Category: Minority Stock Positions

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Commentary: Elon Musk Pushes Tesla Towards BYD’s Playbook

(BRK.A), (BRK.B)

News that Elon Musk wants Tesla to acquire green energy company SolarCity for $2.7 billion in stock was not exactly well received by Tesla investors, with Tesla stock swooning on the announcement. Some accused it of being a bailout of Musk’s SolarCity, which has a need to borrow heavily to fund its rooftop solar panel business.

However, Musk cited the synergies between the companies, which both exploit the move away from fossil fuels.

Whatever you might think of the deal, the one thing worth noting is it would bring Musk’s two companies squarely in line with Chinese vehicle and battery maker BYD Co. Ltd.

BYD is 9% owned by Berkshire Hathaway, and Berkshire has seen the value of its investment skyrocket as BYD becomes a world leader in the same areas that Musk is pursuing.

What are those areas?

BYD is number one globally in EV vehicles. The company vaulted to the number one spot in 2015 from only being number ranked seventh a year earlier.

BYD is the number one maker of rechargeable batteries, and like Tesla even has rechargeable battery home storage already on the market.

BYD is number one in pure electric buses that come in a variety of sizes. From commuter buses to buses for long distance travel, BYD has been quietly conquering the world, and frankly right now has no major competitors. In April 2016, BYD achieved a major milestone, the production of its 10,000th pure electric bus.

BYD’s also rapidly growing a host of other products that include LED lighting, photovoltaic panels for solar farms, and other electric vehicles such as forklifts.

As for solar panels, in the U.S., BYD’s already has a total 109MW using its 270,000 PV modules being developed in California. It also has other projects using its modules, including a 65MW plant in Utah, and a 28MW plant in Arizona.

Perhaps you haven’t heard of BYD, but they are no fly-by-night company. BYD has nearly 180,000 employees working in 22 industrial parks across the globe.

BYD and Berkshire Hathaway

In 2008, Berkshire Hathaway bet on BYD’s potential, purchasing 225 million shares, and today owns roughly 9.1% of the company.

It’s an investment that has paid off handsomely. Berkshire’s original investment of $230 million is now worth roughly $1.77 billion.

Unlike Tesla and SolarCity, BYD is profitable, and it has become profitable using a playbook that is an even bigger version of what Musk is hoping for with his proposed merger.

I don’t know if that playbook will work for Tesla and SolarCity, but it sure seems to be working for BYD.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Minority Stock Positions Stock Portfolio

Palm Springs Latest California City to Add Electric Buses

(BRK.A), (BRK.B)

SunLine Transit Agency, which serves more than 3.5 million passengers annually in the Coachella Valley, California, has expanded its growing alternative fuel vehicles fleet with the addition of its first emissions-free, all-electric buses.

BYD, the world’s largest manufacturer of electric vehicles, has provided the 40 ft. low floor transit buses with seats for 35 and room for more than 60 standing passengers to SunLine.

The transit agency, which includes Palm Springs, began testing the vehicle on service routes in January.

“I’m proud that SunLine Transit has taken this step to add our first all-electric bus to the fleet,” said Lauren Skiver, general manager of SunLine Transit Agency.

“BYD has demonstrated that its electric bus technology is reliable and can meet the needs SunLine has for service routes. Additionally, SunLine will begin to see a return on its investment with cost savings over the lifetime of the bus.”

“SunLine Transit has shown great leadership in expanding its fleet with alternative fuel options, and we are pleased to serve as their technology partner by providing their first all-electric buses,” said Macy Neshati, vice president of Coach and Bus for BYD. “Our BYD electric buses provide a multitude of benefits from reduced operational costs, including significant fuel savings, cleaner air due to no tailpipe emissions, and less noise pollution, making for a more comfortable ride for both bus operator and passenger.”

The buses are equipped with BYD-designed and built iron phosphate batteries, delivering 324 kWh of power that come with a 12 year warranty, the industry’s longest electric battery warranty available. The batteries can run for up to 155 miles of typical urban driving on the service routes with recharging requiring only four hours.

BYD’s pure electric buses and taxis are currently operating in over 200 cities in 48 countries worldwide, including the U.S., Mexico, Colombia, Brazil, the UK, Germany, Austria, Denmark, Holland, Belgium, Japan, Thailand, and China.

BYD and Berkshire Hathaway

In 2008, Berkshire Hathaway bet on BYD’s potential, purchasing 225 million shares, and today owns roughly 9.1% of the company.

