thepupil Posted September 4, 2015 Posted September 4, 2015 "He is practically giving you his valuation. At 1.2 P/B it is unambiguously cheap. At P/B of 2.0 it is expensive. If you estimate "well below intrinsic value" to be 25%, then IV is around 1.6 P/B. Very hard to improve on this. Vinod" +1 It is probably too simple, so people don´t want to use it. ;) Can't stop chuckling! I really do object to this book value stuff! It's a useful shortcut and it's been promoted by Buffett and I've spent years and years using it myself but still, I find it is precisely this entrenched usage that is leading to BRK being persistently undervalued (especially the insurance operation). What do you guys think of the following simple valuation for the ultra longterm equity investor: 1. The stock portfolio (plus Heinz, Bac, converts, preferreds etc) is worth what it's worth. The cash and IG fixed income is worth 50% of gaap but in any case the discount to be a minimum of $25bn. 2. Total operating income has the interest, dividends, gains derived from the above assets removed. All of the remainder (including an averaged number for the insurance underwriting gains) is then capitalized at a rate that makes sense to the investor keeping in mind that with full retention of earnings BRK has historically grown these earnings at a CAGR of 20%, about double the long term returns of the market. 1 + 2 are then added together and are the total equity value for shareholders. (No subtractions of DTL or Float.) *Note on Float. If float grows over time then the above undervalues the company. And If float declines Buffett wrote in this year's report that it would do so very gradually and probably not any more than 3% per annum. makes sense to the investor keeping in mind that with full retention of earnings BRK has historically grown these earnings at a CAGR of 20%, about double the long term returns of the market. hello my obese simian friend, 1. agree to disagree on incremental debt usage being a separate or quantifiable source of intrinsic value to berkshire. I agree it will and has helped grow IV, but I'm not willing to attempt to try to value that or consider it a separate component of growth in value. To your point, BNSF increased debt by $7.1B over 2012-2014, whereas UNP increased it by only $2.5B. BNSF now has ~$20B, while UNP has ~$13B. So either UNP is underlevered, or you are correct in that the Berkshire structure may allow for incrementally more leverage at the subs where the vast majority of the debt is located. 2. I'd like to say that much of talk about the astounding historical growth in operating earnings does not point out that Berkshire has used big chunks of the securities portfolio in order to grow these operating earnings (way back in the day issued shares for utility company, issued shares for BNSF, turned PG into Duracell, turned WaPo into earnings assets, PSX into Lubrizol add-on, etc.). The growth in investments / share has lagged the market returns because of Berkshire's conversion to more of an operating company. Berkshire has been very good at monetizing the increase in value of the holdings and converting them into wholly owned operating earnings. also the securities portfolio historically ahs been MUCH larger than the operating businesses, so using the securities portfolio earnings to subsidize the growth of the operating earnings had a particularly large effect. This will not be as powerful in the future as it has been in the past. I'll be willing to wager anyone that growth in operating earnings per share is less than 14% over the next ten years, up to 20 shares of Berkshire (b shares that is) as the stakes. To be clear i am referring to the $17.5B of pretax earnings from non-insurance non-investment biz (BNSF, Berkshire Energy, manufacturing and service etc.). You'll get PCP as a head start. 14% growth would imply pre-tax operating earnings of $65B. It is not completely impossible, but would be quite extraordinary. If those talking about growth of the past being the norm for the future want to truly bet on it, I'm willing to take the other side.
thefatbaboon Posted September 4, 2015 Posted September 4, 2015 Using numbers for 2014: 1. Stock 115.5, Heinz Stock 15 (estimate), Other Prefs etc 22, HY FI 2.3 = 155 Cash 63, IG FI 24 = 87 = @50% discount = 44 Total: 199 2. EBIT excluding underwriting and anything deriving from above: 17.5 Average underwriting gain of last 12 years: 2 Total 19.5 I think it is reasonable to have a PE of 18 for a company that has a multi decade record of 20% growth and at a time when interest rates are so low. That equates to an EBIT multiple of around 12 times. So the capitalized EBIT: 19.5 * 12 = 234 TOTAL of 1 + 2 = 433 Approx $175 per B share It's approx 5% less if you believe Float runs off at the max -3% that Buffett mentions in AR2014. It's approx 10% less if you believe Float runs off as above and there insurance underwriting goes to break-even. It happens to be about 1.8 times YE 2014 book but I don't see the point in relating it to net book with all the convoluted accounting that makes book what it is (DTL, Float, Goodwill etc etc)
thefatbaboon Posted September 4, 2015 Posted September 4, 2015 "He is practically giving you his valuation. At 1.2 P/B it is unambiguously cheap. At P/B of 2.0 it is expensive. If you estimate "well below intrinsic value" to be 25%, then IV is around 1.6 P/B. Very hard to improve on this. Vinod" +1 It is probably too simple, so people don´t want to use it. ;) Can't stop chuckling! I really do object to this book value stuff! It's a useful shortcut and it's been promoted by Buffett and I've spent years and years using it myself but still, I find it is precisely this entrenched usage that is leading to BRK being persistently undervalued (especially the insurance operation). What do you guys think of the following simple valuation for the ultra longterm equity investor: 1. The stock portfolio (plus Heinz, Bac, converts, preferreds etc) is worth what it's worth. The cash and IG fixed income is worth 50% of gaap but in any case the discount to be a minimum of $25bn. 2. Total operating income has the interest, dividends, gains derived from the above assets removed. All of the remainder (including an averaged number for the insurance underwriting gains) is then capitalized at a rate that makes sense to the investor keeping in mind that with full retention of earnings BRK has historically grown these earnings at a CAGR of 20%, about double the long term returns of the market. 1 + 2 are then added together and are the total equity value for shareholders. (No subtractions of DTL or Float.) *Note on Float. If float grows over time then the above undervalues the company. And If float declines Buffett wrote in this year's report that it would do so very gradually and probably not any more than 3% per annum. makes sense to the investor keeping in mind that with full retention of earnings BRK has historically grown these earnings at a CAGR of 20%, about double the long term returns of the market. hello my obese simian friend, 1. agree to disagree on incremental debt usage being a separate or quantifiable source of intrinsic value to berkshire. I agree it will and has helped grow IV, but I'm not willing to attempt to try to value that or consider it a separate component of growth in value. To your point, BNSF increased debt by $7.1B over 2012-2014, whereas UNP increased it by only $2.5B. BNSF now has ~$20B, while UNP has ~$13B. So either UNP is underlevered, or you are correct in that the Berkshire structure may allow for incrementally more leverage at the subs where the vast majority of the debt is located. 