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BRK 3Q Report


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Just got a chance to look at the 10-q.  Cash up to $55.8B.  Value of equity securities basically unchanged QoQ--from $116.9B at 6/30/14 to $116.4B at 9/30/14.

 

Saw the Burger King preferred mentioned, but had to go to the merger docs to get the specific terms:

 

"In connection with the transactions, Berkshire Hathaway Inc. (“Berkshire”) will purchase for an aggregate purchase price of $3,000,000,000 (USD), (a) Class A 9% cumulative compounding perpetual voting preferred shares of Holdings (the “preferred shares”) and (b) a warrant to purchase Holdings common shares (the “warrant”), which shares issuable pursuant to the warrant will represent 1.75% of the fully diluted common shares of Holdings as of the completion of the transactions, at an exercise price per Holdings common share of $0.01. The warrant may be exercised until the fifth anniversary of the closing of the transactions. Berkshire has informed Holdings that it intends to exercise the warrant promptly following the closing of the transactions."

 

http://www.sec.gov/Archives/edgar/data/1547282/000119312514398471/d786007ddefm14c.htm

 

So much cash, and apparently, so little to buy.

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I love how little commentary there is here on Berkshire. Maybe we all take it for granted.

 

This was a terrific quarter. The 3rd quarter is always critical, because of storm risks.....to go back a bit and compare, from '06-'09, BRK was making ~$2B a quarter in what were mostly cat-free 3rd quarters; and this year it's $4.7 billion.

 

Operating earnings are going to be around $16.5 B this year. That represents 17.1% CAGR since 2000.

 

Berkshire is the least well-known growth story in large-cap land.

 

Coke sells at 20X earnings with slow-to-no growth. BRK sells, by my calculations, at 15.6 times look-through earnings.

 

Doesn't make much sense to me.

 

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I love how little commentary there is here on Berkshire. Maybe we all take it for granted.

 

This was a terrific quarter. The 3rd quarter is always critical, because of storm risks.....to go back a bit and compare, from '06-'09, BRK was making ~$2B a quarter in what were mostly cat-free 3rd quarters; and this year it's $4.7 billion.

 

Operating earnings are going to be around $16.5 B this year. That represents 17.1% CAGR since 2000.

 

Berkshire is the least well-known growth story in large-cap land.

 

Coke sells at 20X earnings with slow-to-no growth. BRK sells, by my calculations, at 15.6 times look-through earnings.

 

Doesn't make much sense to me.

 

shhhh! don't tell everyone

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I love how little commentary there is here on Berkshire. Maybe we all take it for granted.

 

This was a terrific quarter. The 3rd quarter is always critical, because of storm risks.....to go back a bit and compare, from '06-'09, BRK was making ~$2B a quarter in what were mostly cat-free 3rd quarters; and this year it's $4.7 billion.

 

Operating earnings are going to be around $16.5 B this year. That represents 17.1% CAGR since 2000.

 

Berkshire is the least well-known growth story in large-cap land.

 

Coke sells at 20X earnings with slow-to-no growth. BRK sells, by my calculations, at 15.6 times look-through earnings.

 

Doesn't make much sense to me.

 

shhhh! don't tell everyone

+1. Tell 'em when BRK has gotten too big and is just like an index. Hmm. .thought they're already big.

 

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  • 2 weeks later...

In conjunction with 3Q earnings getting released I took a deep look at the Berkshire's results vs. the S&P 500 debate. Instead of the usual book value evaluation of Berkshire, I ignored GAAP accounting and put together a look at what Berkshire's income statement would have been if all stock ownership was consolidated. I put it into an article here: http://goo.gl/WcRkW6. I was actually quite surprised to see Berkshire has actually outpaced the S&P 500 in earnings growth by about 10% per year since 2006... looks like Berkshire is not too big to grow  ::)

 

It took me a few hours to compile all the data to do look through earnings so if anyone is interested in doing their own analysis I can post the raw data here and save you some time.

 

 

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Yes, of course. There's a lot in there so I'll just explain quickly, if you have more questions, pm me or ask here. Tab 1 is just charts and tables for the article and it has the data summarized by year on a high level. Tab 2 has all the top 10 holdings for 2006-2014. That's where all the good stuff is. The rest of the tabs just have lots of data which tab 2 is pulling from.