Berkshire’s original investment of $230 million is now worth roughly $1.77 billion.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Minority Stock Positions Stock Portfolio

State of California Boosts Pure Electric Short-Haul Trucks

(BRK.A), (BRK.B)

The State of California is awarding $23.6 million to the South Coast Air Quality Management District (SCAQMD) for a statewide zero-emission drayage truck development and demonstration project.

Drayage refers to trucks that haul freight over short distances.

The funds, from the California Climate Investments program, will reduce key criteria pollutants, greenhouse gases (GHG), petroleum usage and toxic pollution where reductions are needed most. They are also designed to accelerate the commercialization of heavy-duty advanced, zero-emission technologies, establishing a path for implementing SCAQMD’s clean air plan currently under development.

The South Coast air district is teaming up with air districts in the Bay Area, Sacramento, San Diego and San Joaquin Valley to make the project a statewide demonstration of 43 zero-emission battery electric and plug-in hybrid drayage trucks serving major California ports. Demonstration trucks and charging infrastructure will be used in all five air districts, providing emission reduction benefits in key areas of California with drayage truck activity.

“This project will help put the very cleanest short-haul trucks to work where they are needed most, moving cargo from the state’s biggest ports to distribution centers and rail yards,” said ARB Chair Mary D. Nichols. “This is good news – and cleaner air – for all Californians, but especially those who live in neighborhoods next to these industrial facilities or along some of our state’s busiest trade corridors.”

This is the first large-scale demonstration of zero-emission Class 8 trucks that involves major manufacturers, including BYD, Kenworth, Peterbilt and the Volvo Group.

The companies receiving funds have the engineering resources, manufacturing capabilities and distribution networks to support commercialization of advanced technologies related to moving freight to and from the ports.

“BYD is proud to work with the California Air Resources Board, South Coast Air Quality Management District and our fleet partners to advance clean, battery-electric transportation solutions in communities where it is needed most,” said Stella Li, president of BYD Motors. “BYD is a worldwide leader in battery technology and as the OEM providing the most battery-electric trucks under this solicitation, I believe other fleets will take notice and recognize that battery-powered drayage trucks are reliable and available for wider deployment today. We look forward to celebrating the delivery of our first battery-electric drayage truck in the fall of this year.”

The grant award is part of a larger statewide investment in low-carbon transportation projects that are pivotal to meeting California’s ambitious goals to reduce GHG emissions, improve air quality, deploy zero-emission vehicles and reduce petroleum dependency by accelerating the development and deployment of advanced vehicle technologies.

This project is part of the California Climate Investments, which use proceeds from the state’s cap-and-trade auctions to reduce greenhouse gas emissions while providing a variety of additional benefits to California communities. The project also supports the Governor’s Executive Order (B-32-15) to ensure the state “transition to zero-emission technologies.”

Freight transport in California is a major economic engine for the state but also accounts for about half of toxic diesel particulate matter (PM 2.5), 45 percent of the emissions of nitrogen oxides (NOx) that form ozone and fine particulate matter in the atmosphere, and 6 percent of all GHG emissions in California.

The SCAQMD is the air pollution control agency for Orange County and major portions of Los Angeles, San Bernardino and Riverside counties.

ARB’s mission is to promote and protect public health, welfare, and ecological resources through effective reduction of air pollutants while recognizing and considering effects on the economy. The ARB oversees all air pollution control efforts in California to attain and maintain health based air quality standards.

BYD’s Pure Electric Buses

BYD has already carved out a major portion of the pure electric vehicle market. In 2015, the company shot to number one worldwide in EV car sales from only 7th in 2014.

It’s also dominating the pure electric bus market, and BYD’s pure electric buses and taxis are currently operating in over 200 cities in 48 countries worldwide, including the U.S., Mexico, Colombia, Brazil, the UK, Germany, Austria, Denmark, Holland, Belgium, Japan, Thailand, and China.

BYD and Berkshire Hathaway

In 2008, Berkshire Hathaway bet on BYD’s potential, purchasing 225 million shares, and today owns roughly 9.1% of the company.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Minority Stock Positions Stock Portfolio

Missouri Latest State to Add BYD’s Pure-Electric Buses

(BRK.A), (BRK.B)

COMO Connect, the public bus system owned by the City of Columbia, Missouri, is expanding its bus fleet by adding zero-emission, all-electric buses into service starting in June to better serve customers and reduce operational costs.