2. I'd like to say that much of talk about the astounding historical growth in operating earnings does not point out that Berkshire has used big chunks of the securities portfolio in order to grow these operating earnings (way back in the day issued shares for utility company, issued shares for BNSF, turned PG into Duracell, turned WaPo into earnings assets, PSX into Lubrizol add-on, etc.). The growth in investments / share has lagged the market returns because of Berkshire's conversion to more of an operating company. Berkshire has been very good at monetizing the increase in value of the holdings and converting them into wholly owned operating earnings. also the securities portfolio historically ahs been MUCH larger than the operating businesses, so using the securities portfolio earnings to subsidize the growth of the operating earnings had a particularly large effect. This will not be as powerful in the future as it has been in the past. I'll be willing to wager anyone that growth in operating earnings per share is less than 14% over the next ten years, up to 20 shares of Berkshire (b shares that is) as the stakes. To be clear i am referring to the $17.5B of pretax earnings from non-insurance non-investment biz (BNSF, Berkshire Energy, manufacturing and service etc.). You'll get PCP as a head start. 14% growth would imply pre-tax operating earnings of $65B. It is not completely impossible, but would be quite extraordinary. If those talking about growth of the past being the norm for the future want to truly bet on it, I'm willing to take the other side. I'm not sure the numbers support your contention about the Investments bleeding to support the earnings. Of course PG/Duracell hasn't happened yet. Between 2000 and 2010 Investments per share grew at a CAGR of 6.6%. I haven't got the number in front of me now but I'm pretty sure thats triple the dividend reinvested returns of the S&P 500. From 2010 till 2014 Investments grew 50% while the S&P500 grew approx 60%. Yes, so far behind in this decade but not by much. Not enough to come to your conclusion. I won't wager on an absolute growth rate. I would be willing to work out a wager using a spread to an interest rate. If interest rates (and what that implies about GDP) are as pathetic as they are now for the next decade then any sustained double digit growth rate will be mightily impressive. If long term rate head back to mid single digits then I definitely think Berkshire op companies can grow at the 14% you mention. For consideration, something like a +10% spread to the ten year?
thepupil Posted September 4, 2015 Posted September 4, 2015 I see the 10 yrs of 6.6% (a pedestrian absolute rate of growth) and the subsequent 4 yrs of slower than S&P growth as evidence that the investment side of the equation was used to subsidize the growth of operating earnings. This period includes some spectacular investments on Berkshire's part, many of which have been harvested already, underwriting was spectacular, float growth was really great too...So we'd expect investment per share to go up a lot and at a very high rate. But they didn't...Instead they got plowed into growing operating earnings, which is awesome. But there's diminishing returns to this. Let's just pretend that all cash and investments (about $200B) were plowed into something at 12X pretax earnings. This would add $16B to the run rate of $18B, basically doubling it. If you did that 5 and 10 years ago, the affect would be FAR more dramatic. $18B is simply a lot harder to grow. I personally see Berkshire more as an operating conglomerate that grows at a fast rate because it has this "capex fairy" (investment income, insurance biz, securities portfolio) that rains down growth capex upon it to add divisions and accelerate it. But that magical fairy dust gets less potent with the non-insurance operating earnings starting to dwarf the more financial side of berkshire<---yaaaa it's friday...
thefatbaboon Posted September 4, 2015 Posted September 4, 2015 pupil, So what if the absolute return of 6.6% is low? It was far ahead of the market. And you're contention was that the portfolio was bled to fund BNSF, BE etc. The fact that over the last 14 years investments per share grew faster than the market (while generally being made up of quite a few underperforming stocks!) is clear evidence of the portfolio not being used in the way you imagine. What significant positions have been bled in this way? Not a single large, long term stock holding was liquidated or swapped. WaPo was swapped predominantly for BRK stock and was anyway tiny. Phillips was a recent-ish buy, small and the acquired flow business was anyway not even contributing to growth in the period! The first meaningful swap of a long term position is PG - and it hasn't even happened yet. Honestly I have no idea what you're talking about. The fairly obvious reason for investments per share lagging a bit over the four years of this bull market is that his biggest equity positions are in aggregate only up 45% for the period versus 60% for the market and he's held a bunch of cash. Not very mysterious. I think you are totally off in what you are suggesting.
thepupil Posted September 4, 2015 Posted September 4, 2015 pupil, So what if the absolute return of 6.6% is low? It was far ahead of the market. And you're contention was that the portfolio was bled to fund BNSF, BE etc. The fact that over the last 14 years investments per share grew faster than the market (while generally being made up of quite a few underperforming stocks!) is clear evidence of the portfolio not being used in the way you imagine. What significant positions have been bled in this way? Not a single large, long term stock holding was liquidated or swapped. WaPo was swapped predominantly for BRK stock and was anyway tiny. Phillips was a recent-ish buy, small and the acquired flow business was anyway not even contributing to growth in the period! The first meaningful swap of a long term position is PG - and it hasn't even happened yet. Honestly I have no idea what you're talking about. The fairly obvious reason for investments per share lagging a bit over the four years of this bull market is that his biggest equity positions are in aggregate only up 45% for the period versus 60% for the market and he's held a bunch of cash. Not very mysterious. I think you are totally off in what you are suggesting. the investment and underwriting income was used, limited amounts of share issuance was used (for the big kahuna BNSF); using share issuance represents a monetization of the growth of securities portfolio to buy an operating company and grow operating earnings. Several crisis era investments were settled and harvested for cash also. they did not funded all those acquisitions with the cash generated from non-insurance operating earnings. For example (just because i have my 2013 notes handy). In 2013 they did $15B of non insurance operating, pretax, $11 or $12B post tax. In that year they did $11B of capex, $3B of bolt-ons and bought the Nevada utility for $5.6B. If OpCo berkshire was a standalone company limited to spending within its means, it would've invested $11B to grow. But instead it invested $20B. In that year they did about $3B of insurance gains and $4.7B of investment income. I'm saying the non-insurance gets a little help from its friend. I am not saying the investments were bled. I'm saying they subsidized and continue to subsidize the growth of operating earnings. It's a beautiful thing. You get this constantly increasing operating earnings coupon punctuated by the occasional large investment gain coup (BAC pref/ warrants, Heinz 3X in a few years at current MV, etc.). But once operating earnings reach a certain size and heft relative to the investment portfolio, this effect will juice the operating earnings growth less than it has in the past. It will still be great and I think Berkshire is undervalued. I just can't sit here and let people say operating earnings are going to grow like they have in the past. Because they won't.
