redskin
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Posts posted by redskin
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First off, he owns WFC in his personal account too, not just JPM. He bought some WFC I think in the 90s and then during the GFC.
He said he bought JPM in his personal account and not WFC for the conflict of interest, but he already has WFC so I don't get it. Maybe he wanted to avoid buying even more WFC and keep what he has.
My guess is that he doesn't buy JPM for Berkshire because it already has what, like close to $40 billion in WFC/BAC? That and I also think he likes the deposit bases of WFC and BAC and their larger focus on bread and butter banking. JPM's investment bank is bigger portion of its assets than BAC's I believe, and also a bigger derivative book. Yea BAC has Merrill but he also got a steal with the warrant/pfd deal. Having said that, JPM it's still well run and he loves Jamie Dimon as a leader, so he bought in his personal account. Just my opinions.
Why do you think he owns WFC in his personal account?
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pg. 49 of annual report.
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BAC warrants are on the books at fair value.
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Some interviews with Munger after the Meeting :):
Cheers!
Wow! Thank you! A lot better than the meeting.
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I see lots of people simply add the value of the cash plus investments per share disclosed by Berkshire to a multiple of Berkshire's pre-tax operating earnings to get the value of the stock. (I think the numbers adjusted for PCP should be roughly $145k and $13,498 per share.)
However, my sense is that it's unlikely that the per-share investments can really organically compound at greater than a 6-7% rate right? If they've got 40% in equities and 60% in cash and fixed-income, then if equities do 12% over time and cash and fixed income does ~3%...then really you're looking at ~6.6% pre-tax returns reinvested at ~6.6% (and then on the liability side they've got this nice fat deferred tax liability that comes along with it). Personally, I value that less than $159,794 per share.
So if 12x (~8% equity return) is a fair market multiple of P/E to apply to a stable company that is distributing 100% of its earnings, then maybe one that is reinvesting it at 6.6% should get a 9.9x multiple on earnings, or said differently that per share amount should be valued at $131,830 ( = 9.9/12*$159,794) .
I think I tried to measure their investment per share performance over the last 5 years but since they've been reallocating some of their cash into operating businesses, its a little bit hard to figure out what the performance of their marketable securities have been historically. I think you used to be able to just look at the per-share investments, but now its not fair to do that anymore. Additionally the growth of the float has slowed.
I don't know. what are board's thoughts on that $159k per share? Thanks for indulging me.
I think the $145k per share will continue to grow due to appreciation of the equity portfolio and the free cash flow that will continue to build. Ideally, the current cash and future cash flows will be used for the acquisition of new operating businesses.
The $145,000/share cash/investments currently consists of the approximately $110 billion equity portfolio and $128 of cash/fixed income. With the KHC preferred being repaid and free cash flow, I think cash is probably back close to $70 billion.
How will the 2 column components look in 5 years?
If pre tax operating profits organically increase 4% annually, the per share numbers will go from 13,500/share to $16,400/share
In addition, I think there is something like $1 billion/month ($12B annually) of free cash flow coming in from the operating businesses. Lets say Buffett is able to use all of that free cash flow and $30 billion of the current cash hoard to add to the operating businesses for a total of $90 billion. If Buffett's hurdle rate for acquisitions is 10% pre tax returns it would add $9B pre tax profit to the operating column.
After 5 years with these assumptions Cash/investments would be $166,000/share and Pre tax operating income of $21,877/share. Annual increases of 3% and 10%
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"Gift to my successor" appears for the first time ever,
The table on page 55 gives you the current status of our intangible assets as calculated by GAAP. We now
have $6.8 billion left of amortizable intangibles, of which $4.1 billion will be expensed over the next five years.
Eventually, of course, every dollar of these “assets” will be charged off. When that happens, reported earnings
increase even if true earnings are flat. (My gift to my successor.)
What other gifts in store?
- The 1.2xBV if left unchanged until after the succession. Would create headroom (IV:BV gap) to execute the promised buyback. The longer it takes for the transition, the more the headroom.
- TTT taking on Chair person roles at subs where this does not exist today. How about Combs for Chairman role at PCP?
