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1.2x P/BV entry point


scorpioncapital
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I think you need to read the annual report, i believe it was Charlie who spoke about what a good entry point is. 

 

If Berkshire is set to buy back stock at 1.2x P/BV would this be a good entry for a new investor as well?

It seems we are only 10% away or roughly around $120 per B-share.

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If Berkshire is set to buy back stock at 1.2x P/BV would this be a good entry for a new investor as well?

It seems we are only 10% away or roughly around $120 per B-share.

 

The answer to that question is "yes". Two important nuances:

 

1. I believe you are factoring the mark-to-market on Kraft Heinz into your "only about 10% away" comment;

2. Remember Q3 ends end of September so factor in any decline in general stock prices which will cause Berkshire's book value to drop (ie because of its publicly traded equities and because of the protection it sold (via derivatives) on various equity indexes - both of these are marked-to-market).

 

Factoring in #2 is not as easy as #1(until you are past quarter-end).

 

The way I have bought Berkshire in past is via a look-through p/e approach. Not the Tilson two-column approach copied from the Berkshire annual report, rather I look through everything including the public equity holdings, Kraft-Heinz, etc and figure out the look through "e" or owner earnings. I have not done that in a while, but would guess its around maybe 14-15x right now, maybe 14.5x with the recent acquisition. So if the stock drops 10% more here, take 10% off of that and you are at 13x earnings for something that will growth 6-11% annually pretty safely. What is nice about this "look through everything" approach is that it doesn't move at all with fluctuations in the market prices of securities. Whereas that is not the case with the question you asked on this thread (because of #2 above) and that is also not the case with the Tilson two-column / annual report method. As such, from a a value perspective, you can act more decisively using this approach in a turbulent market - its just a more fundamental approach relative to the multiple of book or two column approach.

 

 

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I should also note I have made about 30 to 50% annualized returns on Berkshire since around 2000 using this approach - buying reasonably close to lows over the past 15 year and selling reasonably near highs - never perfect but good enough to outpace Berkshire itself. I think I did it 4 or 5 times, each time holding for 6 months to 3 years or so.

 

With this new 1.2x book floor thing, however, I don't think those opportunities will be as available anymore using this approach - Warren and Charlie figured out a way for existing shareholders not to sell to guys like me who take advantage of them too much when they are fearful or lose faith in Berkshire.

 

I believe out of these 4-5 times, I have bought Berkshire at least twice at 10x earnings. So, for it to go to 10x earnings from where it is today, it would have to drop 40% - which it won't because they have the 1.2x book thing in place. This is what I mean by those  opportunities not likely to be there as much in future. Doesn't mean it can't happen once in the next 5 years though...

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Mungerville, I totally agree with your approach of looking through everything. That's the way I try to look at it that way as well cause there's so many parts in there and none of them are like the other.

 

The one comment I would have regarding your thoughts are about your view on the equity derivatives. You're marking to some market the position. But those puts are European style and are so out of money that I don't see how BRK pays out any

meaningful amount on them.

 

All that being said having a rule of thumb about P/B to help with quick decision making may not be such a bad thing. I be it served a lot of people well. I just prefer the hard way  ;)

 

Unrelated: I've re-done a deep dive on Geico for the past few days. It is unbelievable how good that business is!

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If Berkshire is set to buy back stock at 1.2x P/BV would this be a good entry for a new investor as well?

It seems we are only 10% away or roughly around $120 per B-share.

 

After the PCP deal, Berkshire is not as cash rich as when it entered the 2008/9 crisis. In fact they are borrowing some money to do the PCP deal. Besides some of their subsidiaries like BNSF are unlikely to produce as much cash in a down turn as recently. So i seriously doubt that they will buy back any significant amount if shares.

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What does the buybacks have to do with the valuation. BK can do way batter doing distressed deals in a downturn that buying back stock. So if you can buy undervalued stock in a company that's adding crazy value why do you need them to buy back their own shares to make crazy profits?

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What does the buybacks have to do with the valuation. BK can do way batter doing distressed deals in a downturn that buying back stock. So if you can buy undervalued stock in a company that's adding crazy value why do you need them to buy back their own shares to make crazy profits?

 

I think his point was that 1.2x P/BV might not be hard line in the sand below which stock won't drop. So it's not about valuing BRK, but rather possibly keeping some powder dry for prices below 1.2x P/BV if they don't stop decline via buybacks.

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I also am inferring that if Berkshire has publicly stated they are willing to buy back stock at 1.2 P/BV and knowing their history of reluctance to do either dividends or buybacks, this number is not exactly what they consider intrinsic value, possibly they consider it a decent discount to intrinsic value. However, I sense a practicality settling over Berkshire. Being so big, their goal is to outperform S&P by a little and so buyback shares at a modest, but not screaming discount.

Agree that a buyback is no floor unless you're the government nothing says it can't go lower than that.

 

 

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+1 on the look - through method.

 

Looking to next year, if you add

 

$1.0B in KHC earnings ( 325MM shares X $3.22 EPS)

$1.5B PCP earnings

$18B Operating earnings from BRK ( up from ~$16-17B this year)

6B  Undistributed earnings from a/o stocks

 

26.5B in earnings next year assuming no recession and normal Insurance results.

 

Today's market cap is 325B

 

So 12.2 X earnings.

 

This may be a little optimistic but it's reasonable.

 

 

 

 

 

 

 

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Feel free to ignore below.