thefatbaboon Posted September 4, 2015 Posted September 4, 2015 I think you're pretty much totally wrong. And taking one year and using wonky accounting doesnt show much of anything. Why do you use a post D&A number for earnings and then imagine subtracting capex? At least add back the non cash depreciation charges - they runs at about $7bn a year! Then you make no allowance for debt finance - surely we should imagine that the purchase of a Nevada utility can be partially funded with debt? Perhaps even after these adjustments there is a small transfer across, but that is one year! I've given you a decade long track record of investments PER SHARE increasing faster than the market, and a fairly obvious account of the recent underperfomance being explainable by the large underperforming positions and carrying zero return cash. I'm not saying that they don't give each other a hand. But the evidence is that depending on the year they take turns and the overall record is that each is flourishing remarkably and neither is sapping the other. You may well be right that BRK will not grow op earnings in the future at historical rates but you should look for other reasons than because investments per share cannot subsidize op co indefinitely.
thepupil Posted September 4, 2015 Posted September 4, 2015 I think you're pretty much totally wrong. And taking one year and using wonky accounting doesnt show much of anything. Why do you use a post D&A number for earnings and then imagine subtracting capex? At least add back the non cash depreciation charges - they runs at about $7bn a year! Then you make no allowance for debt finance - surely we should imagine that the purchase of a Nevada utility can be partially funded with debt? Perhaps even after these adjustments there is a small transfer across, but that is one year! I've given you a decade long track record of investments PER SHARE increasing faster than the market, and a fairly obvious account of the recent underperfomance being explainable by the large underperforming positions and carrying zero return cash. I'm not saying that they don't give each other a hand. But the evidence is that depending on the year they take turns and the overall record is that each is flourishing remarkably and neither is sapping the other. You may well be right that BRK will not grow op earnings in the future at historical rates but you should look for other reasons than because investments per share cannot subsidize op co indefinitely. The 5.6b of the utility was the equity consideration. I think if you look at my he cash generated by the operating subs versus the capex and bolt ons and big elephants used to grow said subs, you will conclude that the opera tints company has been subsidized. Another reason the historical growth rate is too high is the cyclical upswing at BNSF and crude by rail.
thepupil Posted September 4, 2015 Posted September 4, 2015 I used the after depreciation numbers because we are talking growth and growth capex. I didn't think this would be controversial.the share swaps and BNSF are perfect examples of this.
thefatbaboon Posted September 4, 2015 Posted September 4, 2015 It's funny, but taking a closer look at your example year I actually find it remarkable because of how much the op co is able to fund on it's own. And you can't reasonably subtract total capex from a number that has had D&A already subtracted. Thats nuts. They did 19.5bn of capex, bolt-on and the NV utility buy. And the op co's made about $18bn after adding back the depreciation and amortization. Assuming that the $4bn of capex that was in excess of D&A (i.e. the growth capex) and the 3bn of bolt-ons were or could be 25% debt funded then 2013 was a year the Op Co funded itself entirely to the tune of $20bn. (Note we haven't even made any account of the underwriting profits which have been $24bn over the last 12 years and are not required to be accounted for within Investments per share!) I don't want to go back and forward arguing over this. One year here, one year there. I'm sure in 2015 with the PCP buy and the PG/Duracell swap funds WILL be diverted from Investments to Op Co. But it doesn't change the big picture that both are thriving. That up until very recently investments per share were trouncing the market at the same time as op co earnings were speeding along at a 20% cagr. And that the recent lag in Investments per share is adequately explained by mediocre performance of the major equities and a lot of cash and FI. We're four years into the decade...let's see in 6 years. That said the distinction is rather irrelevant. What happened if AXP or KO end up whole owned? They fall out of "Investments per share" and into "Op Co". Or look at Heinz that is in Op Co whilst USG is in Investments. It's all arbitrary. The one thing thats fairly clear though is that you're wrong and that so far there's been no meaningful bleeding, subsidizing or artificial affordability of capex/bolt-on. And please don't interpret this as me saying that BRK will grow op earnings at 20% going forward or that a subsidizing trend may not happen in the future. I'm arguing with you about the historical record.
thepupil Posted September 4, 2015 Posted September 4, 2015 And where did they generate the cash to buy Burlington Northern? whuch is by far the biggest source of operating earnings growth and the biggest part of my point. . Didn't they do some share issuance to buy chunk of the utilities too? Back in the early 2000's? I could be wrong but I thought I read in snowball at peak Berkshire and peak stock holdings valuation he brilliantly issued shares to buy Utes (monetizing increase in investments to grow op earnings). I'm not gonna look it up. Agree with you the 2013 looks better than I originally painted. But I would point out most analyses I've seen believe railroads require higher than d+a maint capex. If I'm wrong and Berkshire operating co is and has internally funded 20% growth and will achieve that in the future, then I'm far underweight, even after adding recently and should go back to 40+%. We both own the same stock and actually have similar target prices. So agree this is a waste of time. I find that in general I'm more bearish than other Berkshire shareholder on both the insurance operations and the future growth of the op earnings . I'll admit to awaiting a collapse in earnings at BNSF for a few years now (once hey build pipelines) and I eagerly await massive insurance losses. Mayby expectations are too low. If I'm wrong I'll make more money than I expect.
thepupil Posted September 4, 2015 Posted September 4, 2015 Also, I did not fully deduct depreciation and amortization. I gave them credit for the tax shield by saying earnings were $11-$12 B post tax (which implies a low tax rate for that year. But whatever.
