Tuesday, April 14, 2009

Buffett Invests in Chinese Electric Car Company

Fortune published a recent article describing Berkshire Hathaway's purchase of a 10% stake in BYD, a Chinese electric car manufacturer last fall. I didn't really notice this announcement when it came out, but it was a decent-sized investment at $230 million for the 10% stake.

Looking at the net income graph in the article, it looks like BYD earned about $180 million in 2008. Dividing that by 10 gets about 18 million of earnings, or a P/E of about 12.7x. (This is just to give you a general sense of valuation, see this site for the current P/E of the S&P 500. Not sure if this site gets the calculation right or not, but I found it after a brief google search).

The reason this acquisition caught my attention is because (as others have noted), Buffett broke some of his own rules to make it. I don't see how an auto company could ever meet his criteria for an excellent business (for more on his criteria, see my review of Buffettology, particularly the 9 questions). I don't think he understands the industry either. It seems like this investment was more likely the brainchild of David Sokol, chariman of MidAmerican Energy and Charlie Munger than it was of Buffett.

I don't have much of an opinion either way but I do note that it continues the trend of Berkshire making acquisitions outside of the United States.

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