The three (3), 30-ft, low-floor, all-electric transit buses will be supplied by BYD, the world’s largest manufacturer of electric vehicles, with a battery that provides 144 miles per charge and can be recharged in only two to three hours.

The three, all-electric buses will provide significant cost savings in addition to dramatically improving local air quality by eliminating tailpipe emissions. The emissions benefits of operating one all-electric bus are so great that COMO estimates that it is roughly equivalent to removing at least 70 passenger vehicles from the road daily.

Once in service, COMO Connect’s three electric buses will be equivalent to removing 210 passenger vehicles from the road in the community daily.

“These new all-electric buses match COMO Connect’s goals and vision for creating a transportation system for the future in Columbia,” said Drew Brooks, multi-modal manager for COMO Connect.

“We leased an all-electric bus from BYD earlier as a demonstration and were very pleased with the results. The electric buses provided operational and fuel cost savings, were reliable on our service routes, and eliminated emissions thereby helping to improve our local air quality.”

“BYD’s all-electric buses provide a multitude of benefits to operator and passenger,” said Macy Neshati, vice president of Coach and Bus for BYD. “The operator enjoys having a reliable bus that saves money and the passenger enjoys having a quieter, comfortable bus that is helping the environment by eliminating harmful emissions that cause air pollution.” The buses are equipped with BYD-designed and built Iron-Phosphate batteries, delivering 197 kWh of power that come with a 12 year warranty, the industry’s longest electric battery warranty available.

BYD’s pure electric buses and taxis are currently operating in over 200 cities in 48 countries worldwide, including the U.S., Mexico, Colombia, Brazil, the UK, Germany, Austria, Denmark, Holland, Belgium, Japan, Thailand, and China.

BYD and Berkshire Hathaway

In 2008, Berkshire Hathaway bet on BYD’s potential, purchasing 225 million shares, and today owns roughly 9.1% of the company.

Berkshire’s original investment of $230 million is now worth roughly $1.77 billion.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Minority Stock Positions

Commentary: Will BYD Be Berkshire’s Alibaba?

(BRK.A), (BRK.B)

No article on Yahoo these days fails to mention the company’s 15% stake in Alibaba. It’s a stock position that has grown so valuable that it’s the tail that literally wags the dog on the valuation of the high-tech company.

Is there an Alibaba in the making for Berkshire Hathaway with Chinese auto and battery maker BYD Company Ltd.?

By that I mean will the value of Berkshire’s share of BYD eclipse the rest of the company?

Well, no, because unlike Yahoo, Berkshire owns assets including insurance companies, railroads, and energy companies that have enormous value.

But, yes, if you are looking for a minority stock position that over time could rival or surpass Berkshire’s huge minority shareholder stakes in Coca-Cola, IBM, or American Express.

How We Got Here

In 2008, at the urging of Berkshire’s Vice-Chairman Charlie Munger, Warren Buffett bet on BYD’s potential, purchasing 225 million shares for $230 million, and today Berkshire owns roughly 9.1% of the company.

It’s a bet that looks better and better every year.

In 2015, BYD became the number one seller of electric cars in the world. It was a dramatic rise for a company that only ranked seventh in 2014.

That’s not all, in April 2016, BYD achieved another major milestone, the production of its 10,000th pure electric bus. The company is thoroughly dominating the rapidly growing market for emissions free buses of all sizes.

An Investment That Eclipses All Others

With a market capitalization of roughly $19.5 billion, that makes Berkshire’s original investment of $230 million worth roughly $1.77 billion.

It’s a phenomenal return in just five years, and BYD’s best days are clearly ahead of it.

Unlike Tesla, which is burning through money, and is in a race to reach ambitious sales goals before it runs out of money, BYD is already profitable.

What’s more, its profits are growing dramatically, despite China’s slowing economy.

BYD is predicting that its first-quarter profit will jump more than 50 percent from the first-quarter 2015. We’re talking profit not just revenue.

Berkshire’s Alibaba-Like Asset

Berkshire’s got some amazing assets, but most of them won’t grow dramatically in the future. GEICO is the second largest auto insurer in the U.S., but its growth at this point will be incremental not logarithmic. Some even question the future of auto insurance with the coming era of self-driving cars. The same goes for BNSF Railway, which as a Class 1 railroad is in a highly regulated industry with only modest growth potential unless anti-trust regulators approve another round of consolidations.