thefatbaboon Posted September 4, 2015 Posted September 4, 2015 Well at one point Berkshire had big investments in the railroads before fully taking BNSF over. So that is another example of perverse effects of cross over because his BNSF shares became an Op co and he sold his non-BNSF railroad shares to partially fund. Also he sold some JNJ to fund if memory serves...but the JNJ had only been bought a year or two before so it was the disinvestment of a recent investment. And you're right there was share issuance but that has been taken into account because I was using investments per share numbers. I hope you don't think that I expect 20% of the future OR that subsidizing might not happen in the future. Maybe PCP and and Duracell/PG in 2015 will be the beginning of a subsidizing trend. I just think that so far the historical record is incredible and that there really is no evidence of this earnings growth having been artificial or built on the back of a partial liquidation. What you say regarding the insurance is something that has confused me too. So far we have 12 years of underwriting profits cumulating to 24 billion. Float hasn't been a liability, it has been a monumental asset. And yet we all sit there like lemmings subtracting it from book and then making our little adjustments. It's retarded. And yet as you say we all live in fear that one day we'll wake up to horrendous losses, although Buffett, who know better than we, says that a monumental catastrophe event will be very manageable: Berkshire would likely be "significantly profitable in a 250bn catastrophe year". Well I'm not sure exactly what "significantly" means but I'm guessing that it would probably not be enough to eat away more than half of the cumulative underwriting profits booked so far. So even after such an event the historical record would show that not only was the float a growing free source of money but that it had still made money although not quite as much. We also keep subtracting out DTL, even though hardly anything of significance has ever been booked in this area and Buffett has said that his big holdings are to be held forever. But we subtract it out and then make our little adjustments. It's retarded. Maybe we can say it has an inhibiting cost - perhaps Warren would have sold KO in '98 if he weren't horrified at the capital gains that would have come due. Thats a cost. But no reasonable person would put it anywhere close to the number we subtract from assets to get equity book. There may however be unannounced examples where the disincentive of taxes encouraged Buffett to hold a position which he was tempted to sell and it subsequently did better than expected. In that case DTL would have been an asset. In the valuation I did a few pages ago I took out DTL and Float. I wanted to apply a little Occams razor. Let's not fool around with book and then make lots of little adjustments. I also used an 18 PE on the Op co's NI. But obviously as you well know if they grow at 20% merely on retained earnings and incremental debt they are worth more than that. If the future resembles the recent past (last 15 years) I look at Berkshire and see a perfectly reasonable way to arrive at an equity valuation that sits quite comfortably around $500bn. But I feel like a nut when I write that. So instead I used the numbers I did earlier in the conversation: say his stocks etc are worth market (even though he is the greatest stock picker ever), his cash is worth 50% (because I don't buy equity to get cash/FI returns and he has stated a desire to hold in excess of 20 fallow cash), and that his incredible portfolio of regulated and advantaged businesses are worth a tiny bit more than the historical market multiple at a time that interest rates have never been lower. And that gets me to $430bn. These are all very reasonable and conservative assumptions in my view the only scandalous thing being that I have ignored Float and DT liabilities.
thepupil Posted September 5, 2015 Posted September 5, 2015 I always add back the DTL. I said I eagerly await insurance losses (because it would lead to market share growth and industry stress), not in fear With respect to the float, I don't think discounting for the working capital requirement is retarded. Your tone seems a bit angry. We both own the stock; you are more bullish than I. It's beer time
rb Posted September 5, 2015 Posted September 5, 2015 What do you guys think of the following simple valuation for the ultra longterm equity investor: 1. The stock portfolio (plus Heinz, Bac, converts, preferreds etc) is worth what it's worth. The cash and IG fixed income is worth 50% of gaap but in any case the discount to be a minimum of $25bn. 2. Total operating income has the interest, dividends, gains derived from the above assets removed. All of the remainder (including an averaged number for the insurance underwriting gains) is then capitalized at a rate that makes sense to the investor keeping in mind that with full retention of earnings BRK has historically grown these earnings at a CAGR of 20%, about double the long term returns of the market. 1 + 2 are then added together and are the total equity value for shareholders. (No subtractions of DTL or Float.) *Note on Float. If float grows over time then the above undervalues the company. And If float declines Buffett wrote in this year's report that it would do so very gradually and probably not any more than 3% per annum. Dear Simian, I would call you baboon but I think that would be rude. It's hard with your handle. I agree with your idea of splitting off insurance from the operating subs and valuing them separately. Though even in insurance geico should probably split off and valued differently still. What I do not agree with is your discounts on cash and FI. A discount may be appropriate for the 20 billion that will not be deployed but nor for the rest. To apply a discount you must assume that the funds will be deployed in a manner that destroys value. This is not the case of Berkshire. They're not some tech company keeping idle cash stashed offshore. Nor are they the kind of company that does "strategic acquisitions" at lofty premiums. Actually I could argue that $1 of cash in the hands of Berkshire is worth more than $1. Because I believe in conservativism I will not do that. But I would find it very hard to make the case that $1 in the hands on Berkshire is worth 70 cents and much harder still to make the case that it's worth 50 cents.