- BHE and BNSF retain 100% of earnings for a long time. Don't burden Omaha unless needed.
- Others?
This is a transition in slow motion, but for sure is.
BNSF has been paying out most of their earnings to Omaha. They have paid $20 billion in dividends since Berkshire purchased.
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I think the cash flow stream can reasonably be expected to grow 5-7% for a total return of maybe 13-15% at today's price. I include acquisitions in my expectation for 5-7% as I basically consider acquired earnings normal growth as if a business had reinvested in itself (ie added another manufacturing facility).
Is this the right way to think about it?
All earnings at Berkshire are used to keep growing earnings (they are retained, not dividended or share repurchased out) so won't total return be equal to (earnings growth + return from change in multiples) instead of (earnings yield + earnings growth + return from change in multiples).
The cash flow stream would not grow without capex, particularly the utility and railroad and the industrials. I think the only types of businesses where you can say total return = earnings yield + growth in earnings are See's Candy types of things where almost no capex is needed for growth. If berkshire triples earnings over the next 10 yrs and the multiple doesn't change, shouldn't the stock price triple. But it should not triple + give you even more for earnings over that time period.
You can do this type of calculation with dividend yield or truly free cash flow yield (after growth capex), but earnings yield seems too generous right?
For example, the S&P 500 trades at 18X (5.5% earnings yield) and a 1.9% dividend yield.
If earnings per share grow by 6% per year for the next ten years and there is no multiple change, what is the total return? By the earnings yield + growth formula you use for berkshire it would be 11.5% (a cumulative 196% return over 10 yrs). But that's not what it would be, instead it would be dividend yield + earnings growth, right? Because the non dividended earnings are what is used to grow the EPS (either through investment or share repurchase).
Growth isn't free.
I would consider the depreciation charges as the amount of capital needed to maintain the position of the existing businesses to grow with the overall economy.
Berkshire's purchases of property and equipment in 2014 was approximately $15b, more than double the 7.3B depreciation and amortization charge. A lot of the additional capex was used in the utility and railroad. Buffett has talked in the past how he believes they will earn adequate returns on these investments (10-12% pre tax?). So the additional $8b capex in these regulated businesses should add $800-950mm.
In addition, the excess cash flows are used to purchase additional streams of income like VanTuyl. With these additional investments, pre tax operating earnings have increased by 14% in the first half of 2015 compared to 2014. It should be even higher over the entire year as more of the utility projects are coming online and the Duracell and KHC deals close in the 2nd half.
The PCP deal alone will increase pre tax operating earnings by approximately 13% and that cash will be replenished quickly to set up the next elephant. I wouldn't bet against Buffett/Berkshire being able to increase earnings significantly over the next 5-10 years.
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Can Berkshire buy stock from open market when they have offer pending?
I don't know, but I also question why they'd want to.
Instead, they wind up with more assets on the balance sheet if you use the same amount of cash to add to existing equity positions.
A buyback is a return of capital -- it's not as good as adding to their positions that earn a return.
That is... if you want a fortress. If you like the idea of growing the many little rivers that feed the mighty Amazon.
IMO.
Buffett is all about increasing intrinsic value, not expanding empire. If he could buy a significant amount of his existing businesses at a price cheaper than buying a new business he would do it. I would guess he'd rather put $37 billion in to BRK share buybacks than PCP but it is unlikely he could repurchase that amount of shares.
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maybe it's 2/3 of the float needs to be kept around in low returning assets, maybe it's half, maybe it's 100%.
I think we can all agree it's not 0% and Berkshire could not dividend out that $80B ( which is why i dislike "investments per share", which no one would talk about if it wasn't used in his letter 20 years ago and rates were very different) or buy an $80B company for cash.
I'm not an insurance regulator and don't know the exact requirements. It just seems that Berkshire likes to keep a hell of a lot of cash and fixed income around despite hating on cash and fixed income all the time.
Like I said, if my valuation method understates true intrinsic value, then I'm undersized in the name and underestimating it. I'm fine with that. As a shareholder, I would love to be surprised to the upside and be wrong and see more cash and fixed income converted to higher returning assets.