Even the recently completed $37.2 billion acquisition of Precision Castparts, which gives Berkshire an aerospace company poised to take advantage of the growing demand for passenger jets in India and China, has the growth potential of BYD. Precision Castparts will grow based on the estimated need for new aircraft with a total value of $5.6 trillion over the next two decades, but it won’t grow ten-fold.

Unlike these companies, BYD is operating in lightly regulated market sectors. It dominates the pure electric bus market (a market that Tesla isn’t even in), and while it has already sold its 10,000th electric bus, that is still just a drop in the bucket for a total bus market that is expected to reach eight million units by 2018.

In 2018, only a fraction of those buses will be electric, but in another decade or two they all may be, and for good reasons.

Why They Will All Be Electric Buses

Why will they be electric buses? Because they will have to be. In order for cities to meet ambitious carbon emission reduction goals, existing diesel and even hybrid buses will have to be phased out. The pollution numbers tell the tale. In countries like China and India, buses make up a huge percentage of their air pollution.

In China alone, diesel buses make up just 10% of the vehicles on the road but contribute over 30% of city air pollution and GHG emissions.

Visionary Leadership That’s Making BYD Number One

As for leadership, Tesla’s Elon Musk is clearly already one of the most fascinating corporate visionaries of the 21st century, but don’t forget that Charlie Munger hailed BYD’s CEO Wang Chuanfu as “a combination of Henry Ford, Thomas Edison and Bill Gates.”

He’s already one of China’s richest men.

While Elon Musk has lots of amazing ideas, including hyperloops, and trips to Mars, many of them don’t have a clear path to profitability. Wang Chuanfu has a goal of being number one, and he’s already there.

BYD’s number one in globally in electric car sales, number one in electric bus sales, and they are the world’s largest manufacturer of rechargeable batteries.

BYD is electrifying forklifts, trucks, and a host of other fossil fuel burning vehicles and devices.

They are also building and home scale eclectic battery storage that’s already on the market in Europe and Africa. Tesla gets a lot of attention for their Powerwall, but BYD is in the same market with their B-Box technology.

Berkshire’s $230 million bet on BYD may prove to be its best bet of all-time, as BYD grows into a a global leader that is mentioned in the same breath as Volkswagen and Toyota.

And, since unlike those auto companies it is also involved in IT, photovoltaics, and commercial and residential battery storage, it may just end up being the biggest one of all, which would be very good for Berkshire Hathaway.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Minority Stock Positions Stock Portfolio

BYD Achieves 10,000 Pure Electric Buses Milestone

(BRK.A), (BRK.B)

While Tesla continues to target the mainstream passenger vehicle market as its path to success, Chinese vehicle and battery manufacturer BYD Company Ltd. is making dramatic progress not only in the passenger vehicle market, but also in the electric bus market. It’s a huge market that the company has practically to itself.

BYD’s recently marked the production of its 10,000th pure-electric bus. The milestone was six years in the making.

BYD’s Changsha electric bus factory gives the company the manufacturing capability to meet the needs of China’s growing electric mass transit needs. Air pollution and carbon emissions are the key drivers of the move to pure electric buses. In China, diesel buses make up just 10% of the vehicles on the road but contribute over 30% of city air pollution and GHG emissions.

The market in China alone is huge, and BYD in January 2016 delivered the first of 300 of its BYD K7 buses to the Chinese city of Shanwei, in Guangdong Province. The city plans to have 3,010 pure electric buses in service by 2019.

BYD’s pure electric buses and taxis are currently operating in over 200 cities in 48 countries worldwide, including the U.S., Mexico, Colombia, Brazil, the UK, Germany, Austria, Denmark, Holland, Belgium, Japan, Thailand, and China.

BYD and Berkshire Hathaway

In 2008, Berkshire Hathaway bet on BYD’s potential, purchasing 225 million shares, and today owns roughly 9.1% of the company.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Charlie Munger Minority Stock Positions Stock Portfolio Warren Buffett

Berkshire Gives Mixed Signals on AmEx Stake

(BRK.A), (BRK.B)

Warren Buffett has long regarded Berkshire Hathaway’s stake in American Express like he views his stake in Coca Cola. It’s one of his “forever stocks.”

With American Express having struggled in recent years, including losing its co-branded relationship with Costco, the question is whether forever is really forever, or just a long time.