thepupil Posted September 5, 2015 Posted September 5, 2015 Well at one point Berkshire had big investments in the railroads before fully taking BNSF over. So that is another example of perverse effects of cross over because his BNSF shares became an Op co and he sold his non-BNSF railroad shares to partially fund. Also he sold some JNJ to fund if memory serves...but the JNJ had only been bought a year or two before so it was the disinvestment of a recent investment. And you're right there was share issuance but that has been taken into account because I was using investments per share numbers. I hope you don't think that I expect 20% of the future OR that subsidizing might not happen in the future. Maybe PCP and and Duracell/PG in 2015 will be the beginning of a subsidizing trend. I just think that so far the historical record is incredible and that there really is no evidence of this earnings growth having been artificial or built on the back of a partial liquidation. What you say regarding the insurance is something that has confused me too. So far we have 12 years of underwriting profits cumulating to 24 billion. Float hasn't been a liability, it has been a monumental asset. And yet we all sit there like lemmings subtracting it from book and then making our little adjustments. It's retarded. And yet as you say we all live in fear that one day we'll wake up to horrendous losses, although Buffett, who know better than we, says that a monumental catastrophe event will be very manageable: Berkshire would likely be "significantly profitable in a 250bn catastrophe year". Well I'm not sure exactly what "significantly" means but I'm guessing that it would probably not be enough to eat away more than half of the cumulative underwriting profits booked so far. So even after such an event the historical record would show that not only was the float a growing free source of money but that it had still made money although not quite as much. We also keep subtracting out DTL, even though hardly anything of significance has ever been booked in this area and Buffett has said that his big holdings are to be held forever. But we subtract it out and then make our little adjustments. It's retarded. Maybe we can say it has an inhibiting cost - perhaps Warren would have sold KO in '98 if he weren't horrified at the capital gains that would have come due. Thats a cost. But no reasonable person would put it anywhere close to the number we subtract from assets to get equity book. There may however be unannounced examples where the disincentive of taxes encouraged Buffett to hold a position which he was tempted to sell and it subsequently did better than expected. In that case DTL would have been an asset. In the valuation I did a few pages ago I took out DTL and Float. I wanted to apply a little Occams razor. Let's not fool around with book and then make lots of little adjustments. I also used an 18 PE on the Op co's NI. But obviously as you well know if they grow at 20% merely on retained earnings and incremental debt they are worth more than that. If the future resembles the recent past (last 15 years) I look at Berkshire and see a perfectly reasonable way to arrive at an equity valuation that sits quite comfortably around $500bn. But I feel like a nut when I write that. So instead I used the numbers I did earlier in the conversation: say his stocks etc are worth market (even though he is the greatest stock picker ever), his cash is worth 50% (because I don't buy equity to get cash/FI returns and he has stated a desire to hold in excess of 20 fallow cash), and that his incredible portfolio of regulated and advantaged businesses are worth a tiny bit more than the historical market multiple at a time that interest rates have never been lower. And that gets me to $430bn. These are all very reasonable and conservative assumptions in my view the only scandalous thing being that I have ignored Float and DT liabilities. Sorry but I feel the need to defend myself a little here... I think slide 9 illustrates the increased size of operating earnings relative to the insurance/investment related earnings quite nicely. The biggest jump in non-insurance earnings come from big acquisitions (most notable BNSF) which was funded with already owned BNSF stock, cash that was FAR more than the previous year's operating earnings (though to your point he borrowed 1/2 of the $16B of cash) and Berkshire stock. They bought lubrizol for $9B a little later which was like 100% of non insurance operating earnings. They've made big purchases in utilities, far more than they could have if BE was separate. Insurance/financial income has gone from well over 100% of non insurance income to about half (and continues to decrease with things like the $20B of cash that will be deployed in PCP (it's $30B cash, but they are borrowing $10b of that, I think) I really don't understand why you are saying "I'm way off and completely wrong" when all I'm saying is the ability for financial Berkshire to subsidize operating Berkshire has markedly decreased because operating Berkshire has grown so wonderfully in size and earnings power. This seems me to be a factual statement. Is it not true that if Berkshire did a similar size deal to BNSF, and a similar amount of already owned stock and cash was contributed from Berkshire financial side of things, that Bon insurance earnings would grow by a smaller % than in the past? I have never said this is a bad thing. It's a great thing. I, like warren, prefer the tax efficiency and control of wholly owned earnings streams to passively owned ones. And I think both sides will thrive and they have. The conversion of stocks to businesses and the diversion of investment and underwriting income into businesses is great. http://www.tilsonfunds.com/BRK.pdf
thepupil Posted September 5, 2015 Posted September 5, 2015 I realize I should let his go, but I'm in an airport so I've got a little free time. My whole point for blabbering on about this is that if you give the operating companies a really fat multiple (and its historical growth rate, if self funded, would indeed deserve a massively fat multiple), and you give full credit to investments / share you'll end up double counting. To use BNSF as an example (because BNSF basically doubled run rate operating earnings it's very important) BNSF consideration of $34B - 23% of already owned stock ($7.8B) - $16B cash, half borrowed - $10B stock (at the time Berkshire was probably 70/30 financial / operating in terms of value so let's call this $7B from financial. I think it's fair to say at least 1/2 came from financial side of Berkshire. Now there is nothing sinister here, the investments aren't being bled, they e still grown at a great rate, blah blah blah. But you just have to put the growth rates in context. Now in your valuation above, you apply an 18 multiple to the operating companies, so you are not double counting and despite violently disagreeing with practically everything I say you come out to a price target that is pretty close to mine. But if you were to say "the operating companies are with 30x because of their growth rate" then I'd say you're getting way aggressive and double counting. You aren't saying that though.
thefatbaboon Posted September 5, 2015 Posted September 5, 2015 I disagreed with your version of the last 15 years as implying that the investments per share have been used up to support earnings. I don't think that is right even in absolute terms when taken in aggregate for the period. And I think whether you agree with that or not the undeniable point so far (and for me the critical point for the method i used to value BRK) is that the Investments per share have grown at a comparable rate to the S&P during a period when OP earnings grew at a 20% cagr. So even if they did subsidize they did so without bringing results below the S&P. Pretty sure that's just fact. And it's important to me because as you point out I just valued the investments per share at market. And made a separate valuation for Op earnings. If you were correct that would of course be wrong - one would have to penalize one to subsidize the other. You may well become right in the (very near) future. Indeed, I think you raise a very valid concern to be looked at come the end of the decade. Did the current underperformance of the investments and reallocations for PC, Duracell continue. But so far I don't think there is the evidence - even including the BNSF period. That being said we're focusing on a strange distinction. At some point most of the current equity Investments may well end up consolidated. Apologies if i came across aggressive or grumpy. Really no offense intended - it's just the way I write. And my frustration is in many ways at myself. I've been obsessed with BRK and WB for 20 years now. And for many many years I have, I think, approached the business wrong. All this book value stuff is very tricky for the simple reason that a good, predictable free cash flowing asset that's funded by a good, cheap/free , source of growing leverage does not lend itself well to capitalization. It's almost impossible to not be too conservative. And this confusion is just further compounded by the various accounting conventions. I think BV anchoring costs shareholders in other ways too. For example, Berkshire should continuously compare share repurchases to acquisitions of investments and businesses. IBM, PCP, NV, Altalink...I don't know the future but I would wager that repurchasing BRK at prevailing prices even though they were over 1.1 or 1.2BV would have been a meaningfully better risk-adjusted use of capital. They could have repurchased 20% of the outstanding shares, and thus increased intrinsic value per share by 25%. Instead if one follows this BV heuristic the repurchases made over book value reduce BVPS so they damage WB's amazing record - even if they are IV accretive! I pray we get rid of the book value column. It should swap places with "intrinsic value today and tomorrow". Bring that to the front and send BV to the back of the report.
