Buffett’s ‘Wake-Up Call’ May Signal More Cost Cuts (Update2)

Buffett’s ‘Wake-Up Call’ May Signal More Cost Cuts (Update2)

By Andrew Frye

Nov. 6 (Bloomberg) — Berkshire Hathaway Inc.’s managers may deliver more cost cuts to Chief Executive Officer Warren Buffett after the billionaire replaced Richard Santulli as the head of a money-losing plane-leasing unit.

Berkshire executives have eliminated jobs and closed plants as the sale of bricks, jewelry and luxury flights suffered in the recession. The company, which reports third-quarter results today, may need further reductions, even as the U.S. recovers, said Jeff Matthews, founder of the hedge fund Ram Partners LP.

“I don’t think Berkshire hit the reset button as hard as other companies” when it came to cutting costs, said Matthews, the author of “Pilgrimage to Warren Buffett’s Omaha.” Naming David Sokol, chairman of Berkshire’s energy business, to lead the aviation operation that Santulli founded may have been received as “a wake-up call to other managers.” Sokol said yesterday that NetJets was laying off as many as 495 pilots.

The CEOs of Berkshire’s operating companies oversee more than 200,000 workers selling Fruit of the Loom T-shirts, Geico car insurance and Dairy Queen ice cream, while Buffett vets investments with a staff of fewer than 20 at the firm’s Omaha, Nebraska headquarters. Berkshire said Nov. 3 it agreed to pay $26 billion to buy Burlington Northern Santa Fe Corp., adding a railroad with about 40,000 employees.

Berkshire has gained about 6.9 percent this year on the New York Stock Exchange, compared with the 18 percent gain in the Standard and Poor’s 500 Index. The stock rose $1,399, or 1.4 percent, to $103,299 at 10:46 a.m. in composite trading.

Stock Market Rally

Third-quarter profit may more than double to $2.89 billion, according to Meyer Shields, an analyst with Stifel Nicolaus & Co. The best back-to-back quarterly rally in the S&P in 34 years is helping Berkshire recover after its first loss since 2001 in the January-to-March period.

Berkshire’s agreement to purchase the 77.4 percent of Burlington it didn’t already own may mean Buffett is more confident in the company’s finances after he scaled back on insuring catastrophes earlier this year to guard capital. The deal is Buffett’s biggest.

“He’s making such a large acquisition at a time when he was so concerned about having enough liquidity,” said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington “It might signal that Berkshire is kind of turning the corner.” Buffett didn’t return a message left with his assistant, Carrie Kizer.

Goldman, Moody’s

Buffett built Berkshire into a $150 billion company over four decades by buying out-of-favor stocks and family businesses. After credit markets froze last year, Buffett added to holdings of bank stocks and agreed to finance Goldman Sachs Group Inc., investments that surged in this year’s recovery.

Buffett purchases operating companies for Berkshire with the promise to their owners never to sell them and says his ideal time horizon to hold a stock is “forever.” He reversed course on credit-rating company Moody’s Corp., reducing Berkshire’s stockholding three times since July. In February, he said he made a mistake by buying ConocoPhillips stock, which cost Berkshire $1.9 billion in the first quarter.

Buffett was a NetJets client before acquiring the firm in 1998 from Santulli, the inventor of fractional jet ownership. Santulli added about 648 jobs at Columbus, Ohio-based NetJets in 2008 before presiding over about $350 million in losses in the first half. Sokol announced 300 job cuts in September and the additional layoffs yesterday.

Santulli said in an August statement he was resigning to spend more time with his family, and Buffett said he accepted the departure “with reluctance.”

‘Nothing is Forever’

“Nothing is forever, even at Berkshire,” Matthews said.

Buffett replaced Marvin Beasley in April as CEO of Helzberg Diamond Shops after saying in an interview that consumers “won’t go in our jewelry stores” because of the recession. A year earlier, Beasley told the Kansas City Business Journal that Helzberg wasn’t planning more job cuts after eliminating 21 positions, saying, “we think it’s going to be OK.”

Helzberg has shut about 36 stores since the end of 2007, reducing the number of outlets to 234, said Marti Greathouse, a company spokeswoman. The closures were part of a plan initiated under Beasley, Greathouse said.

Berkshire last year cut jobs at businesses including Clayton Homes Inc., which builds manufactured housing, and brickmaker Acme Building Brands. The 10 largest employers among Berkshire’s operating units cut staff by 1.2 percent last year, “a significantly smaller decline than total U.S. employment,” according to an analysis by Bill Bergman of Morningstar Inc.

‘No Alternative’

Buffett told shareholders at the firm’s annual meeting in May that he expected more reductions. Shaw Industries, the world’s largest carpet manufacturer, said in October 2008 it was closing a spun yarn plant in Trenton, Georgia, to cut production. About 440 workers were affected, the company said in a statement.

“There really is no alternative,” Buffett said in May. “They are all getting hit because of the recession,” he said, referring to Berkshire’s retail and manufacturing businesses.

The U.S. economy returned to growth in the third quarter and Buffett said while the country has made “enormous progress” from a year earlier, the recovery isn’t complete.

“The patient really went into the emergency room and it won’t come out of the hospital entirely for a while,” he said in an interview in September with the CEO of Berkshire’s Business Wire unit.

‘Earnings Deterioration’

Revenue may continue to fall, on a year-over-year basis, through the end of 2009, said Shields. “We expect Berkshire to focus on cutting expenses to limit further earnings deterioration,” he said in a research note last month.

The U.S. economy has lost about 7.2 million jobs since the recession began in December 2007, the biggest decline since the Great Depression.

3M Co., the maker of 55,000 products from Post-It Notes to safety equipment, reported third-quarter profit that topped analysts’ estimates and raised its full-year forecast after cutting 5,800 jobs since the start of 2008. Caterpillar Inc. said Oct. 26 it expects the return of about 550 of the company’s laid-off employees as demand increases in the coming months. About 2,500 other laid-off workers won’t get their jobs back.

Berkshire probably benefited in the third quarter from lower insurance claims tied to hurricane season, as the period yielded a single U.S. landfall. The company, which makes a quarter to half its income from carriers including Geico and General Reinsurance, reported an 83 percent drop in underwriting profits in the period last year as hurricanes Ike and Gustav contributed to the costliest storm season since 2005.

Third-quarter results may also show gains on derivative bets called equity-index puts. The contracts, which rise in value when stocks advance, weighed on results in 2008.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net.

Last Updated: November 6, 2009 10:50 EST


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