It's Warren Buffett's stealth presence in L.A, and like virtually everything else he touches, it's been doing remarkably well.
Pasadena-based Wesco Financial Corp., which is run by longtime Buffett business partner Charles Munger and is 80 percent owned by Berkshire Hathaway Inc., has been a star performer on Wall Street of late, with its stock price rising 26 percent in three months to a record $466 a share.
Despite this run-up and Wesco's posting of $555 million in operating revenues last year from its furniture rental, insurance and steel operations, the company has kept a very low profile. And that's just the way the straight-talking yet unassuming Munger likes it.
Indeed, in his last "letter to shareholders" in March, Munger, who is chairman, chief executive and president of Wesco, downplayed expectations for the company's future performance, saying that future growth in shareholders' equity was unlikely to match or exceed past performance. In the past, Munger has referred to his tenure at Wesco as "a long slog."
But Wall Street seems to think otherwise, especially in recent weeks. The stock had traded for between $350 and $400 for most of the past year as Wesco's operating units turned in consistently good earnings.
Then, after a "strong buy" recommendation in late September from Matrix Investment Research, a subsidiary of Stern Stewart & Co., Wesco's stock shot up to around $450 a share, where it's hovered for most of October. It closed Thursday at $466. The recommendation may have had a big effect on the stock because it is thinly traded.
"The performance has been good, overall operating income has increased nicely and so has return on capital," said Matrix analyst Ivan Feinseth. "The large price may put some people off, but for anyone who follows Berkshire Hathaway and its philosophy of not allowing stock splits, this stock remains relatively cheap."
Yet Wesco is barely a blip on the radar when compared to the headlines generated by its larger parent. While the 82-year-old Munger is well known in investment circles for his straight talk and investment advice, he doesn't have the cachet of Buffett, known around the world as "the sage of Omaha" or the "oracle of Omaha."
Munger, who eschews e-mail and is known to answer his own phone, declined to be interviewed for this story.
Munger and Buffett's involvement in Wesco dates back to 1970, when the pair obtained majority ownership of what was then a savings and loan. Buffett, with Munger's assistance, had recently transformed Berkshire Hathaway from a textile mill operation into a holding company for investments in other companies.
With Munger and Buffett in control of Wesco with 80 percent of its shares, Munger was installed as chairman and chief executive. At the time, Wesco had a market capitalization of $40 million; today, its market cap is $2.7 billion.
Munger, who added the title of president last year when longtime president Robert Bird retired, has essentially run Wesco as a smaller version of Berkshire Hathaway, acquiring companies he regarded as financially sound, in good business lines and folding them under the Wesco holding company umbrella.
"This company really is run by Warren Buffett and Charlie Munger," said chief financial officer Jeffrey Jacobson. "Like with Berkshire Hathaway, they are looking for well-run companies that don't require huge cash infusions."
Wesco's two main business lines furniture rentals and property and casualty insurance are both doing well, said Feinseth, the Matrix analyst.
The largest revenue generator ($384 million in 2005) is Cort Furniture Rental Services, which Wesco acquired in 2000 though the purchase got off to a bad start.
In what Munger admits was a case of unforeseen bad timing, Cort went in the tank within months of that purchase. The dot-com bust and the economic fallout from the Sept. 11 terrorist attacks hit the commercial furniture rental business hard as companies downsized. That was compounded by a decision in 2001 to launch an apartment locator service, which took far more resources and time to get off the ground than expected.
But Cort's fortunes turned again as the economic recovery gathered steam in 2004 and 2005, prompting this observation from Munger in his letter to shareholders: "We are pleased with the progress CORT made in 2005. We are cautiously optimistic that, in future years, we will be able to look back to the recent past and consider it merely a cyclical aberration in CORT's growth."
In characteristic fashion, Munger injected a note of caution in his outlook, saying the number of furniture leases at the end of 2005 was running 4 percent behind 2004 levels. But Feinseth said that as long as the economy remains in relatively good shape, the demand for rented furniture should keep CORT going.
While Cort has functioned as a stand-alone business unit, Wesco's insurance operations are intertwined with those of parent Berkshire Hathaway, which also is in the insurance business (most notably as the parent company of Government Employees Insurance Co., or GEICO, Insurance).
Wesco Financial Insurance Co., headquartered in Omaha, is part of Berkshire Hathaway's National Indemnity Group of insurance companies; it primarily provides reinsurance and frequently has teamed up with other Berkshire subsidiaries.
A.M. Best Co., which rates insurers, has rated the entire National Indemnity Group "A++," which it classifies as "superior." In its July rating, A.M. Best cites the group's "superior risk-adjusted capitalization, premier market profile, superior although irregular earnings stream, strong investment base, astute management and extraordinary liquidity."
This rating comes in spite of the fact that the reinsurance business has been quite volatile in recent years, with such major catastrophes as the Sept. 11 terrorist attacks and several major hurricanes striking the U.S. mainland.
Separate from Wesco Financial Insurance is Kansas Bankers Surety Co., which provides deposit insurance to banks in Kansas and 30 other states, primarily in the Midwest. Wesco purchased this company in 1996 for $80 million; "Its tangible net worth now exceeds its acquisition price," Munger said in his note to shareholders.
In comparison with its furniture and insurance lines, Wesco's steel operations are small, consisting of one plant and warehouse in the Chicago suburb of Franklin Park. Yet Precision Steel's fortunes have been just as cyclical as those other business lines and it faces increased competition from outside the U.S.
In his note to shareholders, Munger said that Precision Steel benefited from an extremely tight market in 2004 and 2005, a situation he said is unlikely to continue. "We expect the steel warehouse business may revert to difficult times," he said.
But Feinseth said the steel operation is such a small part of Wesco's business that even if it does slump, it won't heavily impact the overall company.
"We look at Wesco's two main lines of business: insurance and furniture rentals. In both cases, the underlying trends have been good. As long as that's the case, I don't see much downside at all," he said.
Whether the rest of Wall Street will remain as bullish on Wesco remains to be seen. Last week, financial market research firm New Constructs LLC issued a neutral, or "hold" rating on Wesco, saying that the company's financial performance is "balanced by a fairly rich stock valuation."
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