BRK Berkshire Hathaway
Zen
Description: At its present price of $83,900, Berkshire Hathaway is
trading at one of the widest discounts to intrinsic value in recent
years. The risk/reward equation with Berkshire is compelling. A.
Operating Businesses: A1. Mid-American Energy's earnings and interest
paid to Berkshire was $237 Million in 2004. There was a one-time
writeoff in 2004 of $579 Million for an ill-fated Zinc recovery
project. Excluding this, net after-tax earnings to Berkshire from MAE
in 2004 would have been $530 Million (approx.). Assume this grows
modestly to $600 Million in 2-3 years. Its likely to do a lot better
- given all of Buffett's comments on this business. A2.
Berkshire's historical cost of insurance float has, on average, been
negative. In 2004 float was $46 Billion with an underwriting profit of
$1.5 Billion or 3.2%. Float has grown considerably since 2000 when it
was $28 Billion. Note that the 2000 float number includes Gen Re. So
Berkshire has grown float by 65% in 4 years organically or about 13%
annually. Let us assume that float grows moderately in the future and
average underwriting profit (now that all units are fixed and firing on
all cylinders) is about $1 Billion or under 2% in a few years. A3. The
"Finance and Finance Products" category generated $2.3 Billion in
pretax earnings in 2004 and $1.8 Billion in 2003. A large part of this
is Buffett's opportunistic trading operation - which may not be
recurring. One could argue that Buffett consistently makes money with
onetime bets - silver, junk bonds in 2002, Finova's liquidation
through Berkadia, AAA bond trades, Level 3 converts, currencies etc.
So, let's say Buffett generates, on average, $1 Billion per year
through the potpourri of opportunistic trading that he's so
exceptionally good at. The rest of it (including Clayton Homes) should
generate atleast $400 Million pretax. So $1.4 Million pre-tax - or
about $1 Billion after-taxes. A4. Manufacturing, Service & Retail
Operations generated $2.5 Billion pre-tax and $1.5 Million after tax in
2004. Some of these businesses (like NetJets) are investing heavily in
Europe for future growth. So, even modest organic growth should put
earnings in this group around $2 Billion after-tax in 2-3 years. In
2006-2007, these operating businesses (A1-A4) in total are likely to
generate $4.6 Billion after taxes.. B. Investments. At the end of 2004,
the public equities portfolio was valued at $38 Billion. C. Cash and
Bonds were $63 Billion at year end. Even at 2%, the cash alone is
generating about $800 Million in Interest earnings annually. Charlie
Munger has stated that their bond holdings are only there because of
lack of interesting equities to put it in. The company is generating
about $1.2 Billion a quarter of cash. Over the next two years, cash is
very likely to increase by $10 Billion. In addition, over the next 2
years float is likely to grow by atleast $5 Billion. So Cash and bonds
at the end of 2006 is likely to be north of $78 Billion. Cash has been
building for a while. It is likely that Buffett will get a chance to
swing a few times in the next few years - perhaps deploying 1/3 to
1/2 of the $78 Billion war chest. If 40% is deployed at a modest 10%
after-tax return, earnings would rise by $3 Billion. Operating Earnings
in this scenerio would be $7.6 Billion. At a 15x multiple this is worth
$114 Billion. Assume just 5% annualized growth in value of the public
equities would put them at $42 Billion. And finally there is the
residual $48 Billion in cash and bonds. This aggregates to $204
Billion. With 1.538 Million shares outstanding, the IV per share is
$132,600 per share in a couple of years. With a present price of
$83,900, it is an annualized return of over 25%. Buffett has mentioned
that it is ok to consider float as equity for Berkshire when
calculating intrinsic value since it has cost it nothing over the
years, on average. None of the aforementioned is aggressive. If equity
markets drop significantly the results may be significantly better. And
there is no assumption of stellar acquisitions - if he is able to buy
businesses in distressed industries (like Clayton) and then add the
Berkshire touch, its even better. There are many ways one can interpret
the following statement from the 2004 Annual letter: "Charlie and I
will work to translate some of this hoard into more interesting assets
during 2005, though we can't promise success." Buffett mentioned to
a group of students that he was trying to buy "a few billion" worth
of a public company recently and today there was news of Berkshire's
new significant stake in Anheuser Busch. I think he has some irons in
the fire already. Some members will disagree with the assumptions.
That's fine. For example, you can assume a zero underwriting profit
and reduce IV by $10,000. You can tweek the numbers to your liking and
arrive at an intrinsic value you're comfortable with. All the major
factors that matter for BRK's intrinsic value are presented here. Any
of them can be edited to your heart's content. My take is that I'm
buying assets worth over 120K or $130K for under $84K and then letting
the greatest capital allocator do his magic on those assets. There is
significant upside here with virtually no downside. Catalyst: Value is
its own catalyst. Over time it will be appropriately weighed and valued
with a good result for investors.
Shai Dardashti
For better formatting, see the actual analysis: [Subject to public review, as pre 90 day delayed Guest Access]
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Also:
Gates paid $88,600 to $89,100 for his latest Berkshire shares
From today's Seattle Post Intelligencer:
REGIONAL NEWS
Gates buys $4.4 million worth of Berkshire Hathaway shares
Bill Gates, Microsoft Corp.'s co-founder and the world's richest man, boosted his stake in Berkshire Hathaway Inc. by adding 50 shares worth $4.4 million.
The purchase brings Gates' total ownership in friend and fellow billionaire Warren Buffett's company to 3,990 Class A shares, according to a filing Tuesday with the Securities and Exchange Commission.
Gates paid $88,600 to $89,100 for the 50 shares bought Thursday, the filing shows. Gates, who became a Berkshire director last December, owns stock that's worth $353.5 million based on Tuesday's closing price.
- Original Story
- Actual SEC Filing (December 27, 2005)
Source URL:
- Shai Dardashti (Editor, Shai Dardashti on Grahamian Value)
Editor, Shai Dardashti on Grahamian Value
www.ShaiDardashti.com
Zen
Next time, please cite the source of the analysis, to avoid potential
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Thanks, Shai! :):)
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