redskin

Where did they make that statement? During the annual meeting last year, Buffett said he could see Berkshire allocating $100 billion to the utility over the next decade. I don't think it was specifically wind/solar.

What are thoughts on MidAmerican? Buffett seems upbeat about the business and he boasts about the huge amount of capex invested, but I don't see the results. After huge amounts of capital invested, net earnings attributable to Berkshire has increased from approximately $1.1 billion in 2007 to $1.3 in 2012. I would like to hear Buffett expand on this at the annual meeting in May.

My logic disagrees a bit with with yours. Would you rather have $100,000 or use the $100,000 to purchase a loan of $100,000 with no interest that is long enduring? The answer for me is I would rather have the $100,000 and not have to ever worry about the $100,000 loan. Thus it is worth less than 100%. Having said that, I do think the value is closer to $100% than say 50%. You also want to make sure not to double count the insurance operations and the float. If you value the float separately (whether or not at 100%) you then should only put a very conservative multiple on underwriting profits of the insurance operations since it may incur sizable catastrophe losses from time to time. Buffett is conservative in his valuation by putting no value on the underwriting profits.

8-k that Berkshire filed yesterday afternoon said $14 billion of financing from WFC and JPM. They also said they would rollover some existing debt that did not have a change of control clause. Berkshire 12B (preferred and equity) 3G 4B (Equity) Debt 14B Total $29 Billion of the $28 billion deal.

3G must really see areas for cost cutting or big opportunities in emerging markets. There is a lot of leverage in this deal with $14 billion of debt put on it. I don't know what kind of financing they will get, but lets say they pay 7% on the debt. Ebitda $2,000 Buffett preferred (700) Interest on debt (980) Pre tax profit = $320 $320 million pre tax on their 8.2 billion equity investment is only 3.9%.

Buffett inviting short sellers to ask questions should make the Q&A even more interesting.

Buffett has said in the past that he doesn't like to be more than 10% of the average volume of a stock when he is accumulating. Therefore, he is probably able to purchase $40-50 million worth of Berkshire per day when it is trading below the $134,000/share level.

Buffett response to CNBC.... http://www.cnbc.com/id/100312929

If it was Gottesman I think they would've used his name in the press release since he would need to file being a Director.

I'm curious to know who that long time shareholder is. I'm thinking a doctor from Omaha.

How did he talk about the valuation? Was it strictly FCF growth of 16%? What will the $100b in investments earn though? I guess my problem is I do not understand the return characteristics of a utility company. If you are expecting a 10% return from these investments, I am not that enthused because then you will need a growth in float to get great returns. If these companies earn a teens return, that's great. Does anyone have a link to a good article describing the shift in capital returns that twacowfca was describing? This is Buffett's discussion of the Mid American valuation in the 2007 annual letter... 'We agreed to purchase 35,464,337 shares of MidAmerican at $35.05 per share in 1999, a year in which its per-share earnings were $2.59. Why the odd figure of $35.05? I originally decided the business was worth $35.00 per share to Berkshire. Now, I’m a “one-price” guy (remember See’s?) and for several days the investment bankers representing MidAmerican had no luck in getting me to increase Berkshire’s offer. But, finally, they caught me in a moment of weakness, and I caved, telling them I would go to $35.05. With that, I explained, they could tell their client they had wrung the last nickel out of me. At the time, it hurt. Later on, in 2002, Berkshire purchased 6,700,000 shares at $60 to help finance the acquisition of one of our pipelines. Lastly, in 2006, when MidAmerican bought PacifiCorp, we purchased 23,268,793 shares at $145 per share. In 2007, MidAmerican earned $15.78 per share. However, 77¢ of that was non-recurring – a reduction in deferred tax at our British utility, resulting from a lowering of the U.K. corporate tax rate. So call normalized earnings $15.01 per share. And yes, I’m glad I wilted and offered the extra nickel.' Those are great returns, but that was then, and now is now. MidAm's earnings ex the PacificCorp acquisition have been a hair above flat from 2009 to date. PacificCorp is a little better. That is more likely to continue than not for quite a while in the deleveraging of the current super cycle. My questimate is that their incremental return on reinvestment of retained earnings has been below cost of capital in recent years. One problem with reinvestment in the industry is that some capex is actually expense to comply with emissions mandates from a hostile administration. This type of capex doesn't add to productive capacity. The $150/share to $250 over last 5 years is approximately 11% annually.

