Two organizations have taken aim at Clayton Homes, a company Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) owns. One is The Center for Public Integrity, and the other is The Seattle Times. Clayton Homes has put out its own rebuttal.
Since Berkshire bought Clayton Homes in 2003, it has grown into the world’s largest mobile home manufacturer. This comes thanks to its vertical integration, making it a powerhouse in the space. It not only makes mobile homes, but has retail outlets to sell them, as well as mortgage arms to insure and finance them.
You don’t become a leader in an industry without causing some uproar. Granted, the recent investigation into the Clayton Homes’ practices brings up a lot of points over predatory lending and the need for consumer protection. But should Buffett really be villainized for this?
The Seattle Times piece is entitled, “The mobile-home trap: How a Warren Buffett empire preys on the poor.” Notice it says, “Warren Buffett empire preys on the poor,” and not, “Clayton Homes preys on the poor.”
We all know the importance of catchy headlines to generate clicks. In reality, this has little to do with Buffett. Sure, his Berkshire Hathaway owns Clayton Homes, but Berkshire is a massive holding company, with Clayton and its subsidiaries being a small part of the company’s portfolio.
In fact, Berkshire’s portfolio includes close to 60 companies, many of which have their own various subsidiaries.
The core of Buffett’s company lies in insurance, energy, railroads and other servicing and manufacturing businesses. About 24% of its operating revenue is generated from McLane Company, 12% from Burlington Northern Santa Fe, 11% from GEICO, and 9% from Berkshire Hathaway Energy.
Buffett is well-respected and has a war chest of cash, allowing him to get deals done that outpace most of Wall Street. This includes investing in Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC) at deep discounts thanks to the financial crisis. Then there’s the most recent one, Kraft Foods Group (NASDAQ: KRFT), where Buffett and 3G Capital made multiples on their money in just a couple years.
Part of what affords Berkshire its ability to make mega-deals is its dependable stream of cash flows generated by its steady businesses that generate cash regardless of the economic backdrop. These businesses include utilities, energy and insurance. So, when the majority of other companies are struggling, Berkshire can use its cash flow to buy up strong businesses on the cheap.
Going forward, Berkshire should continue to do well. This comes as the economy strengthens, allowing its major railroad business to prosper from a growing economy where consumers are buying and shipping more goods. Then there’s its utility business, which will do well as the U.S. population continues to grow.
Berkshire has been one of the great value-creating vehicles for investors over the last half century. Buffett took over Berkshire in the 1960s, and over the last 50 years he’s grown the book value of its Class A shares from less than $20 a share to more than $145,000 a share.
And if you look at the return of Berkshire shares over the last 15 years, it’s nearly five times the return of the S&P 500. It’s tough to compare Berkshire to any other company given its conglomerate structure.
Despite the negativity of the investigation surrounding Clayton Homes, Berkshire is still a behemoth of a company. The negativity won’t be enough to damage the Buffett reputation, and Berkshire’s core business has the capability of performing well in any economic environment.
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