Okonomen
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So.. just doing some calculations. Seems like the BRK market pf has lost around 30 bn USD value as of late... So my dnamic BV still gets me to around 1,2x bv at 180/share. Any thoughts? However, BRK has lost close to 100 bn USD in market value. Some ofi t seems fair geiven that 2020 and maybe 2021 will significantly impact the earning power
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I am actually starting to get worried about debt covenants for a lot of otherwise strong companies. Just think about it... e.g. AutoZone. It's a retailer. Very strong resilient business model with 2,5x ND/EBITDA. Let's say they got a covenants saying <5x ND/EBITDA and we have a large part of 2020 with potential US lockdown or similar... People won't come to the store, so AZO will have very low or perhaps even negative EBITDA for lets say.. 2-3 quarters? This will hit covenants and potential default an otherwise great business?! I assume the bank owning the debt would give some slack, but the banks can give slack to the thousands of companies in the potential sceario I put up for Autozone in this post... Any thoughts? Am I worried over nothing? Just thinking of all the covanants that are going to get breached soon
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If it wasn't for the Murdoch family who owns 1/3 of the voting shares, I think Fox Corp could be an ideal M&A target. 20 bUSD market cap atm, very strong media franchise generating +30% ROIC, not that exposed to cord cutting due to focus on live sports and news, and they have a very promising broadcast segment where they more or less own all comedy cartoon entertainment (family guy, American dad, futurama, simpsons, bobs burger)
Trading at a conservative multiple right now and actually BRK could buy Fox and keep mgmt. like they always do, and the Murdochs could keep a 10% stake or similar
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they are including the equity portfolio, fixed income portfolio and cash, as part of the insurance operations.
Since the end of 2007, we estimate that Berkshire has averaged a nearly 7% annual rate of return on its insurance investment portfolio while holding an average of 20% of its portfolio in cash. Berkshire has been able to produce investment returns that significantly exceed its insurance company peers as the combination of the company’s long-duration float and significant shareholders’ equity allow it to invest the substantial majority of its insurance assets in publicly traded equities, while its peers are limited to invest primarily in fixed-income securities. We believe these structural competitive advantages of Berkshire’s insurance business are enduring and will likely further expand.
Thanks for the input! So it's insurance ops earnings (around 1,5 bUSD after tax with multiple X) + return on float (around 3 bUSD ex portfolio dividends with multiple X) + market portfolio value (215 bUSD) + cash (around 100 bUSD excess cash) and thus with no regards to the float value of 123 bUSD other than what it can produce in returns afaik
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I would value BNSF and BE separately and not have to deal with this issue outside of that. I value them at UNP and XLU multiples (earnings/revenue/tangible book/book etc.) and multiply by 0.5x and 0.75x for scary bear case and bear case. 1.0x for "the market's assessment for what this type of business is worth". Throughout my ownership of Berkshire (about 8 years) Berkshire has traded at a discount to NAV (when I mark up BE and BNSF) and been growing earnings faster than the market. I piggy back off others work for thoughts on the quantum of that discount.
I discount the DTL related to securities almost completely. KO and WFC won't be sold. losses from new stock picks can be realized to realize other winners). Berkshire is my and my family's largest postition, so I care a lot about the company, but I jsut don't spend time on figuring this type of stuff out (25% tax rate or 18% tax rate or 10% tax rate.
Sorry. the US corp rate is 21%, so I'd just take that and apply some haircut.
valuation is a range, not a point, as are earnings.
Thanks for the insights!
What I don't get is why Pershing Square, who recently initiated a position, thinks that nearly half of BRK's IV is from their insurance ops. When I do the calculations I get no where near that value for the insurance ops. They generate around 2 bio. USD in pretax earnings (underwriting profits) through Geico, GenRe, BH etc and by looking at peers a 17x multiple seems fair on their after tax earnings so approx 25 bUSD assuming 25% tax. Last comes the float where I only look at it as a fixed income play and I do not consider dividends from their equity portfolio. So let's say: 123 bio. USD float generating 2% after tax interest and the float grows by 7% a year so that makes: (123 bUSD * 0,02)/0,07 = 35 bio. USD. So a combined 60 bio. USD and thus no way near half of the IV. Am I missing some major insights regarding their insurance ops?
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The delta between the cash paid for taxes and income tax expense relates to the increase in the deferred tax liability.
the deferred tax liability has 2 major components:
1. Increase in DTL related to unrealized gains on investments: To the extent that Berkshire defers realization of gains indefinitely on large positions (I think this applies to some, but not all of the material equity positions), we can assume that this tax expense has very low present value.