How did he talk about the valuation? Was it strictly FCF growth of 16%? What will the $100b in investments earn though? I guess my problem is I do not understand the return characteristics of a utility company. If you are expecting a 10% return from these investments, I am not that enthused because then you will need a growth in float to get great returns. If these companies earn a teens return, that's great. Does anyone have a link to a good article describing the shift in capital returns that twacowfca was describing? This is Buffett's discussion of the Mid American valuation in the 2007 annual letter... 'We agreed to purchase 35,464,337 shares of MidAmerican at $35.05 per share in 1999, a year in which its per-share earnings were $2.59. Why the odd figure of $35.05? I originally decided the business was worth $35.00 per share to Berkshire. Now, I’m a “one-price” guy (remember See’s?) and for several days the investment bankers representing MidAmerican had no luck in getting me to increase Berkshire’s offer. But, finally, they caught me in a moment of weakness, and I caved, telling them I would go to $35.05. With that, I explained, they could tell their client they had wrung the last nickel out of me. At the time, it hurt. Later on, in 2002, Berkshire purchased 6,700,000 shares at $60 to help finance the acquisition of one of our pipelines. Lastly, in 2006, when MidAmerican bought PacifiCorp, we purchased 23,268,793 shares at $145 per share. In 2007, MidAmerican earned $15.78 per share. However, 77¢ of that was non-recurring – a reduction in deferred tax at our British utility, resulting from a lowering of the U.K. corporate tax rate. So call normalized earnings $15.01 per share. And yes, I’m glad I wilted and offered the extra nickel.'

"Mid American isn't such a good investment in my opinion, although they do relatively well in an industry that is tough." Berkshire bought Midamerican for $34/share and now values it at $250/share. Approximately 16% annual return. I thought Buffett's comments regarding Midamerican at the annual meeting were interesting. He believes they may have the opportunity to invest $100 billion over the next 10 years in Midamerican.

The Fed approved JPM's plan to buy back $15 billion worth of stock last year. BAC is a lot stronger than JPM was last year. I would be very disappointed if BAC were to only buy back $3 billion of stock next year. Moynihan has said that all excess capital sitting on the balance sheet is there waiting to be distributed to shareholders. I would hope he would take advantage of the low stock price with large amounts of buybacks. He's also said that it is a priority to at least get back the shares that were issued during the crisis. This is what BAC issued during the crisis.... 10/7/08 455 million @ $22 5/19/09 1.25 billion @ 10.77 12/3/09 1.29 billion @ 15 They should make it a priority to retire these 3 billion shares as Moynihan has said.

I am unimpressed with Andrew Barry's coverage of Berkshire. He seems to be Barron's authority on Berkshire but I don't feel he has a very good understanding of the business. Barry seems to rely entirely on Price/Book in determining the value of Berkshire. Also, using a P/E analysis based on reported earnings only tells 1/2 the Berkshire story. Wishing Barron's could find a journalist that could dissect the true intrinsic value. I remember reading in the past that Buffett had these same frustrations. This was the reason he began communicating with Alice Schroeder. He wanted the intrinsic value of Berkshire to be understood by the public so the stock would trade close to that value.

