Boot maker a good fit for Berkshire, stock analysts say

Wednesday, June 21st 2000, 12:00 am
By: News On 6

The acquisition of Fort Worth-based Justin Industries Inc. by Warren Buffett's Berkshire Hathaway Inc. fits as snugly as a pair of well-worn Tony Lama boots, analysts say.

"This is classic Warren Buffett," said Gary Ransom, a stock analyst at Conning & Co. in Hartford, Conn. "He likes to buy companies that make products that people will use forever. Boots and bricks certainly fit that category."

Berkshire Hathaway, Mr. Buffett's Omaha, Neb., investment vehicle, said Tuesday it will pay $600 million, or $22 a share, for Justin, maker of Justin, Tony Lama and Nocona boots and owner of the most profitable U.S. brick maker, Acme Brick Co.

At first glance, the purchase of a boot and brick company may seem a little out of step in the "new era" of high technology. But Mr. Buffett became famous as the "Oracle of Omaha" because he's often marched to a different drummer.

For instance, in an era when investors flock to companies in industries that didn't even exist a few years ago, Mr. Buffett says he likes to buy companies whose products he can understand. He once explained his investment in General Foods Corp., which makes several familiar brands, by saying: "I can understand Kool-Aid."

Partly as a result of this philosophy, Berkshire Hathaway probably owns the oddest mix of companies in America, including candy makers, restaurants, home furnishings, insurance and even Dairy Queen. Berkshire also has experience running shoe companies: It owns Dexter Shoe Co., H.H. Brown Shoe Co. and Lowell Shoe Co.

The holding company's stock hit a high of $84,000 a share in June 1999 – Mr. Buffett doesn't believe in stock splits – but dropped to $40,800 on March 10. It closed Tuesday at $57,100, up $200 a share.

But for Berkshire investors, the good years have far outweighed the bad, and Mr. Buffett has never wavered from his investing style. He's the quintessential "value" investor, who likes to buy well-managed companies that generate a lot of cash for a relatively low price.

Justin Industries is a perfect fit for that strategy, said John Roberts, who follows Berkshire for J.J.B. Hilliard. Justin has annual cash flow of about $72 million, net income in 1999 of $28 million and not much debt.

"Buffett likes quality businesses like this where he can leave the current managers in place," said Mr. Roberts.

In a written statement Tuesday, Mr. Buffett said the Justin managers "who have produced Justin's outstanding results will continue to run operations from Fort Worth just as they have in the past."

Value investors like to buy companies with low price-to-earnings ratios, which is the stock price divided by its earnings per share. The P/E ratio is an indicator of how much investors are paying for a company's earnings growth, and in general, the lower a stock's P/E ratio, the cheaper it is relative to other stocks. Justin's P/E is 11, low compared to the Standard & Poor's 500 index's P/E ratio of 25.

Even though management of the four companies will remain autonomous, Mr. Roberts said he expects some "synergy'' among the three companies.

"There's probably some overlap in inventory and in distribution that will save money," he said.

Although Mr. Buffett often buys large stock positions in companies – he owns about 20 percent of Coca-Cola Bottling Co., for instance – he seems to favor buying entire companies, as he did with Justin. Currently, Berkshire has more than 20 wholly owned subsidiaries and typically buys two or three more every year.

Most analysts believe Berkshire buys entire companies because it can put a lot of cash to work quickly without running up the price of the company's stock. And Mr. Buffett has often said that he can make more money by buying companies in toto rather than in parts.

"Berkshire generates a lot of cash from its insurance business, and it wants to put that money to work and not have to worry about re-allocating it if the stock price hits a certain target," said Mr. Roberts. Berkshire's insurance companies include GEICO Direct Auto Insurance and General Cologne Re Group.

And at Berkshire's annual meeting in April, Mr. Buffett indicated that buying entire companies makes more sense in a period where the stock market isn't "going to be very exciting for the next 10 years."