Guest longinvestor Posted September 5, 2015 Posted September 5, 2015 I disagreed with your version of the last 15 years as implying that the investments per share have been used up to support earnings. I don't think that is right even in absolute terms when taken in aggregate for the period. And I think wpphether you agree with that or not the undeniable point so far (and for me the critical point for the method i used to value BRK) is that the Investments per share have grown at a comparable rate to the S&P during a period when OP earnings grew at a 20% cagr. So even if they did subsidize they did so without bringing results below the S&P. Pretty sure that's just fact. And it's important to me because as you point out I just valued the investments per share at market. And made a separate valuation for Op earnings. If you were correct that would of course be wrong - one would have to penalize one to subsidize the other. You may well become right in the (very near) future. Indeed, I think you raise a very valid concern to be looked at come the end of the decade. Did the current underperformance of the investments and reallocations for PC, Duracell continue. But so far I don't think there is the evidence - even including the BNSF period. That being said we're focusing on a strange distinction. At some point most of the current equity Investments may well end up consolidated. Apologies if i came across aggressive or grumpy. Really no offense intended - it's just the way I write. And my frustration is in many ways at myself. I've been obsessed with BRK and WB for 20 years now. And for many many years I have, I think, approached the business wrong. All this book value stuff is very tricky for the simple reason that a good, predictable free cash flowing asset that's funded by a good, cheap/free , source of growing leverage does not lend itself well to capitalization. It's almost impossible to not be too conservative. And this confusion is just further compounded by the various accounting conventions. I think BV anchoring costs shareholders in other ways too. For example, Berkshire should continuously compare share repurchases to acquisitions of investments and businesses. IBM, PCP, NV, Altalink...I don't know the future but I would wager that repurchasing BRK at prevailing prices even though they were over 1.1 or 1.2BV would have been a meaningfully better risk-adjusted use of capital. They could have repurchased 20% of the outstanding shares, and thus increased intrinsic value per share by 25%. Instead if one follows this BV heuristic the repurchases made over book value reduce BVPS so they damage WB's amazing record - even if they are IV accretive! I pray we get rid of the book value column. It should swap places with "intrinsic value today and tomorrow". Bring that to the front and send BV to the back of the report. Mathematically it is not possible for them to buy 20% of the share float in quick time. About 500 shares trade daily, it would take 660 trading days. For this reason, they need "single large transactions". Buffett's letter talks about that one day, 10 to 20 years from now when they may be unable to deploy capital intelligently. I believe that this frames the context for buybacks. Between their monumental patience, the near certainty of market folly, the right choice will be made. I bet there is no hand wringing going on at Omaha. That is for message boards!
alwaysinvert Posted September 5, 2015 Posted September 5, 2015 I disagreed with your version of the last 15 years as implying that the investments per share have been used up to support earnings. I don't think that is right even in absolute terms when taken in aggregate for the period. And I think wpphether you agree with that or not the undeniable point so far (and for me the critical point for the method i used to value BRK) is that the Investments per share have grown at a comparable rate to the S&P during a period when OP earnings grew at a 20% cagr. So even if they did subsidize they did so without bringing results below the S&P. Pretty sure that's just fact. And it's important to me because as you point out I just valued the investments per share at market. And made a separate valuation for Op earnings. If you were correct that would of course be wrong - one would have to penalize one to subsidize the other. You may well become right in the (very near) future. Indeed, I think you raise a very valid concern to be looked at come the end of the decade. Did the current underperformance of the investments and reallocations for PC, Duracell continue. But so far I don't think there is the evidence - even including the BNSF period. That being said we're focusing on a strange distinction. At some point most of the current equity Investments may well end up consolidated. Apologies if i came across aggressive or grumpy. Really no offense intended - it's just the way I write. And my frustration is in many ways at myself. I've been obsessed with BRK and WB for 20 years now. And for many many years I have, I think, approached the business wrong. All this book value stuff is very tricky for the simple reason that a good, predictable free cash flowing asset that's funded by a good, cheap/free , source of growing leverage does not lend itself well to capitalization. It's almost impossible to not be too conservative. And this confusion is just further compounded by the various accounting conventions. I think BV anchoring costs shareholders in other ways too. For example, Berkshire should continuously compare share repurchases to acquisitions of investments and businesses. IBM, PCP, NV, Altalink...I don't know the future but I would wager that repurchasing BRK at prevailing prices even though they were over 1.1 or 1.2BV would have been a meaningfully better risk-adjusted use of capital. They could have repurchased 20% of the outstanding shares, and thus increased intrinsic value per share by 25%. Instead if one follows this BV heuristic the repurchases made over book value reduce BVPS so they damage WB's amazing record - even if they are IV accretive! I pray we get rid of the book value column. It should swap places with "intrinsic value today and tomorrow". Bring that to the front and send BV to the back of the report. Mathematically it is not possible for them to buy 20% of the share float in quick time. About 500 shares trade daily, it would take 660 trading days. For this reason, they need "single large transactions". Buffett's letter talks about that one day, 10 to 20 years from now when they may be unable to deploy capital intelligently. I believe that this frames the context. Could they not buy stock from the Gates foundation? It would be a win-win. The foundation gets rid of stock in an easier/cheaper/faster way and BRK gets a big chunk bought back at a cheap price, also while not disturbing the market price during. It also has the upside of not taking advantage of a badly informed owner.
