1.2x P/BV entry point

[rb]

Thank pupil.  Great analysis.  Based on your analysis it looks fairly compelling at these prices.

 

Looking through it, the only thing I see is you use a tax rate of 25%.  I see a 30% rate on the company as a whole, just wondering why you chose 25%?

Please explain why 30?

[no_free_lunch]

This is for most recent quarter.

 

Earnings before income tax : 5,846

Income Tax: 1,739

 

That works out to 29.7% tax rate.  I don't know the financials that well, maybe there is a reason for a lower rate on the operating income?

[thepupil]

For BNSF and BE, IRS depreciation is faster than GAAP depreciation.

 

this defers taxes and creates a difference in cash tax expense and GAAP tax expense, which is represented by an ever increasing deferred tax liability.

 

As long as BNSF and BE capex is greater than depreciation, this never "unwinds" and as long as BNSF and BE are investing at satisfactory returns, the capex needs are not a negative (and much of this is not "needs" but true growth in earnings power). There may be other, smaller, less important businesses within berkshire where the same dynamic is at play.

 

BE Energy 10-K (page 104 cash flow statement), in most recent year net income of $2.1B gets a nice $2.3B addback "deferred income taxes and amortization of investment tax credits"

https://www.bamsec.com/filing/108131615000003?cik=1081316

 

BNSF 10-K (page 19)

https://www.bamsec.com/filing/93461215000005?cik=934612

Deferred income taxes add back of $900MM on NI of $3.8B

 

here is a good article, explains the P,P&E related DTL nicely

http://seekingalpha.com/article/2428045-how-buffett-is-changing-the-future-of-berkshires-float-from-insurance-to-uncle-sam

 

the 25% may have been a little "finger in the air" but it's what i recall from my past analyses of the two companies. I do not keep detailed models on these subs, admittedly. But a full 35% or 30% is not correct.

 

 

Outside of the operating companies:

Appreciation of equities causes tax expense and no cash taxes and an increase in DTL. Berkshire does not sell stock (mostly) and does not pay taxes when they do (they tend to sell some losers).

 

At Berkshire level (which combines the BE/BNSF Accelerated depreciation/PP&E related DTL with the equity appreciation DTL, you can see cash taxes as % of income tax of 50-60%)

cash paid for taxes last 3 years: $4B, $5.4B, $4.7B

Tax expense:                            $7.9B, $8.9B, $6.9B

 

EDIT: BE's tax rate (just using income tax expense, not cash) is just plain low in general (9-22% over the past 3 yrs)

BNSF's cash tax rate was 22% last year. the rest of the non-insurance subs bring up the average but 25% seems like a good estimate.

[no_free_lunch]

Thanks! I  appreciate the detailed response.  Nothing to add, I stand corrected.

[rb]

Or, you can take Buffett comments in this year's AR.

 

If an investor’s entry point into

Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares

have occasionally reached – it may well be many years before the investor can realize a profit. In other

words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire

is not exempt from this truth.

 

Purchases of Berkshire that investors make at a price modestly above the level at which the company

would repurchase its shares, however, should produce gains within a reasonable period of time. Berkshire’s

directors will only authorize repurchases at a price they believe to be well below intrinsic value.

 

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

Vinod,

 

I think you hit the nail squarely on the head. Their explanation fit very nicely with my estimate of Berkshires IV. But this was the most clear estimate of Berkshire's IV yet from Buffett and Munger. I was shocked to see it spelled out so clearly when they've been playing can and mouse games for years regarding the IV.

 

Just to share another insight. It was an off the cuff response from Buffett at an annual meeting a few years ago. There were questions about the value of the smaller BRK subs. Buffett came out and said that they're worth about 14x pre-tax earnings. I was shocked to hear such a direct answer about their value - it was late in the meeting so maybe he was tires. Then I went home and dove deep and found that it's true.

 

I think these days maybe they're trying to obfuscate the valuation of the smaller subs by combining them with insurance.

 

rb,

 

Can you share any insight into what subs Buffett is talking about? This is the first time I am hearing about this, so any additional info you can share around this would be great.

 

Vinod

Vinod,

 

Sorry to get back to you so many pages later in this post but real life intervened. I went back to my notes and that comment was at the 2012 meeting and he was referring to the small subs so ex BNS, BHE, Finance, Insurance, Lubrizol, etc. Basically he was saying the "Other" divisions were worth 14x pre tax.

[rb]

Hi, I am new here but thought rb asked a relevant question that demands a thoughtful answer - how come BRK has remained undervalued even though Buffett has been universally considered the best investing mind for decades and the long-term record of BRK is clear for all to see.

 

I recall hearing Michael Price sort of laughing at the idea that BRK is cheap and saying along the lines that how can it be cheap when tens of thousands line up in Omaha to worship Mr. Buffett year in and year out.

 

I own the stock and I am not questioning if BRK is undervalued. I am more curious about what factors may have led to the market choosing to neglect the stock so often despite its apparent merits.

Honestly I don't know why. I've read a lot of Michael Price had to say I even read the hard to find book of his most important apprentice - Seth Klarman. There's a lot of market game theory going on in there that I'm maybe not smart enough to understand. It's a lot of if you're thinking that what is the other person thinking. If people are coming to Omaha why is BRK undervalued.

