Friday, February 14, 2003
Buffett's bet: Burlington better pick than in '80s

GREENSBORO — Warren Buffett's familiarity with Burlington Industries dates back long before this week's announcement that the famed investor's company, Berkshire Hathaway Inc., plans to plunk down $579 million for the bankrupt textile maker.

In a 1985 letter to shareholders, Buffett used the dismal performance of Burlington's stock price to illustrate his own investing philosophy: Good managers are fine, he said, but good businesses in good industries are a better bet.

And textiles, he stressed then, was not a good industry.

The question now is whether Buffett has experienced a change of heart about the textiles business.

Known variously as a "buy and hold" or "value" investor, Buffett likes to pick up companies at fire-sale prices, but ordinarily firms in industries he views as inherently profitable. 

"My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns)," Buffett wrote 17 years ago, "is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad)."

Buffett based that conclusion on his experience in transforming Berkshire Hathaway from a textile company to a diversified investment vehicle concentrated in insurance, though lately dabbling in old-economy manufacturing firms.

Buffett-the-prophet viewed textiles as keeping steep fixed costs and vulnerable to cheap imports.

Burlington Industries was more than 20 times larger than Berkshire in 1965. But by 1985, Burlington's stock commanded about one-third the purchasing power as it did 20 years before. Meanwhile, Berkshire shares soared.

"This devastating outcome for the shareholders indicates what can happen when much brain power and energy are applied to a faulty premise," Buffett wrote in 1985.

"A textile company that allocates capital brilliantly within its industry is a remarkable textile company — but not a remarkable business." 

How Burlington fits

The perceived irony of that letter was not lost on Matthew Sauer, director of research with Oak Value Capital Management in Durham, which owns a stake in Berkshire Hathaway.

But to Sauer, the deal fits Buffett's strategy of buying companies for about 10 times their annual earning power.

Stripped down to a core, profitable business, Burlington can concentrate on what makes it money without worrying about satisfying public shareholders and thus make unwise acquisitions and expenditures, Sauer said.

Instead, Burlington just has to make regular profits, kicking off enough cash to fund future Buffett acquisitions.

"If you have a core business and firm profits year upon year but it doesn't grow, that's fine with him," Sauer said.

"I imagine that now Burlington has shrunk to a size where there's something underneath that makes reliable income. 

"(Buffett) finds something that makes a 10 percent return or more for his purchase price so he can reinvest that as he sees fit."

Last May, Burlington Industries trumpeted the sale of its bedding, window consumer products and residential upholstery fabrics businesses as the final major steps in its reorganization.

What remains, CEO George Henderson said at the time, is the foundation on which the company hopes to return to financial strength. 

Those pieces include: Lees Carpets, which manufactures commercial floor coverings; Burlington House, which will focus on bedding, mattress fabrics and window coverings in partnership with Springs Industries;

Nano-Tex, which develops high-performance fabrics using nanotechnology to impart characteristics such as stain and wrinkle resistance;

Burlington Apparel Fabrics, which will manufacture synthetics, wools and differentiated denim in the United States and Mexico;

and Burlington WorldWide, which will lead marketing and product development, primarily for Burlington Apparel. 

Analysts like the new, leaner Burlington.

Backing out restructuring and other charges, Burlington last quarter was operating at break even, and even at a profit if charges for interest (which will mostly disappear) are subtracted. 

At the same time, capital expenditures are rock bottom, only $15.6 million last year. 

Taste for manufacturing

Buffett has ramped up acquisitions of manufacturers since 2000.

Berkshire Hathaway's most recent annual report shows a string of purchases of such companies during that time, including last spring's $750 million buy of Fruit of the Loom, which already is exceeding earnings projections. 

"I think Buffett learned his lesson 30 years ago about investing in textiles, which has proven to be a horrible business for investors," said Timothy Vick, senior investment analyst at Arbor Capital Management and author of "How to Invest Like Warren Buffett."

"In this case, however, he is getting Burlington's assets so cheap, he would have a difficult time not making a return on his investment," Vick said.

"All he needs are modest improvements in Burlington's operations over time and he should make his investment back, and then some." 

Moreover, Vick said, the $579 million purchase price looks highly attractive for a company producing $1 billion in annual sales, that will be free of debt and wielding more than $100 million in cash on its balance sheet.

The good news for Greensboro is that Buffett seldom meddles in local affairs; if the company makes money, he'll let existing managers continue as managers, Sauer said, and Burlington headquarters is unlikely to move.

"The jobs in Greensboro, to the extent that they have a reason to be working, they'll all be the same," Sauer said.

"The company won't be moving." 

Or as Vick put it: "The common shareholders will get nothing from this transaction, but workers will get rescued by a company with deep-enough pockets to give Burlington a fighting chance of resurrecting itself."

"Buffett has proven to be one of the best, most loyal owners of companies in the United States. When he buys," Vick said, "he buys for keeps."