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Wesco Financial (WSC)Stock (Rental & Leasing Services Industry, Services Industry)
 Wesco Financial Corporation (NYSE:WSC) is a multi-faceted company that is involved in three main areas: the insurance business, the furniture rental business, and the steel industry. Moreover, since 1973 it has been controlled by Berkshire Hathaway (BRK) who, through one of its many subsidiaries, owns an 80.1% equity stake in Wesco.[1] In the second quarter of 2008, Wesco, like many other companies began to feel the impact of the financial crisis posting a 22% drop in net income as compared to the same quarter in 2007. However, Wesco blames most of this loss on reduced demand for their insurance services which resulted in substantially lower underwriting and investment income on top of increasing operating expenses present in their other business sectors. Additionally, in 2008, Wesco expanded its furniture rental segment by purchasing Roomservice Group located in the United Kingdom as well as a division of Aaron Rents located in the United States.[2] The economic slowdown will also have a negative impact on Wesco Financial's steel business as manufacturers reduce production in order to cope with reduced consumer demand.[3] One aspect of Wesco Financial that has drawn continuous attention on the part of shareholders is the extent that management decisions are influenced by Warren Buffet who effectively controls Wesco Financial through his 28.1% ownership of shares in Berkshire Hathaway. In an interview with the CEO of Wesco in May 2007, though, it was revealed that the extend to this influence may in fact be quite minimal although many Berkshire subsidiaries do voluntarily check in with Buffet before engaging in any major transactions.[4]
[edit] Business OverviewThe three divisions of Wesco financial are formally designated as the Insurance, Furniture Rental, and Industrial segments. Operations within each segment are carried out by distinctly named subsidiaries that are directly managed by Wesco Financial.
  [edit] Insurance Segment (% Revenue: 11% , % Income: 77%)Wesco engages in both primary insurance as well as reinsurance through two subsidiaries called Wesco-Financial Insurance Company and The Kansas Bankers Surety Company. Unlike primary insurance, reinsurance is a way for WSC to provide insurance to other insurance companies. In this process these other insurance companies are able to take on greater risks then they would be able to do without reinsurance contracts.[5] The insurance segment of Wesco Financial represents the smallest proportion of revenue and yet the largest amount of net income. This discrepancy can be primarily explained by two factors. Wesco financial has been able to keep overhead expenses constant and between 2006 and 2007 even managed to reduce these expenses by 6%. More importantly, though, is the investment income that is derived from the insurance segment which accounted for more than 90% of the total income in the insurance division.[6] [edit] Furniture Rental Segment (77%, 22.1%)Wesco operates its furniture rental segment through a subsidiary called CORT Business Services Corporation. This segment is extremely sensitive to economic conditions and in 2007 decreased by .6% following an increase of nearly 5% in the year 2006 as a result of the slowdown in the US economy. For the second quarter of 2008, rental revenues continued to fall declining 2.1%.[6] These declines are excluding trade shows and convention contracts which represent only one time sales and are not viewed as consistent and reliable clientele by Wesco. The falling revenue is mainly associated with decreased customer demand that can be tied to uncertainty regarding future economic conditions. Additionally, this segment saw service fees rise more than 30% in the second quarter of 2008 as compared to 2007. The most significant expense that Wesco faces are its selling, general, and administrative expenses which accounted for nearly 75% of their expenses in fiscal 2007. [edit] Industrial Segment (12%, .9%)The Industrial Segment for WSC is operated through a subsidiary called Precision Steel that has plants in both Chicago, IL and Charlotte, NC. Revenues are generated through the purchase of raw metals that are then cut to a customer's specifications and sold. The market share that is controlled by Precision steel is relatively small, manufacturing only 20 thousand tons of steel in 2007 in total market of more than 60 million tons, or only .03% of the total steel market. In the second quarter of 2008, it generated only $600,000 in income for the firm making it the smallest segment in WSC by profit. [edit] Key Trends and Forces[edit] The current economic downturn will affect all segments of WSCAll three segments of WSC are positively correlated with the economic cycle. For the insurance segment, during economic upturns as business build property and expand operations they will seek to purchase the exact type of insurance offered by WSC.[7] Moreover, during downturns, not only will WSC have a more difficult time getting new customers, many current customers will reduce the coverage of their insurance in order to lower their premium payments which will negatively affect Wesco's revenue. In terms of the furniture rental segment the same logic holds during times of economic growth as businesses seek to acquire the necessary equipment for their offices. However, during periods of slower growth WSC will have to deal not only with diminishing demand but also with the increasing costs of keeping their furniture as inventory in warehouses.[8] Lastly, the industrial segment, like the broader manufacturing industry , is intricately tied to consumer demand which has historically diminished during economic downturns. These fluctuations are most strongly felt in the specialty stainless steel products produced by WSC. During 2007, sales of these products declined more than 14%.[6] [edit] Economies of scale amongst competitors could hurt profits in the Industrial SegmentThe steel industry, while made up of many firms, is dominated by two: Rio Tinto (RTP) and ArcelorMittal (MT) which together make up almost 50% of the market share.[9] The large scale of production that these two firms are capable of allows them to have profit margins of 25% and 11%, respectively, compared to WSC's profit margin of only 3%.[10] One of the main benefits that is derived from a larger operation is the higher return that can be achieved on the expensive capital outlays that are required in order to mine, manufacture, and/or mold the raw materials into useable products that can be sold to distributors and wholesalers. [edit] The potential influence of Warren Buffett on dictating the actions of WSC is significantThe current CEO of Wesco Financail, Charles Munger, has been close friends with Warren Buffet for many years and the two have often appeared in public with many publications suggesting that the two often discuss the details of the large businesses that they own and operate.[11] More importantly, however, is the fact that Munger has publicly revealed that he has sought Buffet's advice regarding investment and capital allocation decisions within Wesco.[12] While there is not any perverse incentives for Warren Buffet to make decisions that harm WSC's shareholders the potential for one individual, who is proximal to a company's daily operations, to affect share price can make share prices more volatile. [edit] CompetitorsThe unique organizational structure of WSC in terms of the types of business that it is engaged in makes it difficult to find direct competitors. However, there are a few other companies that own a diversified array of companies and compete against WSC both in terms of the amount of income that is brought in and the level of returns that these companies can provide for shareholders.
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