I'm not counting float at face value (book value does that). I'm using my perceived capital requirements (which as you point out, may be wrong and overly burdensome) to determine the earnings power of the float over time.
The two column analysis is included in every annual report by Buffett. It was not just mentioned 20 years ago when the yield curve was different. I would assume the Berkshire insurance subsidiaries price their insurance contracts differently with short term interest rates under 1% versus 4-5% in the past. Following is Buffett's discussion of float in last years letter. He says the float liability is 'dramatically less than the accounting liability'. How much is dramatically less?
"So how does our float affect intrinsic value? When Berkshire’s book value is calculated, the full amount
of our float is deducted as a liability, just as if we had to pay it out tomorrow and could not replenish it. But to think
of float as strictly a liability is incorrect; it should instead be viewed as a revolving fund. Daily, we pay old claims
and related expenses – a huge $22.7 billion to more than six million claimants in 2014 – and that reduces float. Just
as surely, we each day write new business and thereby generate new claims that add to float.
If our revolving float is both costless and long-enduring, which I believe it will be, the true value of this
liability is dramatically less than the accounting liability. Owing $1 that in effect will never leave the premises –
because new business is almost certain to deliver a substitute – is worlds different from owing $1 that will go out the
door tomorrow and not be replaced. The two types of liabilities are treated as equals, however, under GAAP."
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Sorry. I think I understand what you are saying. The insurance company is making little spread as long as Berkshire continues to hold the excess cash and short term fixed income. You are still using the 2 column method but fully deducting the float liability. Cash and investments (230B)- Float (80B) = 150B + Operating earnings (18B)X multiple (10?)
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Berkshire is an overcapitalized insurance and operating conglomerate.
Take all the businesses and stocks and peel those away. They can be valued separately. These may be part of the insurance company (BNSF is owned by one of the insurance co's for example) from a legal perspective, but at a certain degree of overcapitalization, they are not part of the insurance co for valuation purposes*.
What you are left with is an insurance operation with no capital ($80B of fixed income and cash offset by $80B of float). The book value of this business is zero. I don't think it is worth zero. I think it is worth what it will earn over time. It will earn the spread on what it earns from its assets and what it earns/loses from its liabilities (underwriting). At the risk of simplifying too much let's just say this is 4%. So $80B * 4% = $3.2B. I would then multiply that by a reasonable multiple.
Let's tax affect it to $2.3B and put 10-20X on there = $23 - $46B. So I think that operation with zero book value and zero liquidation value is worth $23-$46B. By no means do I think it is worthless. I just don't think it is worth $80B, which the two column method and its use of "investments per share" implies.
I should also note that the more fervent of buffett devotees may object to such slicing and dicing up of Berkshire like this because there are synergies between the financial/insurance side (what i call the no capital insurance co, ie the thing with $0 book and that i think is worth $23-$46B) and the rest of Berkshire. I don't fully disagree. Berkshire is a going concern. But in trying to figure out what i am paying for this business and what it is "worth", I find it useful to slice it up in this manner.
What Tilson does is use investment per share AND adds capitalized underwriting profits, which i think is double counting and very aggressive. Hemay or may not think so. Aggressive valuations make for better powerpoints and higher price targets.
*Imagine an insurance co with 99% equity to assets. You would just look at the equity and value it because it is so overcapitalized that the relationship between assets and liabilities would not matter. You'd just look at the assets.
Wouldn't the two column approach be $230b of cash and investments partially funded by the $80b float + a multiple of pre tax operating earnings of approximately $18b. I'm not sure where you get 80-80=0?
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It's up to you to pay whatever multiple you want...
However my take on this is that intrinsic value is (I think) the present hypothetical liquidation value plus a discounted future stream of earnings. That seems to be all the money you can ever derive from the business unless I'm forgetting something.
So the size of the investment portfolio contributes to the future income stream that you discount, but I don't think you can exaggerate it's value in the hypothetical liquidation component because of the offsetting insurance liabilities. But that's just my method.
Eric and petec, I think we all agree.
The present hypothetical liquidation value is $0. Assuming berkshire estimates its liabilities correctly, then cash and FI of $80 - float of $80 = 0.
And the discounted future streams of earnings is (normalized spread)*(float) + (value from growth in float).