BRK_rawdata.xlsx

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Yes, of course. There's a lot in there so I'll just explain quickly, if you have more questions, pm me or ask here. Tab 1 is just charts and tables for the article and it has the data summarized by year on a high level. Tab 2 has all the top 10 holdings for 2006-2014. That's where all the good stuff is. The rest of the tabs just have lots of data which tab 2 is pulling from.

 

Thanks for the work you've put in and for sharing.

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It took me a few hours to compile all the data to do look through earnings so if anyone is interested in doing their own analysis I can post the raw data here and save you some time.

 

Great article. Love the emphasis on the repeatability :), and thanks for sharing the underlying numbers.

 

At the end of the article, you state that Berkshire is trading at a discount to intrinsic value.

I wonder as to how much of your assertion is based on the relative valuation compared to the S&P500?

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It took me a few hours to compile all the data to do look through earnings so if anyone is interested in doing their own analysis I can post the raw data here and save you some time.

 

Great article. Love the emphasis on the repeatability :), and thanks for sharing the underlying numbers.

 

At the end of the article, you state that Berkshire is trading at a discount to intrinsic value.

I wonder as to how much of your assertion is based on the relative valuation compared to the S&P500?

 

Thank you. I appreciate the compliment. It is highly based on relative valuation although I don't like the typical connotation of relative valuation. I like to look at it more like how graham would put two companies next to eachother and compare. I do not like looking at Facebooks's valuation and then saying it is trading at a discount to peers such as Twitter, which is the image I get in my head when I hear the term relative valuation.

In the end it's all about opportunity cost, yes Berkshire may be more attractive than the S&P 500 but there are still many other investments within someone's circle of competence to compare to. I also like earnings yield. So if I determine Berkshire is attractive relative to other investments I think is the earnings yield now or in a few years something is find attractive as a business owner?

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It took me a few hours to compile all the data to do look through earnings so if anyone is interested in doing their own analysis I can post the raw data here and save you some time.

 

Great article. Love the emphasis on the repeatability :), and thanks for sharing the underlying numbers.

 

At the end of the article, you state that Berkshire is trading at a discount to intrinsic value.

I wonder as to how much of your assertion is based on the relative valuation compared to the S&P500?

 

Thank you. I appreciate the compliment. It is highly based on relative valuation although I don't like the typical connotation of relative valuation. I like to look at it more like how graham would put two companies next to eachother and compare. I do not like looking at Facebooks's valuation and then saying it is trading at a discount to peers such as Twitter, which is the image I get in my head when I hear the term relative valuation.

In the end it's all about opportunity cost, yes Berkshire may be more attractive than the S&P 500 but there are still many other investments within someone's circle of competence to compare to. I also like earnings yield. So if I determine Berkshire is attractive relative to other investments I think is the earnings yield now or in a few years something is find attractive as a business owner?

 

100 Shares,

 

Nice work, thanks. I hope you own 100 shares of BRK -A :)

 

I do a look-through calc which is somewhat different than yours.

 

I include net operating earnings from all op's, including insurance, and then, like you, I add the  undistributed earnings from the stocks ( but back out the dividends BRK has already collected, which are included in the operating earnings).

 

I'm coming up with a look-through figure about 10-15% lower than yours, and it must have to do with the operating earnings number...so here is my question:

 

Can you explain where you get the $20.7B number ( from article #2 in your series)?

 

You wrote;

 

"<....Now we take that and add it to Berkshire's TTM Net Earnings of $20.7B to get 25.7B.>"

 

As I have it, the last 4 quarters of net operating earnings - including insurance op's - starting from Q4 2013: $3.8B, 3.5B, $4.3B, $4.7B = 16.3B.

 

I might be way off, but I'm showing less operating earnings than you, and I'm including all of the op's.

 

For reference, I pull the quarterly numbers from P. 24:

 

 

http://www.berkshirehathaway.com/qtrly/3rdqtr14.pdf

 

Thanks in advance!

 

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It took me a few hours to compile all the data to do look through earnings so if anyone is interested in doing their own analysis I can post the raw data here and save you some time.