 

I find it interesting that BRK is so weak recently. It has already dropped quite a bit this year and it's underperforming in a crash too. It seems that people don't think BRK is a good hold for a downdraft and there's not much buying either.

 

I wonder if this is due to the fact that they bought PCP and people think they don't have enough cash for buybacks or opportunistic investments in a market drop.

 

Anyway, so far "BRK is cash equivalent" theory has been thoroughly discredited this year.

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Of course BRK isn't a cash equivalent. And I must say I like the weakness in BRK it's pretty good value at these levels.

 

I don't know about the thesis that they're low on firepower. They still have about 25 billion in cash available to deploy plus all all the FCF that comes in. That's what an extra say 4-4.5 Bn a quarter?

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Right. I am not bitching that it's dropping either. I'll keep buying.

 

I am trying to understand the short term moves, which is of course a no no. That's why I said "Feel free to ignore". :)

 

I guess it's harder for you since you have a big position.

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+1 on the look - through method.

 

Looking to next year, if you add

 

$1.0B in KHC earnings ( 325MM shares X $3.22 EPS)

$1.5B PCP earnings

$18B Operating earnings from BRK ( up from ~$16-17B this year)

6B  Undistributed earnings from a/o stocks

 

26.5B in earnings next year assuming no recession and normal Insurance results.

 

Today's market cap is 325B

 

So 12.2 X earnings.

 

This may be a little optimistic but it's reasonable.

 

Where are you optimistic - not on Heinz, not on PCP. Probably not on undistributed earnings from a/0 stocks. Is it your $18B up from $16-17 this year? If so, why assume earnings are going to go up? Would the railway not be having issues at this point with earnings given fracking? Should you just be assuming flat earnings?

 

I haven't run these numbers in about 18 months. 

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+1 on the look - through method.

 

Looking to next year, if you add

 

$1.0B in KHC earnings ( 325MM shares X $3.22 EPS)

$1.5B PCP earnings

$18B Operating earnings from BRK ( up from ~$16-17B this year)

6B  Undistributed earnings from a/o stocks

 

26.5B in earnings next year assuming no recession and normal Insurance results.

 

Today's market cap is 325B

 

So 12.2 X earnings.

 

This may be a little optimistic but it's reasonable.

 

Where are you optimistic - not on Heinz, not on PCP. Probably not on undistributed earnings from a/0 stocks. Is it your $18B up from $16-17 this year? If so, why assume earnings are going to go up? Would the railway not be having issues at this point with earnings given fracking? Should you just be assuming flat earnings?

 

I haven't run these numbers in about 18 months.

 

Actually I'd be surprised if we are lower than 13x right now...but again I have to run my numbers.

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+1 on the look - through method.

 

Looking to next year, if you add

 

$1.0B in KHC earnings ( 325MM shares X $3.22 EPS)

$1.5B PCP earnings

$18B Operating earnings from BRK ( up from ~$16-17B this year)

6B  Undistributed earnings from a/o stocks

 

26.5B in earnings next year assuming no recession and normal Insurance results.

 

Today's market cap is 325B

 

So 12.2 X earnings.

 

This may be a little optimistic but it's reasonable.

 

Where are you optimistic - not on Heinz, not on PCP. Probably not on undistributed earnings from a/0 stocks. Is it your $18B up from $16-17 this year? If so, why assume earnings are going to go up? Would the railway not be having issues at this point with earnings given fracking? Should you just be assuming flat earnings?

 

I haven't run these numbers in about 18 months.

 

<Is it your $18B up from $16-17 this year?>

 

Yes, that may be optimistic, as it assumes a modest underwriting profit and organic growth from the existing operating companies.

 

I'm not that worried about Burlington ( assuming no recession) as they are turning around a lousy performance from 2014. They don't have the tough comparisons some of their competitors have.

 

 

 

 

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I saw that article over the weekend. It's basically lazy journalism with a couple of buzzwords dropped in. I wanted the 5 minutes of my life back after I was done reading it. Considered sending an email to the author to tell him how much of an idiot he is and why that is. But I figured that it wouldn't accomplish anything and it would be more of my life wasted so I didn't.

 

There's may analyses infinately better posted on this board every single day.

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This guy obviously isn't impressed for some reason...http://www.thestar.com/business/2015/08/14/why-berkshire-hathaway-is-a-stock-to-avoid-olive.html

 

Two reasons: He isn't the sharpest knife in the drawer and has the IQ of a toaster.

 

The comment section is worse:

 

"thoroughly researched piece and convincing article. Just one thought. When one invests in Berkshire, one is actually investing in a portfolio and not in a stock. Is it fair to compare a portfolio return with single stock return? We all know that the portfolio returns are less volatile than a single stock returns."

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I agree it was the most superficial rubbish of an article i've read in a while. Not that I'm particularly bullish on BRK after the run its had in the last 2-3 yrs but nonetheless this incoherent article was non sense.

On one hand it speaks of the cash juggernaut that it has become, and on the other it mentions that WEB isn't quite finding the same deals as yesteryear. Any of us would love to have owned BRK for any of the decades he speaks of there.

To my mind owning BRK is like owning the S&P, but you could expect a point or two outperformance over time. There are tons of capital allocation choices for successors including investments in subsidiaries, acquisitions, share buybacks, dividends etc. and you can bet that the culture of Berkshire is such that going forward the management will appropriately weigh each of those options in deploying those undeniable cash flows. That last point alone will distinguish them by atleast a couple of percentage points over their collective S&P peers.

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