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Buffett and Munger joined the Wesco board in 1974, while Blue Chip continued to purchase shares – by the end of 1974 it had 64% of Wesco. It wasn’t until 1977 that it held 80%, the limit agreed with Betty Caspers Peters.
Wesco performed well, for example, the 80% of its profits after tax attributable to Blue Chip amounted to $4.46m in 1976 and $5.715m in 1977, which is a pretty good return on the amount paid of somewhere between $30m and $40m (Sorry for the imprecision, but the exact amount is not publically available, and the shares were bought at various prices over a long period).
It’s interesting to note that it was not just improved performance in the savings and loans business that boosted earnings, but “capital gains” were significant from a strong balance “showing substantial assets outside its subsidiary savings and loan association and available for commitment elsewhere.” (Blue Chip Stamp letter to shareholders, 1977, from Charles T. Munger, Chairman of the Board Donald A. Koeppel, President).
The following year, 1978, the 80% of Wesco’s net income attributable to Blue Chip jumped up to $7,417,000. It happened to be a very good year for savings and loan associations, but this was not to last, as we’ll see later.
Note that Berkshire Hathaway did not benefit from Wesco’s profits to the full extent of $7.417m because at that time BH held only 58% of Blue Chip which, in turn, owned 80% of Wesco Financial Corporation. Thus, Berkshire’s equity in Wesco’s earnings was about 46%. It was not until 1983 that Berkshire Hathaway owned 100% of Blue Chip Stamp.
A steely move
We’ve already seen that some of the funds held within the company were being used to invest in securities, but until February 1979 Wesco had only the one operating business. Then it was joined by a mid-western steel service center business called Precision Steel Warehouse Inc., located in the outskirts of Chicago, purchased for approximately $15m. As well as selling lengths of metal, it manufactured and distributed tool room supplies and other products sold under its own brand names.
Precision Steel reported after-tax earnings of $1,918,000 for 1978, so the price of only $15m seemed pretty good. However, steel suppliers operate in highly competitive markets, subject more than most to the ups and downs of the economy.
For the next few years profits fell. At first, the decline was slight, but in the last quarter of 1981 a severe recession in steel industry began and profits plunged. In 1982 only $0.3m after tax was made.
The recession-induced decline was exacerbated by what Munger and Koeppel describe in their 1982 Blue Chip letter as “a business mistake”. They said they should never have entered the small measuring-tool distribution business. This Precision Steel subsidiary was closed down in 1982 “at substantial cost”.
Quite frankly, this was a less than auspicious beginning for a mini-conglomerate.
However, storms have been weathered, and Precision Steel is still owned by Wesco in 2016. But it has suffered from many years of famine, with only a few years of feast. For example, in the late 1990s it had a row of years when after-tax profits reached the giddy heights exceeding $3m. This was followed by a four-year period of approximately break-even.
All in all, we have to look at the Precision Steel investment as one of the least profitable uses of money under the command of Buffett and Munger.
Savings and loan disaster
So, back in the early 1980s Wesco had a struggling steel operation and the original savings and loan business plus a portfolio of securities. But the S&L started to present managerial challenges……To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