This article was referenced in the Bloomberg story.... http://www.c-ville.com/Weschlers_imprint_on_local_news_grows_with_Berkshire_Hathaways_purchase_of_Media_General_papers_with_audio/

I was looking through the results of the Fed's CCAR for BAC. The Fed's stress scenario projected a 5.9% Tier 1 common ratio under severe adverse economic conditions. The minimum required by the Fed was 5%. These were based upon the banks 3rd quarter results of 2011. At the time, BAC's Tier 1 common capital was $118 billion and risk weighted assets were $1,360 billion. Through Q2 of 2012 BAC has Tier 1 Common of $134 billion and risk weighted assets of $1,193. How much will the Fed allow them to return this go around? If BAC had asked last year, I calculate they would've been allowed to return approximately $12 billion. (5.9%-5= .9% X 1,360). BAC has increased their Tier 1 Common by $16 billion since Q3 2011. They have also reduced risk weighted assets by $167 billion. Conservatively, if you use 5% for the reduced assets, they will need $8.35 billion less capital. Adding all of these together gets you approximately $36 billion the Fed would allow them to return and still maintain the 5% Tier 1 Common ratio if a similar stress test is used. This is about 40% of their current market cap and they will be replenishing it every year as the legacy assets come off. Of course BAC will be extremely conservative with what they ask for, but I would imagine they would request at least half of that amount. They also have an additional quarter to build more capital. Hopefully they will request most of it in share buybacks.

http://www.forbes.com/sites/randalllane/2012/08/27/inside-warren-buffetts-private-poker-game/

Kintsler is my guess for the next CEO of Berkshire. He started at the Berkshire homestate insurers. Buffett then sent him to Fecheimer and finally on to Buffett's beloved See's Candy. Kintsler has been embedded in the Berkshire culture for a long time.

If one values Berkshire as two businesses, the insurance business and the operating units, in order not to double count, I believe that one has to deduct the float i.e. liabilities from the insurance valuation. Therefore, as it 31/12/2011, Berkshire had about $159bn of cash and investments in the insurance business with float of about $73bn giving a net value of about $86bn or $52,000/share. The insurance business also generates underwriting profit so this would need to be added to the valuation. Using a 2% underwriting profit and 5% investment income on the $30bn of premiums could give rise to a valuation of about $20bn, making the insurance business in total worth about $106bn or $64,000/share. (One should note that when Berkshire purchased GEICO, it payed a premium of 1x premiums over book value) Assuming the non insurance business generates about $12bn of pre tax earnings per year, an investor that assumes no growth in earnings and demands a 6% discount rate, would value that earnings stream at about $144bn or $87,000 per share. A no growth valuation of Berkshire equates to about $151,000 per share. The question is how much can Berkshire grow earnings in the future for both the insurance and non insurance businesses. If one assumes a 10% per annum growth rate for the non insurance business for 5 years and then a 2% terminal growth rate, it would add another $100bn plus to the valuation or about $60,000 per share. One should note that over the last 10 years Berkshire has increased its operating earnings for the non insurance units from $3.3bn in 2002 to over $12bn in 2011 implying a growth rate of 13.8% per annum. At 120,000 per share, Berkshire looks cheap with a comfortable margin of safety! I think you are undervaluing the insurance subsiaries with your $85 billion estimate. First, the insurance subsidiaries have a statuary surplus of $95 billion. Second, I don't agree with deducting the float entirely. By this logic, if float were to double to $140 billion it would add no value. The float is a perpetual loan at 0% as long as they can maintain the current level of float while breaking even on underwriting. If you were to discount the float, I don't think it would be by any more than what you would add to the valuation to account for the probability of an underwriting profit. In the 2011 annual report WEB has stated that the insur ance float will most likely remain flat or decline slightly. 2011 Annual Report.... "It’s unlikely that our float will grow much – if at all – from its current level. That’s mainly because we already have an outsized amount relative to our premium volume. Were there to be a decline in float, I will add, it would almost certainly be very gradual and therefore impose no unusual demand for funds on us." This is how I look at the float. What would you pay to have $70 billion interest free and the ability to have Buffett, Combs and Weschler invest the money for you? If Berkshire can make a 8% return on that interest free loan and you use a discount rate of 10% it would be worth $56 billion ($5.6B/.10). Obviously, if you discount the return with current interest rates or are more optimistic about the returns that can be achieved it would be worth a lot more. redskin, in my valuation appraisal I was trying to separate out the insurance business valuation, the operating units and the value one puts on WB growing earnings. In valuing the insurance business, I just looked at two aspects, the cash/investments and the profitability of the insurance operations. These two aspects come to at least $106bn. This valuation does not include anything for WBs ability to generate earnings from retained profits. I tried to give an idea of what this might be worth by showing how the operating units might grow in the future and how much that would be worth. Maybe that was not clear from what I had written. You are right that the float has some value which is why I applied a 5% investment income to the annual premiums in arriving at a combined value of the insurance assets. However, the 5% is a normalised figure and is probably high currently as Berkshire's float is about $70bn with $33bn in cash and $31bn is fixed interest securities. I think that WB has been very cautious investing float which has resulted in the float being invested mainly in cash and fixed interest securities. If one looks back at 2001, float was about $45bn with cash and fixed interest investments at $42bn. On the other hand, Berkshire has invested retained earnings from its insurance business and non insurance businesses extremely well over the years. Estimating how much this is worth is very subjective but it is definitely worth quite a lot. I tried to give a feel for how much this might be worth by stating that a 10% growth rate with a 2% terminal growth could add about $100bn to the valuation. redskin, we probably arrive at a similar valuation but I may be attributing the value slightly differently. I think I would value the insurance business higher than your estimates. There could be a case made for adding back 100% of the float liability if Berkshire is able to maintain the current level of float over time and has breakeven underwriting. Here is a quote from Buffett's 1997 annual letter..... "Since 1967, when we entered the insurance business, our float has grown at an annual compounded rate of 21.7%. Better yet, it has cost us nothing, and in fact has made us money. Therein lies an accounting irony: Though our float is shown on our balance sheet as a liability, it has had a value to Berkshire greater than an equal amount of net worth would have had."