Costco’s jump to Visa is expected to take a big bite out of AmEx revenues, as it represented a whopping 8% of total billed credit card charges.

“I personally feel OK about American Express, and I’m happy to own it,” Buffett, said while taking questions at the meeting Berkshire Hathaway annual meeting. He did note AmEx’s problems, stating that it “has been under attack for decades — more intensively lately — and it will continue to be under attack. It’s too big a business, and too interesting a business.”

Buffett acknowledges that banking and finance draw a lot of attention and competitors, and there is always someone trying to knock you off your pedestal.

In that regard, Charlie Munger was less sanguine about AmEx.

“Anybody in payments who’s an established long-time player with an old method has more danger than used to exist,” he said.

Buffett is loath to sell Berkshire’s stake in AmEx and Coca Cola, because the cost basis is very low, and the profits from the sales would incur billions in taxes. The positions are both so large that they would also be hard to unload without affecting share prices.

Buffett also noted that Berkshire’s fund managers Ted Weschler and Todd Combs may not be as wedded to holdings in those companies as he has been when the day comes that they take over the entire $100+ billion portfolio. Each currently manages a $9 billion portfolio.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Minority Stock Positions Stock Portfolio

BYD Ups Its Foothold in Australia

(BRK.A), (BRK.B)

BYD Company Ltd., the Chinese battery-maker and vehicle manufacturer that is roughly 10-percent owned by Berkshire Hathaway, is increasing its electric vehicle foothold in Australia.

BYD has become the first Chinese electric vehicle manufacturer to be certified by the Australian Design Rules (ADRs), the country’s stringent technical standards for emissions, vehicle safety and theft resistance.

The company is already in the Australian market, with its pure electric buses in a shuttle service tested for Sidney Airport between December 2014 and May 2015.

It has also sold its pure electric forklift in Sydney and Melbourne.

BYD’s big vehicle news is the introduction of its e6 pure electric crossover for use as taxi.

According to BYD, with the ADRs certification, the BYD e6 taxi got the green light to access the Australian market, meaning that the company’s global electrified public transportation platform now extends to yet another major market.

7+4 Strategy

BYD’s comprehensive “7+4” electrification strategy in the Australia region aims at electrification of all forms of ground transportation: urban bus, coach, taxi, passenger car, urban logistics trucks, construction trucks, and urban sanitation trucks (7), as well as vehicles for warehousing, mining, airports and ports (4).

The company now gets one step closer to fulfilling its lofty electrification plans in a country that prizes sustainable development.

Currently, the BYD e6 and K9 global footprint is present in over 190 cities in 43 countries in all continents.

BYD and Berkshire Hathaway

In 2008, Berkshire Hathaway bet on BYD’s potential, purchasing 225 million shares, and today owns roughly 9.1% of the company.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Categories
Minority Stock Positions Stock Portfolio

BYD Debuts Two New Pure-Electric Cars

(BRK.A), (BRK.B)

When the electricity goes out in your house, you don’t usually look to your car for emergency backup, but two new cars from BYD provide just that.

Chinese battery maker and electric vehicle manufacturer BYD Company Ltd. has added two new pure-electric Sedans to its lineup of EVs, and both cars are equipped to serve as emergency power sources, or even just power for non-emergency setting such as trips or parties.

Currently marketed solely in China, the Qin EV300, will come in four versions with prices ranging from 259,800 to 309,800 Chinese Yuan; and the e5, coming in three versions with prices ranging from 229,800 to 249,800 Chinese Yuan.

According to the company, it based the recent rollouts on a thorough assessment of what EV potential users value the most, and after finding out that range anxiety is still a major factor in purchase decisions, it provided both models with a 300km driving range, although a potential customer, upon testing the Qin EV300, managed to drive 349.5 km on a single charge.

The Qin EV300 is equipped with BYD’s high-efficiency, high-speed permanent magnet synchronous motor, with a maximum power of 160kW and maximum torque of 310Nm, accelerating from 0 to 100 km/h in 7.9 seconds, and features re-generative braking system. The model also features BYD’s signature Insta-Pure Technology, a function that purifies the air in the interior of the vehicle by quickly lowering PM2.5 values.

Emergency Power Supply

Both the Qin EV300 and the e5 are equipped with another of BYD’s signature features: the VtoL function, in which the vehicle serves as a massive mobile electricity supply to power appliances like cookers, refrigerators, power tools and many others, so that users can rely on the vehicle to plan outdoor activities that depend on electricity, or in case of emergencies like power cuts or blackouts.

