Swedish_Compounder

I would use owner earnings for BRK:s fully owned businesses. Doing that better captures the value of float increase and deferred taxes.

It is really interesting when thinking about the long term effects of these two layers of buy backs. Actually, Berkshires three largest stocks (Apple, American Express and Bank of America) seem committed to making large buybacks over time. Also, Berkshire seems to want to buy back 4-5% annually. I have been looking at the un-distributed earnings from stock component from 2011 to 2021E. I estimate that this component has increased by roughly 13% CAGR per BRK B share during those ten years when BRK simultaneously built a mountain of cash. If BRK had repurchased 4,5% of their shares per year, the figure would be more like 17% CAGR. And then the largest components of the 2011 stock portfolio consisted of IBM, Wells Fargo and Coca Cola, which were no great components. If Apple, Bank of America and American Express have a good operational performance the coming 10 years and continue buying back stock and BRK get the chance to buy back at 4% or more a year, the un-distributed earnings from investees component could have a much stronger development than it did the last 10 years. It is also not impossible that they get the chance to add another holding which consistently buys back it stock, further improving the new formula for success.

I am thinking something similar. If we think over the coming ten years, it could also be that they make one or two large acquisitions. I think we will see somewhere around 10-15% CAGR FCF per share increase over the coming 10 years. That is my investment thesis.

I remember he stated in an interview that he would like to buy back 4-5% of the shares outstanding per year. It seems that is what he is doing now. I expect the repurchases will continue unless the shares appreciate quite a bit from these levels in a short time. Buffett was unusually open with his views that the Berkshire share is cheap during the annual meeting this year. He is probably biding his time with the cash balance, keeping it at around 140 BUSD and waiting for a large acquisition, or something large to do in the equity markets.

Yes, it is great news that he signals large continuing buy-backs. It now seems probable that he will buy back 5% or so of the shares per year. I think he will continue to do so even if the valuation moves up a bit since there is a rather large distance to an over-valuation. I hope so. This should be very positive for the look through EPS development going forward. It also tilts the risk-reward proposition in a positive direction, further reducing the downside.

Right. Cash flow from ops will probably have more than doubled from 2010 to 2020. Only really large acquisition during those ten years was PCP I believe (BNSF consolidated from Feb 2010). So 7% CAGR the coming ten years seems achievable I think. Now, they have much more cash to begin with, which they could together with the incoming cash flows use for share repurchases if they decide to do so. If the excess cash stands still or goes down the coming ten years, that could mean they can both afford large repurchases and some acquisition activity. Note that this is not a forecast, but more a view of how it could look ten years from now. Forecasts are always difficult to make... I really hope they step up their share repurchases even if the price goes up some. BRK is still very cheap compared to the market and compared to what they need to pay for acquisitions and other stocks, especially when taking quality into account.

I would not be totally surprised if they buy back 4-5 percent of their stock per year the coming ten years. Stock portfolio could be worth 600-700 billion. Cash flow from operations 80 billion. Not an unlikely scenario in my view...

I expect that they buy back a lot of stock right now. Otherwise I will be disappointed.

There are lots of valuation and details indeed, but does he anywhere evaluate the company the way Buffett stresses more than once in this years letter that he evaluates companies attractiveness - by analyzing the returns on the net tangible assets required for its operations? Buffett writes that it is over 20% for the stock holdings, on a weighted basis. So one simplification could be to assign 20% to the stock holdings and also analyze the operating entities and in the process not forget to deduct excess cash not required to run the operations.