http://www.nypost.com/p/news/business/boxed_in_by_lowe_A1SoEHWbrW4US1TDlk3S7J

If one values Berkshire as two businesses, the insurance business and the operating units, in order not to double count, I believe that one has to deduct the float i.e. liabilities from the insurance valuation. Therefore, as it 31/12/2011, Berkshire had about $159bn of cash and investments in the insurance business with float of about $73bn giving a net value of about $86bn or $52,000/share. The insurance business also generates underwriting profit so this would need to be added to the valuation. Using a 2% underwriting profit and 5% investment income on the $30bn of premiums could give rise to a valuation of about $20bn, making the insurance business in total worth about $106bn or $64,000/share. (One should note that when Berkshire purchased GEICO, it payed a premium of 1x premiums over book value) Assuming the non insurance business generates about $12bn of pre tax earnings per year, an investor that assumes no growth in earnings and demands a 6% discount rate, would value that earnings stream at about $144bn or $87,000 per share. A no growth valuation of Berkshire equates to about $151,000 per share. The question is how much can Berkshire grow earnings in the future for both the insurance and non insurance businesses. If one assumes a 10% per annum growth rate for the non insurance business for 5 years and then a 2% terminal growth rate, it would add another $100bn plus to the valuation or about $60,000 per share. One should note that over the last 10 years Berkshire has increased its operating earnings for the non insurance units from $3.3bn in 2002 to over $12bn in 2011 implying a growth rate of 13.8% per annum. At 120,000 per share, Berkshire looks cheap with a comfortable margin of safety! I think you are undervaluing the insurance subsiaries with your $85 billion estimate. First, the insurance subsidiaries have a statuary surplus of $95 billion. Second, I don't agree with deducting the float entirely. By this logic, if float were to double to $140 billion it would add no value. The float is a perpetual loan at 0% as long as they can maintain the current level of float while breaking even on underwriting. If you were to discount the float, I don't think it would be by any more than what you would add to the valuation to account for the probability of an underwriting profit. In the 2011 annual report WEB has stated that the insur ance float will most likely remain flat or decline slightly. 2011 Annual Report.... "It’s unlikely that our float will grow much – if at all – from its current level. That’s mainly because we already have an outsized amount relative to our premium volume. Were there to be a decline in float, I will add, it would almost certainly be very gradual and therefore impose no unusual demand for funds on us." This is how I look at the float. What would you pay to have $70 billion interest free and the ability to have Buffett, Combs and Weschler invest the money for you? If Berkshire can make a 8% return on that interest free loan and you use a discount rate of 10% it would be worth $56 billion ($5.6B/.10). Obviously, if you discount the return with current interest rates or are more optimistic about the returns that can be achieved it would be worth a lot more.