 

I'm a simpler man than that. I try to think about valuation and what IV is. If I can buy something cheap I'll do it. I won't loose much sleep about the idiot that sells it to me cheap. That's his decision. Though if I knew what some of my counterparties were I would spring money for postage and a thank you card.

[vinod1]

Or, you can take Buffett comments in this year's AR.

 

If an investor’s entry point into

Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares

have occasionally reached – it may well be many years before the investor can realize a profit. In other

words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire

is not exempt from this truth.

 

Purchases of Berkshire that investors make at a price modestly above the level at which the company

would repurchase its shares, however, should produce gains within a reasonable period of time. Berkshire’s

directors will only authorize repurchases at a price they believe to be well below intrinsic value.

 

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

Vinod,

 

I think you hit the nail squarely on the head. Their explanation fit very nicely with my estimate of Berkshires IV. But this was the most clear estimate of Berkshire's IV yet from Buffett and Munger. I was shocked to see it spelled out so clearly when they've been playing can and mouse games for years regarding the IV.

 

Just to share another insight. It was an off the cuff response from Buffett at an annual meeting a few years ago. There were questions about the value of the smaller BRK subs. Buffett came out and said that they're worth about 14x pre-tax earnings. I was shocked to hear such a direct answer about their value - it was late in the meeting so maybe he was tires. Then I went home and dove deep and found that it's true.

 

I think these days maybe they're trying to obfuscate the valuation of the smaller subs by combining them with insurance.

 

rb,

 

Can you share any insight into what subs Buffett is talking about? This is the first time I am hearing about this, so any additional info you can share around this would be great.

 

Vinod

Vinod,

 

Sorry to get back to you so many pages later in this post but real life intervened. I went back to my notes and that comment was at the 2012 meeting and he was referring to the small subs so ex BNS, BHE, Finance, Insurance, Lubrizol, etc. Basically he was saying the "Other" divisions were worth 14x pre tax.

 

rb,

 

Thanks for the info.

 

Vinod

[karthikpm]

http://blogs.rhsmith.umd.edu/davidkass/uncategorized/berkshire-hathaway-is-undervalued-on-a-pricebook-value-basis/

[JBTC]

Hi, I am new here but thought rb asked a relevant question that demands a thoughtful answer - how come BRK has remained undervalued even though Buffett has been universally considered the best investing mind for decades and the long-term record of BRK is clear for all to see.

 

I recall hearing Michael Price sort of laughing at the idea that BRK is cheap and saying along the lines that how can it be cheap when tens of thousands line up in Omaha to worship Mr. Buffett year in and year out.

 

I own the stock and I am not questioning if BRK is undervalued. I am more curious about what factors may have led to the market choosing to neglect the stock so often despite its apparent merits.

Honestly I don't know why. I've read a lot of Michael Price had to say I even read the hard to find book of his most important apprentice - Seth Klarman. There's a lot of market game theory going on in there that I'm maybe not smart enough to understand. It's a lot of if you're thinking that what is the other person thinking. If people are coming to Omaha why is BRK undervalued.

 

I'm a simpler man than that. I try to think about valuation and what IV is. If I can buy something cheap I'll do it. I won't loose much sleep about the idiot that sells it to me cheap. That's his decision. Though if I knew what some of my counterparties were I would spring money for postage and a thank you card.

 

I am totally guessing there - perhaps while most people still revere WB for his past record and broadly appreciate his thinking on investing and the world, they are not convinced WB can do a lot to lift BRK's performance in coming years. This thinking might be based on the fact that his large public holdings have not performed too well recently (IBM probably has done the most harm) and BRK's size may have become too big.

 

The valuation has become cheap as a result.

 

 

[physdude]

Hi, I am new here but thought rb asked a relevant question that demands a thoughtful answer - how come BRK has remained undervalued even though Buffett has been universally considered the best investing mind for decades and the long-term record of BRK is clear for all to see.

 

I recall hearing Michael Price sort of laughing at the idea that BRK is cheap and saying along the lines that how can it be cheap when tens of thousands line up in Omaha to worship Mr. Buffett year in and year out.

 

I own the stock and I am not questioning if BRK is undervalued. I am more curious about what factors may have led to the market choosing to neglect the stock so often despite its apparent merits.

Honestly I don't know why. I've read a lot of Michael Price had to say I even read the hard to find book of his most important apprentice - Seth Klarman. There's a lot of market game theory going on in there that I'm maybe not smart enough to understand. It's a lot of if you're thinking that what is the other person thinking. If people are coming to Omaha why is BRK undervalued.

 

I'm a simpler man than that. I try to think about valuation and what IV is. If I can buy something cheap I'll do it. I won't loose much sleep about the idiot that sells it to me cheap. That's his decision. Though if I knew what some of my counterparties were I would spring money for postage and a thank you card.

 

I am totally guessing there - perhaps while most people still revere WB for his past record and broadly appreciate his thinking on investing and the world, they are not convinced WB can do a lot to lift BRK's performance in coming years. This thinking might be based on the fact that his large public holdings have not performed too well recently (IBM probably has done the most harm) and BRK's size may have become too big.