Guest longinvestor Posted September 5, 2015 Posted September 5, 2015 I disagreed with your version of the last 15 years as implying that the investments per share have been used up to support earnings. I don't think that is right even in absolute terms when taken in aggregate for the period. And I think wpphether you agree with that or not the undeniable point so far (and for me the critical point for the method i used to value BRK) is that the Investments per share have grown at a comparable rate to the S&P during a period when OP earnings grew at a 20% cagr. So even if they did subsidize they did so without bringing results below the S&P. Pretty sure that's just fact. And it's important to me because as you point out I just valued the investments per share at market. And made a separate valuation for Op earnings. If you were correct that would of course be wrong - one would have to penalize one to subsidize the other. You may well become right in the (very near) future. Indeed, I think you raise a very valid concern to be looked at come the end of the decade. Did the current underperformance of the investments and reallocations for PC, Duracell continue. But so far I don't think there is the evidence - even including the BNSF period. That being said we're focusing on a strange distinction. At some point most of the current equity Investments may well end up consolidated. Apologies if i came across aggressive or grumpy. Really no offense intended - it's just the way I write. And my frustration is in many ways at myself. I've been obsessed with BRK and WB for 20 years now. And for many many years I have, I think, approached the business wrong. All this book value stuff is very tricky for the simple reason that a good, predictable free cash flowing asset that's funded by a good, cheap/free , source of growing leverage does not lend itself well to capitalization. It's almost impossible to not be too conservative. And this confusion is just further compounded by the various accounting conventions. I think BV anchoring costs shareholders in other ways too. For example, Berkshire should continuously compare share repurchases to acquisitions of investments and businesses. IBM, PCP, NV, Altalink...I don't know the future but I would wager that repurchasing BRK at prevailing prices even though they were over 1.1 or 1.2BV would have been a meaningfully better risk-adjusted use of capital. They could have repurchased 20% of the outstanding shares, and thus increased intrinsic value per share by 25%. Instead if one follows this BV heuristic the repurchases made over book value reduce BVPS so they damage WB's amazing record - even if they are IV accretive! I pray we get rid of the book value column. It should swap places with "intrinsic value today and tomorrow". Bring that to the front and send BV to the back of the report. Mathematically it is not possible for them to buy 20% of the share float in quick time. About 500 shares trade daily, it would take 660 trading days. For this reason, they need "single large transactions". Buffett's letter talks about that one day, 10 to 20 years from now when they may be unable to deploy capital intelligently. I believe that this frames the context. Could they not buy stock from the Gates foundation? It would be a win-win. The foundation gets rid of stock in an easier/cheaper/faster way and BRK gets a big chunk bought back at a cheap price, also while not disturbing the market price during. It also has the upside of not taking advantage of a badly informed owner. Yes, Gates foundation could be a "single large transaction", but surely maximizing the benefit to the charitable work takes priority for GF over BRK shareholders! So could estate transactions like the one in 2011. Again, it won't be a tragedy if they are forced to choose dividends over buybacks!
thefatbaboon Posted September 5, 2015 Posted September 5, 2015 I disagreed with your version of the last 15 years as implying that the investments per share have been used up to support earnings. I don't think that is right even in absolute terms when taken in aggregate for the period. And I think wpphether you agree with that or not the undeniable point so far (and for me the critical point for the method i used to value BRK) is that the Investments per share have grown at a comparable rate to the S&P during a period when OP earnings grew at a 20% cagr. So even if they did subsidize they did so without bringing results below the S&P. Pretty sure that's just fact. And it's important to me because as you point out I just valued the investments per share at market. And made a separate valuation for Op earnings. If you were correct that would of course be wrong - one would have to penalize one to subsidize the other. You may well become right in the (very near) future. Indeed, I think you raise a very valid concern to be looked at come the end of the decade. Did the current underperformance of the investments and reallocations for PC, Duracell continue. But so far I don't think there is the evidence - even including the BNSF period. That being said we're focusing on a strange distinction. At some point most of the current equity Investments may well end up consolidated. Apologies if i came across aggressive or grumpy. Really no offense intended - it's just the way I write. And my frustration is in many ways at myself. I've been obsessed with BRK and WB for 20 years now. And for many many years I have, I think, approached the business wrong. All this book value stuff is very tricky for the simple reason that a good, predictable free cash flowing asset that's funded by a good, cheap/free , source of growing leverage does not lend itself well to capitalization. It's almost impossible to not be too conservative. And this confusion is just further compounded by the various accounting conventions. I think BV anchoring costs shareholders in other ways too. For example, Berkshire should continuously compare share repurchases to acquisitions of investments and businesses. IBM, PCP, NV, Altalink...I don't know the future but I would wager that repurchasing BRK at prevailing prices even though they were over 1.1 or 1.2BV would have been a meaningfully better risk-adjusted use of capital. They could have repurchased 20% of the outstanding shares, and thus increased intrinsic value per share by 25%. Instead if one follows this BV heuristic the repurchases made over book value reduce BVPS so they damage WB's amazing record - even if they are IV accretive! I pray we get rid of the book value column. It should swap places with "intrinsic value today and tomorrow". Bring that to the front and send BV to the back of the report. Mathematically it is not possible for them to buy 20% of the share float in quick time. About 500 shares trade daily, it would take 660 trading days. For this reason, they need "single large transactions". Buffett's letter talks about that one day, 10 to 20 years from now when they may be unable to deploy capital intelligently. I believe that this frames the context for buybacks. Between their monumental patience, the near certainty of market folly, the right choice will be made. I bet there is no hand wringing going on at Omaha. That is for message boards! I never know when people are joking. I probably have to assume it's not possible to be on here for all those hundreds of posts and not know that BRK also has b shares that trade. Apologies in advance if i'm being thick and you're just being funny. 20% of BRK is approx 500m B shares. About 4m B shares and 300 A shares trade daily. Approx 4.5m B equivalents. 240 trading days p a. So 1.08bn shares a year. The first IBM share bought Q1 2011. We are now (PCP) Q3 2015. So 4 and half years. So approx 4.9bn shares have traded over the period. So in order to get 500m Berkshire would have been in the market buying 10% vol.