 

Great article. Love the emphasis on the repeatability :), and thanks for sharing the underlying numbers.

 

At the end of the article, you state that Berkshire is trading at a discount to intrinsic value.

I wonder as to how much of your assertion is based on the relative valuation compared to the S&P500?

 

Thank you. I appreciate the compliment. It is highly based on relative valuation although I don't like the typical connotation of relative valuation. I like to look at it more like how graham would put two companies next to eachother and compare. I do not like looking at Facebooks's valuation and then saying it is trading at a discount to peers such as Twitter, which is the image I get in my head when I hear the term relative valuation.

In the end it's all about opportunity cost, yes Berkshire may be more attractive than the S&P 500 but there are still many other investments within someone's circle of competence to compare to. I also like earnings yield. So if I determine Berkshire is attractive relative to other investments I think is the earnings yield now or in a few years something is find attractive as a business owner?

 

100 Shares,

 

Nice work, thanks. I hope you own 100 shares of BRK -A :)

 

I do a look-through calc which is somewhat different than yours.

 

I include net operating earnings from all op's, including insurance, and then, like you, I add the  undistributed earnings from the stocks ( but back out the dividends BRK has already collected, which are included in the operating earnings).

 

I'm coming up with a look-through figure about 10-15% lower than yours, and it must have to do with the operating earnings number...so here is my question:

 

Can you explain where you get the $20.7B number ( from article #2 in your series)?

 

You wrote;

 

"<....Now we take that and add it to Berkshire's TTM Net Earnings of $20.7B to get 25.7B.>"

 

As I have it, the last 4 quarters of net operating earnings - including insurance op's - starting from Q4 2013: $3.8B, 3.5B, $4.3B, $4.7B = 16.3B.

 

I might be way off, but I'm showing less operating earnings than you, and I'm including all of the op's.

 

For reference, I pull the quarterly numbers from P. 24:

 

 

http://www.berkshirehathaway.com/qtrly/3rdqtr14.pdf

 

Thanks in advance!

 

it's from morningstar and i used net earnings not operating income so my number will be higher as it includes capital gains from sales of securities and other mark to market items that may flow into the income statement. Net operating earnings is probably more accurate and definately more conservative. Capotal gains really shouldn't be included as its double counting the stocks if I am adding back look-through earnings. However capital gains may also outpace look through earnings because of buying at a discount. So I do think some capital gains can be added back without effectively double counting occurring because some of the capital gains results from business results and some result from chnages in market valuation. The changes in market valuation occur because it is purchased when it is undervalued is definately a source of value and shouldn't be ignored. How much and which belongs to each category is a fuzzier line. In this case I think off the top of my head capital gains were about $3B in the ttm which would account for the 10-15% difference. I looked at the $3B as a fraction of the portfolio which is $115B so about 2.5%. I thought a 2.5% return from the undervalued securities appreciating excluding business results was probably along normalized maybe a bit high but I left it in there for simplicity. Hope all that made sense.

 

Again this rests on the assumption that capital gains are outpacing look through earnings. If they are equal then what I said doesn't apply. And if capital gains trail look through earnings you can probably assume that means you are paying to muchh and a deduction could be applied.

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It does not make sense to include capital gains in the calculation of operating earnings. Berkshire's business model shifted in the past 15 years to a point where it is now primarily a collection of businesses. If you want to be really conservative, you probably should exclude underwriting gains from operating earnings as Buffett pointed out that they generally try to underwrite insurance to achieve a 100% combined ratio.

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Thanks, 100 & Munger D.

 

I think reasonable people can disagree on these issues. I am ok including a modest amount of u/w earnings. For instance, $2B on $37B of earned premium, which is where we seem to be. Blowout years of $4 B need to be discounted IMO.

 

I agree with Munger on cap gains being excluded.

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I agree with that capital gains are not operating earns. And I agree it is not conservative to include them. I included them for simplicity since they weren't very large in the past 12 months.

 

Also I know buffett doesn't include underwriting profit but when did he say they aim for 100% CR. I've always thought CR and bond returns work in unison to achieve desired return on capital while still passing on as much of the saving as possible to the consumer. With bond yields so low they have to get some underwriting profit to get decent return on their capital in the insurance business. When bond yields are high insurers are more willing to let underwriting profits dissapear.