While BYD has yet to market its cars in the U.S., preferring to focus more on its pure-electric buses in the territory, it has moved into the number one spot worldwide for electric vehicle sales.

BYD and Berkshire Hathaway

In 2008, Berkshire Hathaway bet on BYD’s potential, purchasing 225 million shares, and today owns roughly 9.1% of the company.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Acquisitions Commentary Minority Stock Positions Warren Buffett

Commentary: Will Berkshire Ever Seal the Deal on USG?

(BRK.A), (BRK.B)

If ever there was a company that looks like the perfect fit for Berkshire Hathaway it would have to be USG–the leading manufacturer of gypsum wallboard. After all, Berkshire already owns insulation manufacturer Johns Manville, Acme Brick, and presently has a 41.91% stake in USG.

USG and Berkshire

Berkshire played a key role in saving USG during the nadir of the Great Recession.

In 2008, with the housing market imploding and lending all but frozen, Berkshire came to USG’s rescue with $300 million of convertible notes that paid Berkshire 10-percent interest. At the time, the boost in confidence that USG received from Warren Buffett’s financing helped the company avoid bankruptcy. Boost investor confidence it certainly did, and the day of the transaction USG’s stock soared 22-percent to $6.89 a share.

Five years later, in December 2013, Berkshire exchanged $243.8 million of the convertible notes for common stock, and with additional purchases, its stake in USG now makes it the company’s single largest shareholder.

USG is a solid earner with a Price/Book of 2.16, a P/E of only 3.73, and EPS of $6.72. The stock currently pays no dividend and USG has stated they have no plans to do so. USG does carry a substantial amount of debt, which as of December 31, 2014, totaled $2.209 billion.

Wallboard Numbers Are Up

So, is now the time for Berkshire to fully bring USG into the Berkshire family of companies? Demand for gypsum wallboard is up. According to the Gypsum Association, a not-for-profit trade association, roughly 21.8 billion square feet of gypsum board were shipped in 2014. This was an increase of approximately 4% from 20.9 billion square feet in 2013. USG’s share of the gypsum board market in the U.S was approximately 26% in 2014, basically unchanged from 2013.

The Chinese Drywall Scandal

As an American manufacturer, USG has been a beneficiary of the Chinese drywall scandal that came to a head in 2009. Imported wallboard from China that had high sulfur content brought reports of fumes that created upper respiratory problems, and the market for wallboard from China was hit hard. Thousands of homes in Florida and other states needed to have their wallboard ripped out and replaced.

About USG

In 1902, 30 independent gypsum rock and plaster manufacturing companies merged to form the United States Gypsum Company. Over more than a century, USG has been issued 1,100 patents for its products. In addition to wallboard, the company is a leading manufacturer of acoustical panel and specialty ceiling systems. The company has 34 manufacturing plants in the U.S., and has roughly 9,000 employees in more than 30 countries.

USG’s a true market leader with a 26% market share of the U.S. gypsum wallboard market. It is followed by National Gypsum at 21%, and Georgia-Pacific at 16%. It has an even more commanding 50% share of the joint compounds market.

Time to Pull the Trigger?

The Chicago-based company has seen its ups and downs, including three bankruptcies. The last bankruptcy was in July 25, 2001 under Chapter 11 in order to deal with a mountain of asbestos litigation costs related to asbestos containing joint compounds. The establishment of the The United States Gypsum Asbestos Personal Injury Settlement Trust put the company’s asbestos woes in the rear-view mirror, and its stock price reflects it.

Also on the upside is the extensive cost cutting the company has done over the past decade. USG has closed high-cost manufacturing plants, and used salaried workforce reductions and other cost reductions to trim an additional $22 million to $28 million annually. In all, its cost reductions have totaled $500 million.

With a market cap of just over $3.66 billion ($1.46 billion of which is already owned by Berkshire), USG is a great fit for Berkshire if it wants to gobble up the whole thing. USG would fit nicely into the Marmon Group of companies, which include a host of companies that supply the construction industry.

So, will Berkshire pull the trigger? A two billion dollar deal is not a big one for Berkshire these days, and with new housing starts hitting a nine-year high, and slowly heading back towards the historical levels of 1.5 million starts a year, USG looks like a solid company worth adding to the Berkshire portfolio.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.