2. Increase in DTL related to the companies, primarily Burlington Northern and Berkshire Energy.
Page 96 of the most recent 10-K shows the breakdown between the two (obviously things will change in the subsequent quarters, but it gives you a feel). $18 billion of the $60 billion DTL ( about 30% again as of 12/2018) is related to unrealized gains on the equity portfolio. About 50% ($28/$60 billion) relates to property plant and equipment. This is associated with Berkshire Energy and Burlington Northern. This is helpful
https://ftalphaville.ft.com/2016/04/29/2160510/warren-buffett-a-dream-deferred/
Essentially, the key input for determining the "correct" cash tax rate for the railroad and utility is if they are able to keep increasing their ability to re-invest. Will they keep the asset base high such that they keep running on the treadmill of outspending depreciation expense.
Burlington Northern's D&A is about $2.3 billion / year. It's capex has been $2.6B (2010) - $5.6B (2015) and averaged above $3B or so, so a delta between the cash tax rate and income tax expense rate appears sustainable for now.
Berkshire Energy's depreciation is running at about $3 billion. It's capex is running at $6 billion (2010: $2.5 billion, 2014: $6.5 billion, LTM: $6 billion). Again there appears to be a sustainable difference between capex and depreciation.
I think that explains the high level, but I could be wrong on the exact particulars.
Honestly, I don't pay a whole lot of attention to it. I just use what the market values class 1 railroads and large high quality utilities as proxies for value for each of those and assume that Berkshire doesn't sell all of its unrealized investments at a gain very quickly. My rang of intrinsic value is squishy and my sizing is non-binary so being super precise on that hasn't been an emphasis for me.
Thanks for a great explanation. On (1) it seems like in a valuation one should not subtract the DTL on investments as it seems fair to assume that BRK will never ever sell their portfolio securities?
On page K-96 in the BRK AR 2018 we can see the detailed deferred tax net liability.
If I may ask, what would you assume in a BRK valuation? 25% tax on current pretax earnings + subtraction of the net tax liability? Some day it will reverse due to accelerated depreciation that cannot go on forever, but this will also boost accounting earnings. I just think this sounds somewhat too conservative
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Can someone explain to me how BRK can pay only ~10% cash taxes annually? Should we use this as the tax rate in the valuation model instead of the more common 25%?
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So, what is the Insurance business worth? What proportion of BRK's IV is insurance?
Hmm, I'll give the autonomous vehicle thing a rest. This is really meaty.
To get a ballpark, we could consider a few things and sanity check them.
Please treat this as thinking aloud by a non expert, not a fully reasoned analysis. I'd like to see how others might go about it and see if there's a better model to valuing the insurance business.
I'll start with just one part of the picture, and see what you think:
The value of the underwriting profit
The 2016 underwriting income was $2.131 bn.
For a sanity check, over the 14 years of consecutive underwriting profit, a time during which float and underwriting have grown, $28 bn has been earned. The average over 14 years is $2.0 bn per year.
And Berkshire tends to underwrite conservatively, with 'loss development' for long-term risks tending slightly to work out in the shareholder's favour, not the norm in the industry. In fact, some of the 'losses' in the insurance division in the last 6 months may be as a result of such conservatism. Berkshire does not need to present the biggest underwriting profit it can, nor to pay taxes now on profits presumed by rosy projections of future insured losses that might not materialise.
Yes, only picking the 14 'up years' is slightly cherry picking to avoid the down year that preceded it, but I think GenRe's problems at purchase are now fixed and the trend is upward.
So if we are to capitalise some sort of underwriting profit, and still anticipate growth in the coming decade and perhaps the odd down year, despite the reduced megacat exposure, I think we should anticipate an average Underwriting Profit of $2.0 bn per year, the lower of the 2016 and the 14 year average is probably neither too conservative nor too optimistic if we capitalise at a reasonable yield.
Perhaps capitalise that at a 10% yield pre-tax or about 7% post-tax (P/E = 14) - what do you think? The underwriting earnings power might be worth $2,000 mn / 0.10 = $20 bn.
If there were to be a mega-cat, I anticipate that Berkshire would make up in the future what it lost in that year through increased business (as a good payer, a company that survives and an opportunist value investor) and in increased premiums during a 'hard market' following major losses, so I'm not too concerned to make allowances for possible down years, especially as I'd anticipate decent growth in underwriting earnings to add to the total return.
The next step would be to value the investments and/or account for float, but that could be another post.
