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Berkshire Hathaway Seems Cheap


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Seems like the market price of Berkshire Hathaway as of end of day 2/3/14 is now somewhere between 1.2x-1.3x book for estimated book value ending 12/31/2013.  My guess-estimate is most of BRK subsidiaries are doing fine in 2014 and other than fluctuations in mark to market investments (stocks, puts etc.) the book value of BRK in 2014 YTD is same as or greater than year end 2013. 

 

Year end 2013 book value should certainly be nicely greater than reported 9/30/2013 book value.  .  The WEB is "old and will eventually die discount" continues to hang over BRK stock.  I hope WEB is backing up the truck on BRK stock and actually buying back stock.  So far previous buy back announcement seems to have used mostly as stock price floor setting and as a stock price marketing tool.  I have been disappointed with the level of the buyback given how big the discount is and how long it has been going on.  Imho BRK should trade at no less than 1.8x-2.0x book value even with the succession issue.  Come on WEB, reward the patient and long term shareholders!  I would like to own more BRK without putting up more capital!

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I think the end of year buyback threshold will end up somewhere between 106-107 on the B shares.  Buffett will buy back the stock every day it is below 1.2x book, but not a single share above that.  You can't really fault him - he was active buying the stock in the open market towards the end of December 2012 on the few days it traded below 1.2x book (in addition to the large reported block trade that prompted the change from 1.1x to 1.2x).

 

It hasn't traded below 1.2x a reported book value a single time since then.  The jury is still out on whether he will use a more real-time book value, but I wouldn't be surprised if he only uses the last-reported publicly available book value per share to instruct the broker.

 

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Seems like the market price of Berkshire Hathaway as of end of day 2/3/14 is now somewhere between 1.2x-1.3x book for estimated book value ending 12/31/2013.  My guess-estimate is most of BRK subsidiaries are ......................  I would like to own more BRK without putting up more capital!

+1

 

 

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I wish he had an open ended mandate for repurchases....why not buy back at 1.21?

 

I believe so that he's fair to all shareholders.  He doesn't like buying out his partners without telling him he's going to, since he believes they are selling at a low price.

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I wish he had an open ended mandate for repurchases....why not buy back at 1.21?

 

I believe so that he's fair to all shareholders.  He doesn't like buying out his partners without telling him he's going to, since he believes they are selling at a low price.

 

That said, he did bump that 1.1x buy order to 1.2x during 2012 when that long term shareholder had to sell his $1.2B holding. If I remember correctly, the PR went out the same time as the purchase.

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At least for the B-shares, ycharts' numbers appear to be incorrect.  Backing out the implied book value from their number shows them using a book value of $219.385 billion for BRK, when the actual Q3 book value is $208.382 Billion  Not sure what their error is, maybe share count like most finance websites.

 

-- I checked their A-share number and it's much closer to reality (off by $1B).  The fact that the two were different is a tip off, although the B shares closed at a 1% discount to the A shares on Monday.

 

Last reported book value per share is $84.509 on the B-shares, for a buyback number of $101.41 on the B's and a P/B of 1.29x

 

 

Not sure if their calcs are accurate but here are two interesting links:

 

http://ycharts.com/companies/BRK.A/price_to_book_value

 

http://ycharts.com/companies/BRK.B/price_to_book_value

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I wish he had an open ended mandate for repurchases....why not buy back at 1.21?

 

I believe so that he's fair to all shareholders.  He doesn't like buying out his partners without telling him he's going to, since he believes they are selling at a low price.

 

That said, he did bump that 1.1x buy order to 1.2x during 2012 when that long term shareholder had to sell his $1.2B holding. If I remember correctly, the PR went out the same time as the purchase.

Very different from buying back shares over the market in terms of informational advantage.

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If 2013 BVPS comes in around $131,000 and reported earnings/OCI/investments grow at 7% in 2014, P/BV is 1.1X 2014 BVPS. I know it's based on assumptions and it is not the latest historical value that Buffett will use for repurchases but it is not all that far-fetched. Based on the same 7% growth rate for pre-tax operating earnings (ex-insurance), I estimate IVPS (investments per share + 9 X pre-tax operating earnings) at more than $220,000 for 2014. Using Equity + deferred tax + float, I get to $224,000 at the end of 2014 (that assumes 0% growth in deferred taxes/float). Estimated 2014 BVPS = $149,000 (14% YoY).

 

At 0% growth in reported earnings/OCI/pre-tax operating earnings/investments/float, I get: BVPS = $147,700, IVPS = $203,000, Equity + Def. tax + Float = $223,000.

 

It would take a pretty mediocre operating/investment year to ruin 2014; not that it hasn't happened before.

 

Those values represent bigger discounts to current market price than I can find elsewhere for quality productive assets.

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I just upped my allocation to 35% in Berkshire mostly in DITM calls (representing about 90% of my portfolio's worth in shares) since I cannot see how the PPS will remain this low for more than 2 years straight without a sharp drop in the S&P (I plan to soon buy a bunch of S&P puts to take care of this possibility). I know that this sounds nuts from a simple portfolio allocation perspective but the risk/reward seems absurdly good now. 80 strike 2016 calls at slightly less than 34 means that the BV at end 2015 must be less than 142,500/A share or Berkshire must be trading below the buyback threshold for one to actually post a loss. Any multiple expansion in the next two years or decent increase in BV by then will result in a very nice return (I am going to sell slowly into any strength). Looks like a nice risk/reward situation.

 

Please tear this thesis to shreds - I still keep thinking I am nuts to have such a large allocation to one stock but the math keeps coming back to tell me this is a really great deal.

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It's a fine thesis to use deep in the money LEAP calls to add some leverage to a safe equity position.  Just a heads up to others that might consider this  as a swap for Berkshire shares they already own in an IRA -  I attempted to swap BRK.B shares for calls in a "margin-type" interactive brokers IRA a couple years ago.  The margin-type IRA at IB allows to you immediately use the proceeds of a sale, rather than waiting the 3 days for settlement like a regular IRA.  The way this works without violating the IRA rules is that the second trade settles after the first trade, so no temporary loan is ever present.  Stock options settle the next business day, so you have to wait 2 days to do the swap - risking a price change in the underlying.  I remember sweating it out for two days hoping the price didn't rise.  If it falls, you benefit of course...

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