Petec, I think the two column method is a little optimistic, but whatever, let's move on. There are probably more interesting debates to be had and we pretty much agree with the main drivers.
I just read the thread and apologize if you are trying to move on to other topics. thepupil, are you saying the insurance float liability negates the cash and fixed income investments and the insurance business is only worth the value of the equity securities ($126B) plus a small multiple on underwriting?
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BNSF 10-Q is out as well - always interesting to see. Another Billion dollar dividended out to Omaha this quarter -
http://www.sec.gov/Archives/edgar/data/934612/000093461215000016/llc-3312015x10q.htm
Berkshire has taken $17 billion in dividends since acquiring BNSF. What is BNSF worth? $80 billion? Currently on the books at $35 billion. If it was valued at market, book value per share would increase by $27,000 per share.
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What is your interpretation of the conventional two column approach? What about your approach is modified?
I don't just use the value of investments; I look at the equity of the insurance operations instead. Then I add to it the value of the pre-tax operating earnings (annualized pre-tax earnings x 9). It's still a simple order of magnitude measure, that is purely mechanical and partially fitted to the past data.
You may be right.
I don't think this is a good way to value the company. I believe a lot of the operating companies are owned by the insurance subsidiaries, including BNSF. Therefore the book value of BNSF would be included in the insurance equity. You could do this but you would need to exclude BNSF operating earnings and all other operating companies owned by insurance subs.
I'm aware of the odd ownership structure of some of the subs, but if you look at the consolidated balance sheets, Rail, Utilities, and Energy assets are separated from the insurance operations. The insurance assets are almost entirely financial, so I don't think I'm double counting significantly there.
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TL:DR, what is your estimate for IV?
I have a simple spreadsheet that does a modified two-column valuation based on the current financials. The current, imo conservative, IV estimate is:
Per A share = $ 219,000
Per B share = $ 145
Somewhere in the neighborhood of 1.5 x BV
I would say BRK is, at best, only modestly undervalued at current prices. You might say it's in the low end of the range of fair value.
My little spreadsheet goes back to around 2001 with its calculations. By this measure, BRK was clearly undervalued in 2011 and 2012 and has moved towards fair value since then. Not a huge revelation given the buy-back activities around that time and Buffet's own discussion of BRK's valuation. In mid to late 2012 you could buy BRK between $70 and $80 (per B share) while my simple estimate of IV was slightly above $100. It was around that time that some people (including myself) were going long BRK Leaps, which turned out pretty well.
I think the intrinsic value is considerably higher than $219,000. I like to take Buffett's advice and use a simple addition of cash/investments and (pre tax operating earnings*multiple). $140,000 + (11,000*10) = $250,000.
A few other observations/questions....
BHE pre tax earnings were $2.7 B in 2014. Buffett has said BHE's renewable portfolio upon completion will have cost $15 billion. During a shareholder meeting a few years back, Buffett said he would be satisfied with 12% returns on capital in the utility business. How much of the $15 billion investment is currently online. This should create an additional $1.8 billion of pretax operating earnings or $1,000/share?
Buffett has twice mentioned in annual letters the difference between what the tank cars are worth and the value on the books. They currently own 105,000 tank cars on the books at $5 billion. Buffett has said these new cars sell for over $100,000. A difference of over $5 billion.
The Heinz preferred and common shares are currently on the books at $11 billion. Once the Kraft/Heinz shares are valued at market the common will be worth approximately $21 billion using the current KFT price. He will contribute an additional $5 billion cash at closing. The Kraft/Heinz investment will be worth $21b + $8 b preferred= $29B. Should increase investments and cash by $13B. $29B - ($11B + $5B cash) or $8,000/share?
How much is the $60 billion of cash worth? If Buffett is able to invest $60 billion over the next few years in operating companies that produce 10% pre tax returns, pre tax operating earnings will increase by $6B or $3,650/share.
What will the numbers look like in 3 years?
Current investments/cash (with Kraft/Heinz valuation adjustment) $148,000/share. Subtract $60 billion cash ($36,000/share)= $112,000/share. Buffett makes 8% annually on investments over 3 years. $141,000/share.