thefatbaboon Posted September 5, 2015 Posted September 5, 2015 What do you guys think of the following simple valuation for the ultra longterm equity investor: 1. The stock portfolio (plus Heinz, Bac, converts, preferreds etc) is worth what it's worth. The cash and IG fixed income is worth 50% of gaap but in any case the discount to be a minimum of $25bn. 2. Total operating income has the interest, dividends, gains derived from the above assets removed. All of the remainder (including an averaged number for the insurance underwriting gains) is then capitalized at a rate that makes sense to the investor keeping in mind that with full retention of earnings BRK has historically grown these earnings at a CAGR of 20%, about double the long term returns of the market. 1 + 2 are then added together and are the total equity value for shareholders. (No subtractions of DTL or Float.) *Note on Float. If float grows over time then the above undervalues the company. And If float declines Buffett wrote in this year's report that it would do so very gradually and probably not any more than 3% per annum. Dear Simian, I would call you baboon but I think that would be rude. It's hard with your handle. I agree with your idea of splitting off insurance from the operating subs and valuing them separately. Though even in insurance geico should probably split off and valued differently still. What I do not agree with is your discounts on cash and FI. A discount may be appropriate for the 20 billion that will not be deployed but nor for the rest. To apply a discount you must assume that the funds will be deployed in a manner that destroys value. This is not the case of Berkshire. They're not some tech company keeping idle cash stashed offshore. Nor are they the kind of company that does "strategic acquisitions" at lofty premiums. Actually I could argue that $1 of cash in the hands of Berkshire is worth more than $1. Because I believe in conservativism I will not do that. But I would find it very hard to make the case that $1 in the hands on Berkshire is worth 70 cents and much harder still to make the case that it's worth 50 cents. You might be right. That 50% too much. My thinking was $20bn on hand as said by Buffett, which knowing him will almost certainly be a bit more, and $5bn floating around the subs as part of working capital. I also assumed that there would be some minimum amount of investment grade FI that he'd keep around. It's an estimate to be sure but I wouldn't be surprised if there's never less than $40bn unproductive cash/FI. Maybe I should just subtract $40bn instead of doing the 50% thing.
Guest longinvestor Posted September 5, 2015 Posted September 5, 2015 I disagreed with your version of the last 15 years as implying that the investments per share have been used up to support earnings. I don't think that is right even in absolute terms when taken in aggregate for the period. And I think wpphether you agree with that or not the undeniable point so far (and for me the critical point for the method i used to value BRK) is that the Investments per share have grown at a comparable rate to the S&P during a period when OP earnings grew at a 20% cagr. So even if they did subsidize they did so without bringing results below the S&P. Pretty sure that's just fact. And it's important to me because as you point out I just valued the investments per share at market. And made a separate valuation for Op earnings. If you were correct that would of course be wrong - one would have to penalize one to subsidize the other. You may well become right in the (very near) future. Indeed, I think you raise a very valid concern to be looked at come the end of the decade. Did the current underperformance of the investments and reallocations for PC, Duracell continue. But so far I don't think there is the evidence - even including the BNSF period. That being said we're focusing on a strange distinction. At some point most of the current equity Investments may well end up consolidated. Apologies if i came across aggressive or grumpy. Really no offense intended - it's just the way I write. And my frustration is in many ways at myself. I've been obsessed with BRK and WB for 20 years now. And for many many years I have, I think, approached the business wrong. All this book value stuff is very tricky for the simple reason that a good, predictable free cash flowing asset that's funded by a good, cheap/free , source of growing leverage does not lend itself well to capitalization. It's almost impossible to not be too conservative. And this confusion is just further compounded by the various accounting conventions. I think BV anchoring costs shareholders in other ways too. For example, Berkshire should continuously compare share repurchases to acquisitions of investments and businesses. IBM, PCP, NV, Altalink...I don't know the future but I would wager that repurchasing BRK at prevailing prices even though they were over 1.1 or 1.2BV would have been a meaningfully better risk-adjusted use of capital. They could have repurchased 20% of the outstanding shares, and thus increased intrinsic value per share by 25%. Instead if one follows this BV heuristic the repurchases made over book value reduce BVPS so they damage WB's amazing record - even if they are IV accretive! I pray we get rid of the book value column. It should swap places with "intrinsic value today and tomorrow". Bring that to the front and send BV to the back of the report. Mathematically it is not possible for them to buy 20% of the share float in quick time. About 500 shares trade daily, it would take 660 trading days. For this reason, they need "single large transactions". Buffett's letter talks about that one day, 10 to 20 years from now when they may be unable to deploy capital intelligently. I believe that this frames the context for buybacks. Between their monumental patience, the near certainty of market folly, the right choice will be made. I bet there is no hand wringing going on at Omaha. That is for message boards! I never know when people are joking. I probably have to assume it's not possible to be on here for all those hundreds of posts and not know that BRK also has b shares that trade. Apologies in advance if i'm being thick and you're just being funny. 20% of BRK is approx 500m B shares. About 4m B shares and 300 A shares trade daily. Approx 4.5m B equivalents. 240 trading days p a. So 1.08bn shares a year. The first IBM share bought Q1 2011. We are now (PCP) Q3 2015. So 4 and half years. So approx 4.9bn shares have traded over the period. So in order to get 500m Berkshire would have been in the market buying 10% vol. My bad, missed the B share trading volume. All the same, are we not saying the same thing, it will take a long time for them to buy 20% back at 10% of daily trading. Also, when they report that they bought back, won't the market bid the shares up and away and thus out of their buying range?
thefatbaboon Posted September 5, 2015 Posted September 5, 2015 long, It might cause a run up but I think that it's only when you design your buyback the way Warren has. If the buyback was just there in the background at a floating level with no fixed level then i don't think it has the same effect. Imagine none of this hullabaloo about 1.1 or 1.2bv being "well below intrinsic value". Intrinsic value isn't so static. One has to do something: build cash, buy out owners or add more business/investments. There seems no logical reason to pin oneself into a corner about only buying at x multiple of book. Just lots of questions by BRK's allocator in chief: Shall I buy IBM or BRK or build cash? Shall I buy NV or BRK or build cash? Shall I buy PCP or BRK or build cash? Repurchasing at 2.5 times book would have been better than buying Dexter Shoe. And I would guess with some of the recent buys (IBM, NV, Alta, PCP (Not Heinz!)) we will find that the money would have been better spent on repurchases at say an average of 1.35 bv where it's been over the last 4 years. Warren made a nonsensical morality play out of the buyback for no discernible reason. He says he doesn't want to take advantage of a seller. Except that a well executed buyback would achieve completely the opposite: his bid would HELP any seller get a better price. And so long as he is not over paying, and thus damaging continuing partners, a share repo helps the seller get a better sale and the non seller get a better intrinsic value. I found his arguments in this area quite bizarre and I think it also damages his investees who he wants to encourage to repurchase their stock. I mean what does it imply about IBM?? Hi IBM, I will write long paragraph in my AR about how great your repurchase is, and every year I will mention how great it is that KO, AXP et al increase my look through percentage of their earnings via repurchase BUT I will also write at length how I don't want to take advantage of my lovely partners by repurchasing BRK shares. Apart from the fact that he is simply wrong I find it quite rude to his long term investees!
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