Wesco Financial Corporation(AMEX:WSC) is a multi-faceted company that has operations in three main areas: the property and casualty 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.
Starting in the second quarter of 2008, Wesco, like many other companies, began to feel the impact of the financial crisis, posting a 22% year-on-year drop in net income. Wesco blames most of this loss on reduced demand for its insurance services, which are aimed primarily at a commercial property industry that has seen double digit declines in value since the beginning of 2008.
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. These acquisitions come at a time when the rent-to-own industry, as a whole, is experiencing mixed results as sales to consumers grow due to the lack of traditional bank financing and credit that would have ordinarily allowed customers to purchase expensive products upfront while sales to businesses decline due to lower economic growth. The economic slowdown, however, will have a negative impact on Wesco Financial's steel business as manufacturers reduce production in order to cope with reduced consumer demand.
One aspect of Wesco Financial that has drawn attention from shareholders is the extent to which 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, Charles Munger (a close friend of Buffet's), it was revealed that the strength of his influence causes many Berkshire subsidiaries, including Wesco Financial, to voluntarily check in with Buffet before engaging in any major transactions. The fundamental issue that such an ownership structure brings up is the potential for a single individual, Warren Buffet, to override minority shareholder interests.
The 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.
In 2009, WSC earned a total of $813 million in total revenues. This was a slight increase from its 2008 total revenues of $799 million. However, despite the slight increase in total revenues, WSC's net income took a hit. Between 2008 and 2009, WSC's net income declined from $82 million in 2008 to $54 million in 2009.
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.
Wesco operates its furniture rental segment through a subsidiary called CORT Business Services Corporation which offers a large selection of desks and other assorted office furniture to customers who can either lease or rent-to-own the products. This segment is extremely sensitive to economic conditions since many of its customers are other businesses.
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; it manufactured only 20 thousand tons of steel in 2007, in total market of more than 60 million tons - only .03% of the total steel market. However, unlike its larger competitors WSC specializes in producing niche steel products for a small number of customers.
All three segments of WSC are positively correlated with the economic cycle.
The 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. 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%.
One of the main benefits 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. However, both types of manufacturers will see reduced profits as a result of declining economic conditions. For generic bulk manufacturers such as Rio Tinto (RTP), falling profits result from falling market prices of steel as demand for raw materials decreases. On the other hand, specialty steel makers such as WSC, are heavily dependent on a limited number of customers which may be responsible for a large proportion of the profits.
The 2008 CEO of Wesco Financial, Charles Munger, has been close friends with Warren Buffet for many years. The two have often appeared in public, and many publications have suggested that the two often discuss the details of the large businesses that they own and operate. More important, however, is the fact that Munger has publicly revealed that he has sought Buffet's advice regarding investment and capital allocation decisions within Wesco. While there are no 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 them more volatile, as well as override the interests of any smaller shareholders.
The 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 is one other company, Blackstone Group (BX) that owns a diversified array of companies and competes 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. Using the performance metrics outlined above it is also possible to compare the individual segments of WSC with other companies that offer similar products.