In the 1994 annual report of Berkshire Hathaway, Warren Buffett commented, "we believe that our formula - the purchase at sensible prices of businesses that have good underlying economics and are run by honest and able people - is certain to produce reasonable success." When it comes to the auto manufacturing industry, the phrase "have good underlying economics" is the test.
Two years ago (1.25.2006), I pointed out Kerk Kerkorian's investment in GM as a good indicator for potential profits. (It did.) But I also commented on my unwillingness to follow him in, writing, "As a one to three year hold, GM stock has significant potential to appreciate. But, as a long term hold, the business is not attractive, even though there is clearly money to be made."
The news in today's WSJ confirmed my business apprehension. In an article discussing the possibility of Ford selling Jaguar and Range Rover to Tata Industries (surprising in itself), the pricing was discussed, "It isn't clear how much Tata or the other bidders would be willing to pay for the brands. Merrill Lynch & Co. estimated this year the combined sale of the Jaguar and Land Rover brands would raise $1.3 billion to $1.5 billion. Ford acquired Jaguar for $2.5 billion in 1989 and Land Rover for $2.75 billion in 2000" - an estimated $4 billion or 75% loss!
If Ford is unable to value these auto manufacturing businesses any more clearly than that, what ability could I (or most outsiders) possibly have in arriving at "sensible prices?"
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