redskin

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?

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.

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.

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.

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.

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.

Thanks. I didn't see the previous topic.

http://www.gatesnotes.com/Books/Business-Adventures?WT.mc_id=07_15_2014_johnbrooks2_tw&WT.tsrc=Twitter

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!

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.

Doug Kass seems to think the meeting is a waste of time.... http://media.bloomberg.com/bb/avfile/News/Surveillance/vBt7dJ2LBVaw.mp3

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?

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//

I think Hagstrom's 'The Warren Buffett Way' is a good place to start.

http://money.cnn.com/2013/10/10/leadership/heinz-buffett-3g.pr.fortune/index.html

Several posts have discussed an aim of achieving returns higher than their cost of capital. How do you calculate Berkshire's cost of capital? I'm curious after reading Buffett's 2003 comment, "Charlie and I have not the faintest idea what our cost of capital is and we think the whole concept is fairly crazy, frankly." Warren and Charlie dismiss any calculation that involves using beta like a cost of capital calculation.

Bloomberg

http://management.fortune.cnn.com/2012/08/22/sees-candies-buffett-berkshire/ Kinstler began his career at Cornhusker Casualty, an Omaha insurance company Berkshire opened in 1970. In 1991 he went to run Cypress Insurance in San Mateo, Calif., for nine years before moving on to Fechheimer Brothers, a Berkshire-owned, Cincinnati-based uniform maker. In 2005, Buffett and Munger tapped him to move back to California and take over See's. Kinstler says he knew little about the business, but jokes, "As soon as I found out I get free candy ..."

My guess would be Brad Kinstler from See's Candy.

Less cash with the dividend I believe you meant to say. Assuming a dividend tax of course. Dividend paying stocks don't have more IV. They just return cash differently. The IV of $1 distribution is $1 (before tax) no matter how you slice it. But the tax man slices it, and that's why dividends are *always worse if you pay taxes. * Unless your capital gains tax rate is substantially higher than your dividend tax rate -- and your cost basis is very very low. But nearly always it's better to repurchase shares no matter how high they trade. Usually it's only someone like Berkshire Hathaway that pays a 35% tax on capital gains versus a 14.5% tax on dividends. Oh, and how ironic it is that he is always bitching about buybacks unless the price is ridiculously low. Remaining shareholders would be hurt by a buyback at prices above intrinsic value. Yes, you can sell your shares back to the company above intrinsic value. However, if you have large unrealized gains in a great business it may not be beneficial to sell if the intrinsic value is expected to increase significantly over time. If a company is buying back its shares at 2X its intrinsic value i would be reluctant to maintain an investment with that management no matter how great the business is. If management is buying back shares at a 30% premium in a great business and I have significant unrealized gains I would likely stick around even though management is destroying value slightly.

Amen!

If a low dividend deters a certain group of investors from investing in BAC, then the buyback will potentially be more beneficial. If the low dividend keeps the stock price down then BAC will have the opportunity to buy back more shares at a lower price. Seems like a good strategy to me.

Hi Redskin, Do you know where I can find Buffett talking about a trip to meet with BAC employees? It's very interesting if he did. I think it was during the CNBC interview that he mentioned it.

After reading the press release I got the feeling that Buffett may have advised Moynihan. Buffett said he was in Charlotte to meet with BAC employees a short time ago. I can imagine him bringing a copy of 'Outsiders' and handing it to Moynihan.

Looks to me that BAC will be allowed approximately $9 billion. Hopefully buybacks.