If one values Berkshire as two businesses, the insurance business and the operating units, in order not to double count, I believe that one has to deduct the float i.e. liabilities from the insurance valuation. Therefore, as it 31/12/2011, Berkshire had about $159bn of cash and investments in the insurance business with float of about $73bn giving a net value of about $86bn or $52,000/share. The insurance business also generates underwriting profit so this would need to be added to the valuation. Using a 2% underwriting profit and 5% investment income on the $30bn of premiums could give rise to a valuation of about $20bn, making the insurance business in total worth about $106bn or $64,000/share. (One should note that when Berkshire purchased GEICO, it payed a premium of 1x premiums over book value) Assuming the non insurance business generates about $12bn of pre tax earnings per year, an investor that assumes no growth in earnings and demands a 6% discount rate, would value that earnings stream at about $144bn or $87,000 per share. A no growth valuation of Berkshire equates to about $151,000 per share. The question is how much can Berkshire grow earnings in the future for both the insurance and non insurance businesses. If one assumes a 10% per annum growth rate for the non insurance business for 5 years and then a 2% terminal growth rate, it would add another $100bn plus to the valuation or about $60,000 per share. One should note that over the last 10 years Berkshire has increased its operating earnings for the non insurance units from $3.3bn in 2002 to over $12bn in 2011 implying a growth rate of 13.8% per annum. At 120,000 per share, Berkshire looks cheap with a comfortable margin of safety! I think you are undervaluing the insurance subsiaries with your $85 billion estimate. First, the insurance subsidiaries have a statuary surplus of $95 billion. Second, I don't agree with deducting the float entirely. By this logic, if float were to double to $140 billion it would add no value. The float is a perpetual loan at 0% as long as they can maintain the current level of float while breaking even on underwriting. If you were to discount the float, I don't think it would be by any more than what you would add to the valuation to account for the probability of an underwriting profit.

What is Berkshire Hathaway worth in 5 years? The pre tax earnings of the non insurance businesses was $7,000/share in 2011. Cash and investments was approximately $100,000/share. Berkshire is generating $12 billion ($7,200/share) of free cash annually. A few simple assumptions.... Cash and investments increase at a rate of 6% annually over next 5 years. I would expect the investment portfolio to perform better but he is also holding a lot of cash at very low rates. PV= 100,000 Rate= 6% Periods= 5 FV= $134,000 Buffett is able to deploy the $12 billion of free cash in to wholely owned businesses with a hurdle rate of 10%. This would add approximately $720 annually to the pre tax earnings of non insurance businesses. The non insurance businesses increase their pre tax earnings by 5% annually. PV= 7,000 Payment= 720 Rate= 5% Periods= 5 FV= 13,000 If you put a 10X multiple on the non insurance businesses you would get $130,000/share. Add cash and investments and you get $264,000/share. This would be an annual return of over 16% from the current price. These numbers don't include the possibility of underwriting gains from the insurance businesses. I also think the assumptions are very conservative. While Buffett would prefer purchasing businesses entirely, it is likely he will use some of the incoming cash to increase his publicly traded securities, which I believe with current conditions he should be able to achieve the 10% hurdle rate. I think the investment provides a very nice margin of safety. Even if these conservative numbers turn out to be optimistic, the investment should still provide an adequate return. I believe the returns will end up being significantly higher.

http://www.msnbc.msn.com/id/3036789/ns/msnbc_tv-morning_joe/#47779271