Warren Buffett's Chinese automaker, BYD (BYDDY.PK) has been the subject of much criticism over the past couple of years as profits have dropped about as much as possible, only a short time after Berkshire Hathaway (NYSE: BRK-A, NYSE: BRK-B) announced its 10% stake in the company. Many investors have gone as far as to say this was outside of Buffett's wheelhouse and that the investment may be one of his worst. Though I am inclined to disagree, it is difficult to argue with the tremendous loss in value for the beleaguered auto company. This week, however, brought new and interesting news to light. The company is in talks with the U.S. government to provide electric buses to cities, subsidized by Uncle Sam. Could this be a catalyst to set the company back on track toward growth?
When I first caught wind of Buffett's investment in BYD, I was eager to drink the Kool-Aid. Charlie Munger described the company's founder, once the richest man in China, as a cross between Henry Ford and Thomas Edison. That's a strong endorsement, coming from one of the drier, harsher personalities in the investing world (which is itself also a rare accomplishment). The company was gaining a reputation for its batteries and low-cost autos while investors rushed in on the news of the world's greatest investor taking a 10% stake.
Then, things turned around. The company's solar profits tanked, its cell phone battery business was beaten to a pulp, and there were concerns that vehicle batteries had an explosive (literally) issue. By August of last year, profits were down 94% year over year. The stock had traded around $15 in 2010, but has spent much of the last 12 months under $4.
Was this Buffett's worst investment since Berkshire Hathaway?
BYD, in addition to being a vehicle manufacturer, has a solar panel business. As aforementioned, it has been decimated along with many U.S. panel manufacturers. Now, those losses are slowing, and the company's growing segments are beginning to shine a little brighter. Ideally, the panel business will be put to rest, but we'll touch on that in a moment.
At the end of April, the company announced that the first half of the year's profit is up more than 315% compared to last year's numbers. Now, keep in mind last year's numbers were in the dumpster, but these are certainly encouraging figures -- reflecting slimming solar losses and strong sales figures from newly introduced vehicle models.
The company is also opening its Lancaster, Calif., manufacturing plant this week. The facility will build the K9 Electric Bus, capable of traveling more than 150 miles on a single charge. BYD is negotiating with the U.S. government for subsidies to help move these buses to metropolitan areas around the country. For those of us in California and other progressive states, we may be seeing these high-capacity green machines on roads in the very near future.
At the moment, it looks like BYD has turned a corner. Management has shown interest in shedding the solar panel business completely, along with conventional, gas-powered automobiles. The result would be a slimmer BYD whose core business is already showing tremendous promise.
I had cooled on BYD for some time, after being disappointed with the company's three-year (lack of) performance, but recent evidence is compelling and may warrant a deeper look at the financials. At its current price, BYD offers investors a much more value-conscious (if generalist) play on electric vehicles compared to U.S.-based Tesla. BYD is priced around 1.1 times sales while Tesla is around 15. And with the continued support of Buffett and Berkshire, this green-tech behemoth may be one of the safest plays in the industry.
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