it in Korea and by the end of 2006, Berkshire owned a 4% stake in Posco valued at $1.16 billion. Berkshire also bought a 2.9% stake in Tesco, then worth $1.82 billion. 

With its purchase of an 80% stake in Israel’s Iscar Metalworking for $4 billion, 2006 undoubtedly marked Berkshire’s emergence as a “globe-trotting” company. 

“More and more, Berkshire has become ‘the buyer of choice’ for business owners and managers,” Buffett noted in a letter to shareholders at the end of 2006. “Initially, we were viewed that way only in the U.S. (and more often than not by private companies). We’ve long wanted, nonetheless, to extend Berkshire’s appeal beyond U.S. borders.” 

In 2007, Berkshire reported a stake in Sanofi, while Munich Re was added in 2010. Over the past decade, there have been other foreign investments for Buffett, including PetroChina, Swiss Re and BYD Co. But at the end of 2011, only four foreign investment holdings in the Berkshire portfolio had a value of more than $1 billion. Read more: 10 stocks from Buffett and other top investors.
Munich Re (Germany)
 
Berkshire’s investment in reinsurer Munich Re makes sense, given Buffett’s long history with the insurance industry, Larson said. 

Berkshire’s 20.1 million shares of Munich Re, or 11.3% of the company, were valued at around $2.5 billion at the end of 2011, making it Berkshire’s biggest foreign holding.


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Munich-based Munich Re is the world’s largest insurer by premium revenue, with key operations in reinsurance, insurance and health care. It’s listed on the DAX 30 DX:DAX -0.11%  and the DJ Euro Stoxx 50 XX:SX5E -0.42%


The company’s return on equity at the end of 2011 was 3.3% while debt leverage was 18.3% at the end of 2011, according to the company. In August, Munich Re reported its second-quarter net profit rose 9.8% to 808 million euros ($1.06 billion) from 736 million euros ($965.5 million). Gross premium revenue rose 5.5% to 12.6 billion euros ($16.5 billion). 

Roderick Wallace, an analyst at S&P Capital IQ Equity Research, raised his 2012 profit forecast for the company to 2.75 billion euros ($3.6 billion) from 2.55 billion euros ($3.3 billion), citing improved revenues.
Posco (South Korea)
 
Berkshire owned 5.1% of the world’s fourth-largest steel mill at the end of 2011. “This was a bet on the Korean economy, but the company itself has a relatively good position on cost,” Larson said. 

Formerly known as Pohang Iron and Steel, Posco was established in 1968 by the Korean government more as a symbol of its industrial aspirations rather than a reflection of economic reality. Along with its New York-listed American Depositary Receipts, Posco trades on the Korea Stock Exchange KR:SEU -0.26% and on the London Stock Exchange. 


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Posco was privatized in 2000 as part of the government’s effort to restructure state-run entities and its name was officially changed to Posco in 2002. It has 33 affiliated companies and is the sixth-largest business conglomerate in Korea with combined sales of $58.3 billion. 

Posco’s return on equity was 9.5% in 2011, according to Samsung Securities. Net debt to equity ratio was 50.1%. In July, it reported its second-quarter profit slumped to 466 billion Korean won ($417 million), from 1.37 trillion won ($1.2 billion) a year earlier
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Even so, some analysts believe Posco is underpriced, given its growth potential. “Its ability to generate stable earnings outpaces those of its peers,” said Chris Kim, an analyst at Samsung Securities in Seoul.
Sanofi (France)
 
Buffett favors diversified firms with strong development pipelines that regularly bring products to market, Larson said.

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Sanofi fits that bill. Berkshire held a 1.9% stake in Sanofi, the world’s sixth-largest drug company, at the end of 2011. Headquartered in Paris, Sanofi bought Aventis in 2004 and Genzyme in 2011, as part of an effort to grow through mergers and acquisitions. 

Flagship medicines include sleeping aid Ambien and blood thinner Plavix. Sanofi also manufactures taxotere, which is used in breast cancer treatment. The company’s products are sold in 170 countries and Sanofi has a significant presence in emerging markets, which account for 30% of sales.
In July, Sanofi reported second-quarter net profit climbed 16% to 1.17 billion euros ($1.4 billion) from 1 billion euros ($1.3 billion) a year earlier. Sales edged up 0.4% to 8.87 billion euros ($11.6 billion).
Shares of Sanofi are listed on Euronext Paris XX:N100 -0.50%  and foreign investors account for 62.1%. Sanofi’s New York-listed shares are up 25% in 2012 so far. 

Tesco (United Kingdom)
As of Jan. 13, Berkshire held a 5.1% stake in Tesco, the third-largest retailer in the world by sales behind Wal-Mart Stores Inc. and Carrefour S.A. The company does business in Europe, Asia and the U.S., where it operates 185 Fresh & Easy grocery stores.

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Tesco reported a net profit of £2.8 billion ($4.5 billion) in fiscal 2012 ended Feb. 25, up from £2.7 billion ($4.4 billion) in the year-ago period. Sales, meanwhile, rose to £64.5 billion ($104.6 billion) from £60.5 billion ($98.1 billion). 

Tesco is rated a hold by Sam Hart at U.K.-based investment manager Charles Stanley. The company is listed on the FTSE 100 UK:UKX -0.37%

“Tesco has a credible plan in place to revive its underperforming U.K. business, but the process is likely to be a protracted one,” Hart said in a June research report. “The current valuation suggests these risks are probably largely discounted, but the shares are unlikely to perform until clear evidence emerges of an improved like-for-like sales performance relative to peers.” 

The Essays of Warren Buffett: Lessons for Corporate America, Second EditionThe Essays of Warren Buffett: Lessons for Corporate America, Second Edition by Warren E. Buffett
Buy new: $24.32 / Used from: $17.64
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The Snowball: Warren Buffett and the Business of LifeThe Snowball: Warren Buffett and the Business of Life by Alice Schroeder
Buy new: $13.60 / Used from: $4.50
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