Interesting post. I personally think that if they introduce a large regular dividend for some years which is slowly increasing year by year, this is the most likely trigger for higher valuation, since the market likes safe and increasing dividend companies and tends to put high valuations on those. I think this is more likely to happen after Buffett's departure, since he is probably more likely to make large irregular one time dividends if he needs to distribute cash via dividend. I believe he mentioned that in some interview. I think it is un-likely that the general market will understand how to value Berkshire other than via the dividend power, since it is composed differently than any other company, does no marketing efforts and try to report as conservative profits as possible in order of minimizing tax. Most people tend to over-simplify or over-complicate the valuation method in my view. Regarding your #7, Buffett says that these variations flowing through the P&L should be disregarded. One simple way to look at the expected value increase / earning power of BRK is to take: a) the earnings excluding unrealized and realized profits from sales of stocks but including underwriting income and investment income such as received interest and dividends (say approx 25 BUSD) b) add your own epectation of the expected annual increase in the current stock portfolio value net of tax. If you expect 8% on a 250 BUSD portfolio you here have 20 BUSD c) this is heavily debated, but if you want to include some of or the full expected annual cash flow received from float increase you can do this. Add between 0 and 8 BUSD Thus, from the above assumptions the earnings power can be estimated to approximately 45-53 BUSD (very rough approimation). But will the market use this methodology to value Berkshires earnings? Most likely not because it is not precise, contains assumptions and even unusual components such as the float increase. Their large excess cash makes it possible to probably add 7-10 BUSD to that number if they find the right acquisition target and borrows some money to fund the acquisition. The Danish insurance company TopDanmark is an interesting example to study in my view. They had not paid any dividend for many years, but used all cash flows for share repurchases. Once it was in the spring of 2017 declared that they would change policy to instead pay dividends, the share price increased something like 50% within a year or so and seems to have stabilized on higher multiples than before, at a level yielding 4,5% dividend or so. It is though not certain that the increased share price was due to the change of cash distribution policy. If others have more examples of how the aluation changed for stable companies that went from buy-backs to dividends, it would be interesting. I personally have lost any expectations for changes in the valuation multiples of Berkshire, at least short term. I mainly use Berkshire as a low risk component to balance the high potential cases in my portfolio, since it gaves me a feeling of safety to keep some Berkshire. In the next major market downturn it is possible that I sell all my Berkshire shares if they do not decline so much and I find bargains in the market. So, it is for me also a "potential dry powder" component. However, if I run out of good ideas in a strong market it is possible that I put all my money in Berkshire until I get new good ideas. This is the way Dynamic works and that makes a lot of sense to me.

One should also keep in mind that the tax rate has changed. If the pre tax multiple was 12x with the 35 % tax rate it should be 14,5x now I suppose.

Interesting. Ackman keps it simple and values the company based on look through PE ratio. He considers the company to be undervalued with its low teen P-E and sees potential for mid teen EPS growth in the medium term. That must mean that he sees potential for 15 percent CAGR stock price for several years if the gap to intrinsic value closes.

Hi there John, No, my post was not about book value. It was about intrinsic value. I do not value companies based on book value. I know there are many technicalities which could be discussed, such as the value of float and float increases and the value of deferred taxes. I also know that maintenance CapEx is a bit higher than depreciation. However, who said that those factors are not discounted properly when valuing that cash flow at 14x for a great set of assets when other great companies such as CostCo, UNP, Coca Cola, P&G etc are valued north of 20 times free cash flow?

Well, if you read what I am writing, I am not forecasting 15% CAGR. It is a possible high case scenario. It is not my base case scenario. So I will also take the bet you propose that actual growth will be below the high case scenario.

Jurgis, yes,and that is because the stock is under-valued today. What I tried to convey was that with share repurchases, acquisitions and stock additions it could be worth four times more per share in 2028 (I wrote market cap, but meant value per share). What it will trade for might be different than hat it is worth though. Imagine that they do two USD 100B acquisitions during the coming five years, which will each provide USD 12B cash flow ten years from now (not impossible) then cash flow ten years from now would instead be USD 61B. Assume they can add USD 100B of equity holdings over the years, which grow in value to 200B, then the stock portfolio will grow to USD 550B (possible / likely scenario, to be honest I also Think the existing holdings will grow more than 6% a year given many if the larger holdings very strong balance sheets and heavy repurchase activity). Assume they repurchase 3,5% of outstanding shares each year, which would decrease the share count by 30% (not so likely maybe given the recent snail pace). If these things would happen and we value the operating earnings at 14 times cash flow, we would get a value of ((61*14)+550)/0,965^10=2005, which is rougly four times the current market cap. Given recent comments from WEB, I do not think the repurchases will be that large, but if they get lucky, the acquisitions could be larger than assumed above. I Believe the "Buffett sleeps for ten years" scenario is a low case and the above possibility is a high case. The outcome will probably be in between with value probably being a triple from todays market price. This makes it a very safe stock to own and even recommend to long term oriented family and friends in my opinion.