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Inside Wall Street

A Recession Special at Buffett's Buffet?

Billionaire Warren Buffett's Berkshire Hathaway (BRK.B) is a robust enterprise without equal in many ways. And it has become an even more compelling value play in the current crisis: Berkshire doesn't suffer the leverage, credit, and quality concerns that plague other financial outfits. "With enormous diversified assets and a stock down 35% from its December 2007 high, it's the one to own in 2009," says John Maloney, president of M&R Capital Management. (By comparison, the S&P 500-stock index has dropped 45% from its October 2007 peak.) With its AAA rating, Berkshire, whose principal business is insurance, stands out among other vastly weakened financials, he adds.

Operating profits have grown 20% annually for 30 years. And the stock is selling at a 21% discount to its net asset value, notes Maloney. Its price-to-book and price-earnings ratios are also below historic levels. He figures that if its B shares, now trading at $3,190 (down from $4,858 on Feb. 19), were to sell at their net asset value, they would fetch 27% more. (One B share is equivalent to 1/30th of an A share, now at $96,490—down from $147,000 on Sept. 19—and has only 1/200th of a voting right.) Maloney, who bought B shares in December at $3,150-$3,200, sees them hitting $4,000 in a year.

"By investing in Berkshire, an investor gets not only an undervalued quality stock but also the guidance and advice of Buffett, the premier investment manager in the world, who controls the company as its chairman and CEO," argues Maloney. Berkshire operates in diverse businesses, including property and casualty insurance, reinsurance, finance, energy and utilities, newspapers, manufacturing, and retailing. In Berkshire, an investor gets to participate in the growth of some of America's top blue-chip corporations.

Berkshire owns sizable stakes in such large-cap companies as American Express (AXP), Burlington Northern Santa Fe (BNI), Coca-Cola (KO), Johnson & Johnson (JNJ), Procter & Gamble (PG), Washington Post (WPO), Wal-Mart (WMT), and Wells Fargo (WFC). In October, Buffett acquired $8 billion worth of newly issued 10% perpetual preferred stock of Goldman Sachs (GS) and General Electric (GE), plus warrants to buy up to 43.5 million shares of Goldman and 134 million of GE.

Ian Gendler of Value Line (VALU) says in a report that "Berkshire's prospects for 2009 and beyond appear solid." Analysts' consensus earnings estimate for B stock is $183.33 per share for 2008 and $200 for 2009.

Joshua Shanker of Citigroup (C), who rates Berkshire a hold, says a big worry is who will succeed Buffett, now 78, given his "impressive track record." He says it's one of the risks to Berkshire, a client. Citigroup owns shares of Berkshire.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Thriving at Brink's Home Security

One of the few stocks flourishing in spite of the 2008 market meltdown is Brink's Home Security (CFL). Its stock surged from 13 on Nov. 20 to 21.33 on Jan. 7. Spun off in October 2008 by Brink's Co., the storied armored-car and money-processing outfit, Brink's Home Security provides residential burglar, fire, and carbon monoxide alarm services. It does business with 1.3 million customers in North America.

Some 90% of Brink's Home revenues are recurring, with subscribers signing three-year contracts but often staying on much longer, according to Ian Zaffiro of Oppenheimer (OPY), who rates the stock outperform. Despite the housing and economic uncertainties, he says Brink's is likely to post healthy 2009 growth in subscribers, revenues, and profits. He forecasts earnings of $1.66 a share in 2009 and $1.87 in 2010, compared with $1.25 in 2008.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

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