Let's get back to what this thread should really be about: valuing their insurance ops ;)
I pretty much agree with the approach above, but again, it is difficult to put a value on the remaining 5 bio. USD annual investment income from their insurance float as it both consist of various interest income but also (as far as I can read) dividends from their market portfolio. Does anyone have any inputs on how to value this as the income stems from cash on hand at the moment but this cash is planned for M&A
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So, what is the Insurance business worth? What proportion of BRK's IV is insurance?
Hmm, I'll give the autonomous vehicle thing a rest. This is really meaty.
To get a ballpark, we could consider a few things and sanity check them.
Please treat this as thinking aloud by a non expert, not a fully reasoned analysis. I'd like to see how others might go about it and see if there's a better model to valuing the insurance business.
I'll start with just one part of the picture, and see what you think:
The value of the underwriting profit
The 2016 underwriting income was $2.131 bn.
For a sanity check, over the 14 years of consecutive underwriting profit, a time during which float and underwriting have grown, $28 bn has been earned. The average over 14 years is $2.0 bn per year.
And Berkshire tends to underwrite conservatively, with 'loss development' for long-term risks tending slightly to work out in the shareholder's favour, not the norm in the industry. In fact, some of the 'losses' in the insurance division in the last 6 months may be as a result of such conservatism. Berkshire does not need to present the biggest underwriting profit it can, nor to pay taxes now on profits presumed by rosy projections of future insured losses that might not materialise.
Yes, only picking the 14 'up years' is slightly cherry picking to avoid the down year that preceded it, but I think GenRe's problems at purchase are now fixed and the trend is upward.
So if we are to capitalise some sort of underwriting profit, and still anticipate growth in the coming decade and perhaps the odd down year, despite the reduced megacat exposure, I think we should anticipate an average Underwriting Profit of $2.0 bn per year, the lower of the 2016 and the 14 year average is probably neither too conservative nor too optimistic if we capitalise at a reasonable yield.
Perhaps capitalise that at a 10% yield pre-tax or about 7% post-tax (P/E = 14) - what do you think? The underwriting earnings power might be worth $2,000 mn / 0.10 = $20 bn.
If there were to be a mega-cat, I anticipate that Berkshire would make up in the future what it lost in that year through increased business (as a good payer, a company that survives and an opportunist value investor) and in increased premiums during a 'hard market' following major losses, so I'm not too concerned to make allowances for possible down years, especially as I'd anticipate decent growth in underwriting earnings to add to the total return.
The next step would be to value the investments and/or account for float, but that could be another post.
Let's get back to what this thread should really be about: valuing their insurance ops ;)
I pretty much agree with the approach above, but again, it is difficult to put a value on the remaining 5 bio. USD annual investment income from their insurance float as it both consist of various interest income but also (as far as I can read) dividends from their market portfolio. Does anyone have any inputs on how to value this as the incoem stems from cash on hand at the moment but this cash is planned for M&A
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Hi all,
This may sound like a "boring" idea, but have you considered an investment in Berkshire Hathaway? Many probably thinks it must be fairly valued etc, but before you dismiss it completely, let me elaborate:
* the market seems to mostly view BRK as an asset manager dependent on old Buffett’s stock picking skills, valuing the company close to 1,3x BV, thus not putting much weight on the strength of their subsidiaries
* however, BRK has 270 high quality subsidiaries generating 30 bio USD pretax earnings, among others the railway BNSF which makes up 20% of net profits. Around 70% of pretax earnings are from relatively non-cyclical businesses. Around 7 bio. USD pretax is from insurance and 5 of the 7 bio. USD is investment income generated on their float
* they have 120 bio. USD in cash ready to be deployed in a good opportunity maybe during a market crash
* they have a market portfolio worth 200 bio. USD currently. With it follows a deferred tax liability of 50 bio. USD which we can views like an interest free loan from the government
The market cap is 500 bio. USD, they have only 4 analysts and I think a fair value is closer to 700 bio. USD due to undervalued subsidiaries, but despite an upside that is not mindblowing we get also a limited downside and a great long term compounder and a uniquely advantaged structured holding company.
Any thoughts? :)
I would especially like to get some inputs on how to value their insurance operations
Berkshire closed down to near book value
in Berkshire Hathaway
Posted
So.. just doing some calculations. Seems like the BRK market pf has lost around 30 bn USD value as of late... So my dynamic BV still gets me to around 1,2x bv at 180/share. Any thoughts? However, BRK has lost close to 100 bn USD in market value. Some of it seems fair given that 2020 and maybe 2021 will significantly impact the earning power at subs