Current pre tax operating earnings/share $10,850. Add $1,000/share as utility projects come on line. $11,850 increases 5% annually organically over next 3 years. Will become $13,717/share. Add $3,650/share as $60 billion of cash is deployed at 10% pre tax return. Total in 3 years = $17,367/share.
Cash continues to build. Even after $60B deployed, cash is approximately $50B or $30,000/share in 3 years.
In summary, Cash/investments/share= $171,000. Pre tax operating earnings= $17,367/share.
$171,000 + ($17,367*10)= $344,000/share
This would be an annualized return of 17.5% on the current $212,000 share price.
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What is your interpretation of the conventional two column approach? What about your approach is modified?
I don't just use the value of investments; I look at the equity of the insurance operations instead. Then I add to it the value of the pre-tax operating earnings (annualized pre-tax earnings x 9). It's still a simple order of magnitude measure, that is purely mechanical and partially fitted to the past data.
I don't think this is a good way to value the company. I believe a lot of the operating companies are owned by the insurance subsidiaries, including BNSF. Therefore the book value of BNSF would be included in the insurance equity. You could do this but you would need to exclude BNSF operating earnings and all other operating companies owned by insurance subs.
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Buffett stated in last years annual report that, 'When our current projects are completed, MidAmerican’s renewables portfolio will have cost $15 billion.' If you look at the Q3 filing of BH Energy, the renewables segment had operating income of only $252 million for the 9 months year to date. A 10% return on the $15 billion portfolio should produce $1.5B pre tax. There is going to be a big jump in earnings as these projects come online in the next few years and new projects are added.
During the annual meeting a couple years ago Buffett mentioned he could see an additional $100 billion invested in utilites over the next 10 years.
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Thanks. I didn't see the previous topic.
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I thought the question regarding Mid American and it's returns on capital was a good one, but I wish Warren had elaborated a bit more. Even though Warren boasts about the huge amount of CapEx being reinvested at MidAmerican operating earnings have increased from $1,846mm in 2009 to $2,102mm for 2013 (A 3.3% annual increase). Warren seems very excited about the business because they are getting 10%+ returns on capital. Just wish he could explain why it's not showing up in operating profit.
There is a detailed investor presentation for MidAmerican (BRK Energy) at this link. There is a slide that shows ROE of each of the energy subsidiaries and some discussion of capital expenditures vs cash flows. You can also see MidAmerican's tax rate declining to 7% or so from closer to 20% earlier as the tax credits come online. I think there is a substantial lag between investments and the resulting cash flows. They are also earning below the allowed ROEs at all the subs (obviously not over). A lot of the behavior is to show the regulators what a great owner BRK energy is for regulated assets so they will be able to buy whatever they want going forward.
http://www.sec.gov/Archives/edgar/data/1081316/000108131614000014/ic2014.htm
(side note - I tried to find some Topaz Solar Farms LLC bonds to see the yields since they are BBB, but could not find any available. Anyone know the yields on those?)
Thank you!
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I thought the question regarding Mid American and it's returns on capital was a good one, but I wish Warren had elaborated a bit more. Even though Warren boasts about the huge amount of CapEx being reinvested at MidAmerican operating earnings have increased from $1,846mm in 2009 to $2,102mm for 2013 (A 3.3% annual increase). Warren seems very excited about the business because they are getting 10%+ returns on capital. Just wish he could explain why it's not showing up in operating profit.
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Doug Kass seems to think the meeting is a waste of time.... http://media.bloomberg.com/bb/avfile/News/Surveillance/vBt7dJ2LBVaw.mp3
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Since it is such a large and complicated business, I would like to know his thoughts on succession at the reinsurance unit. How is the talent backing up Ajit Jain?
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I find it hard to believe he would be offered a price attractive enough for him to be interested.
http://www.forbes.com/sites/mikeozanian/2014/04/04/warren-buffett-interested-in-buying-piece-of-chicago-cubs//
Buffett/Berkshire - general news
in Berkshire Hathaway
Posted
I thought these were Berkshire pension holdings. I remember him addressing this in the past. He said he wasn't sure why it was disclosed that way.