Berkshire Hathaway Inc. (BRK.B) One of the Largest Losers From Tesco PLC (TSCO)’s Financial Problems

Warren Buffett is famous for his impecable ability to pick profitable stocks, which brought him the title of Oracle of Omaha. However, among the vast portfolio of equity holdings, Buffet’s company, Berkshire Hathaway Inc. (NYSE:BRK.B) Hathaway, has one position that is compromising Mr. Buffett’s stock-picking skills. This company is Tesco PLC (LON:TSCO), a UK-based operator of food retail stores, which of late has been going through a rough period, causing its stock to lose over 40% since the beginning of the year.

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The stock took another deep a couple of days ago, after Tesco PLC (LON:TSCO) announced that it had discovered an overstatement in its guidance for the half year, caused by accelerated recognition of commercial income and delayed accrual of costs. The mistake was commited in the expected profit section, which caused an overstatement of 250 million GBP (approximately $405 million). The discovery sparked a real scandal which let to a 10% drop in stock price of the company on Monday and the suspension of four of the company’s UK executives.

According to Berkshire Hathaway Inc. (NYSE:BRK.B)’s letter to shareholders for 2013, the holding company owns some 301.05 million shares of Tesco PLC (LON:TSCO), which give it ownership of 3.7% of the company. Berkshire included Tesco in the list of 15 companies where it owns the largest stakes in terms of value adding also the cost of purchase of these holdings and their market value. It is important to mention that Tesco was the only holding which had a lower market value than cost. Berkshire Hathaway Inc. (NYSE:BRK.B) spent around $1.7 billion for the acquisition of its position in Tesco PLC (LON:TSCO), which means that Berkshire has lost over $750 million since buying shares of the company. This is not that much for a company, whose equity portfolio is worth over $107 billion, which includes only its investments in US stocks.

While the story with Tesco PLC (LON:TSCO)’s overstatement is still not completed, since the company expects an investigation on the matter to be conducted by Deloitte, the chance that the company will make a recovery is slim. Tesco has already admited a huge decline in its profits and with UK consumers being stolen by discount chains such as Aldi and Lidl, the future of Tesco looks grim.

We shall watch the development of the situation and wait for Mr. Buffett’s next letter to shareholders to see whether Berkshire Hathaway Inc. (NYSE:BRK.B) will still own shares of Tesco PLC (LON:TSCO) by the end of the year.

Disclosure: none