 

Also I don't think the capital gains not counting as earning a can be settled that simply just because operating businesses have increased. Assume they bought $10B of equities this year at. 25% discount to intrinsic value. When they sell after reaching iv then they have gains of 2.5B related to this original discount. I'm not arguing that this should be included. I think it would be rather reckless to assume this value is constantly being generated on a yearly basis. However that doesn't detract from the fact that this value was created and could be accounted for if somekne wanted to.

Like I said I included it out of laziest in the article I published but I do think it's an interesting discussion. It's certainly not operating earnings. But if you did look through earnings only then this value generated by skilled investors is never captured in your model. Im speaking strictly on a theoretical basis. IV isn't exact enough to actually perform these calculatiions.

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As I pointed out before, Berkshire is not in the stock picking game anymore. Even inside the stock portfolio, 2/3 of the portfolio consists of permanent holdings like Wells Fargo, Coca-Cola, American Express and likely IBM. I think Buffett views these as partially owned operating businesses he never intends to sell (as I recall he did not sell KO at 40-50 times earnings back in 1997) which is why look-through approach makes sense. Even with the remaining portfolio, you run the risk of double-counting by looking at capital gains in addition to look-thru' earnings from investees.

 

Another data point we have along these lines is that Buffett has been exchanging the stock in companies like Graham Holdings and P&G for fully owned operating subs like Duracell or Berkshire stock.

 

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Yes, of course. There's a lot in there so I'll just explain quickly, if you have more questions, pm me or ask here. Tab 1 is just charts and tables for the article and it has the data summarized by year on a high level. Tab 2 has all the top 10 holdings for 2006-2014. That's where all the good stuff is. The rest of the tabs just have lots of data which tab 2 is pulling from.

 

Many thanks indeed for you work :)

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It took me a few hours to compile all the data to do look through earnings so if anyone is interested in doing their own analysis I can post the raw data here and save you some time.

 

Great article. Love the emphasis on the repeatability :), and thanks for sharing the underlying numbers.

 

At the end of the article, you state that Berkshire is trading at a discount to intrinsic value.

I wonder as to how much of your assertion is based on the relative valuation compared to the S&P500?

 

Thank you. I appreciate the compliment. It is highly based on relative valuation although I don't like the typical connotation of relative valuation. I like to look at it more like how graham would put two companies next to eachother and compare. I do not like looking at Facebooks's valuation and then saying it is trading at a discount to peers such as Twitter, which is the image I get in my head when I hear the term relative valuation.

In the end it's all about opportunity cost, yes Berkshire may be more attractive than the S&P 500 but there are still many other investments within someone's circle of competence to compare to. I also like earnings yield. So if I determine Berkshire is attractive relative to other investments I think is the earnings yield now or in a few years something is find attractive as a business owner?

 

100 Shares,

 

Nice work, thanks. I hope you own 100 shares of BRK -A :)

 

I do a look-through calc which is somewhat different than yours.

 

I include net operating earnings from all op's, including insurance, and then, like you, I add the  undistributed earnings from the stocks ( but back out the dividends BRK has already collected, which are included in the operating earnings).

 

I'm coming up with a look-through figure about 10-15% lower than yours, and it must have to do with the operating earnings number...so here is my question:

 

Can you explain where you get the $20.7B number ( from article #2 in your series)?

 

You wrote;

 

"<....Now we take that and add it to Berkshire's TTM Net Earnings of $20.7B to get 25.7B.>"

 

As I have it, the last 4 quarters of net operating earnings - including insurance op's - starting from Q4 2013: $3.8B, 3.5B, $4.3B, $4.7B = 16.3B.

 

I might be way off, but I'm showing less operating earnings than you, and I'm including all of the op's.

 

For reference, I pull the quarterly numbers from P. 24:

 

 

http://www.berkshirehathaway.com/qtrly/3rdqtr14.pdf

 

Thanks in advance!

 

Thanks again for pointing this out. And thank you to everyone that participated in the discussion.  I'm recalculating now and I get operating earnings of $24.4B so at 35% tax, so that's $15.8B after tax, right on par with what you were getting.

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