 

The valuation has become cheap as a result.

 

What I find strange is that the market is ignoring the much bigger home run in Kraft-Heinz and the excellent asset swaps (PG shares for Duracell, PSX shares for Lubrizol Specialty Products etc.) that make capital gains taxes essentially go away given that these are enabled due to the presence of WB. It is true that the public stock portfolio's performance could have been better but it looks to me that these people are missing the forest for the trees. I find it amazing that the stock is now trading at lower prices than at the same time last year given the large new additions to IV that have taken place (KHC, asset swaps, more retained earnings  and even a decent increase in float). Too bad the buybacks are restricted to 1.2xBV and lower as buybacks now would almost definitely increase IV in my opinion.

[rb]

Hi, I am new here but thought rb asked a relevant question that demands a thoughtful answer - how come BRK has remained undervalued even though Buffett has been universally considered the best investing mind for decades and the long-term record of BRK is clear for all to see.

 

I recall hearing Michael Price sort of laughing at the idea that BRK is cheap and saying along the lines that how can it be cheap when tens of thousands line up in Omaha to worship Mr. Buffett year in and year out.

 

I own the stock and I am not questioning if BRK is undervalued. I am more curious about what factors may have led to the market choosing to neglect the stock so often despite its apparent merits.

Honestly I don't know why. I've read a lot of Michael Price had to say I even read the hard to find book of his most important apprentice - Seth Klarman. There's a lot of market game theory going on in there that I'm maybe not smart enough to understand. It's a lot of if you're thinking that what is the other person thinking. If people are coming to Omaha why is BRK undervalued.

 

I'm a simpler man than that. I try to think about valuation and what IV is. If I can buy something cheap I'll do it. I won't loose much sleep about the idiot that sells it to me cheap. That's his decision. Though if I knew what some of my counterparties were I would spring money for postage and a thank you card.

 

I am totally guessing there - perhaps while most people still revere WB for his past record and broadly appreciate his thinking on investing and the world, they are not convinced WB can do a lot to lift BRK's performance in coming years. This thinking might be based on the fact that his large public holdings have not performed too well recently (IBM probably has done the most harm) and BRK's size may have become too big.

 

The valuation has become cheap as a result.

I keep hearing arguments about Warren being old and dying everywhere. However, if you look at the quick valuation I did earlier in the thread I used pretty pedestrian numbers. You don't need Warren to get that - any mediocre manager will get those. And I didn't include the insurance business. You get that as a gift. One could argue that my discount rate is too low but I think one should have a pretty good argument why that is.

 

Plus there are a lot of companies out there that are not run by Buffett. Should all of them have a be trading at a big discount to IV because of that?

[gary17]

RB

Do you have the link to your analysis handy?

 

Also, if interest rates are low, is that a good reason for using a low discount rate?

 

Thanks

[rb]

RB

Do you have the link to your analysis handy?

 

Also, if interest rates are low, is that a good reason for using a low discount rate?

 

Thanks

Gary

 

Yes, low interest rates imply low discount rates. I've used 8.5 for my little Berkshire exercise. I think that may be a bit high as well but hey it's probably around there. The discount rates also don't really change the conclusion unless you want to use some crazy high rates.

 

Here's my analysis that I've posted earlier. For those that read it already, sorry for the repetition.

 

So what would be owner earnings? BRK had 17.5B in pre tax op earnings. PCP had 2.4B. Let's call it 20 together. BRKs cash taxes have been around 19%. Let's say 20%. So that's 16B after tax.

 

Now, Berkshire's businesses are really good businesses. They will have growth. But let's assume a much more pedestrian rate of growth (without BRKs extraordinary CAPEX juice) of 5%. It's clear that even at that growth rate the economic depreciation at BRK is higher than the accounting one. So accounting depreciation is at 6.3B. Let's bump that to 8.5 - that would take down owner's earnings to $13.8B.

 

Now using a simple DDM with a 5% growth rate and a cost of equity of 8.5%, that gives a value to the operating side of 414B - 29% above the market cap plus you get the insurance business and the investments for free. If you want to use a 10% cost of equity (though that would be insane) then the operating business is worth 290. Either way you look at this thing it is severely undervalued. And this is based on just 5% growth rate.

[JBTC]

RB

Do you have the link to your analysis handy?

 

Also, if interest rates are low, is that a good reason for using a low discount rate?

 

Thanks

Gary

 

Yes, low interest rates imply low discount rates. I've used 8.5 for my little Berkshire exercise. I think that may be a bit high as well but hey it's probably around there. The discount rates also don't really change the conclusion unless you want to use some crazy high rates.

 

Here's my analysis that I've posted earlier. For those that read it already, sorry for the repetition.

 

So what would be owner earnings? BRK had 17.5B in pre tax op earnings. PCP had 2.4B. Let's call it 20 together. BRKs cash taxes have been around 19%. Let's say 20%. So that's 16B after tax.

 

Now, Berkshire's businesses are really good businesses. They will have growth. But let's assume a much more pedestrian rate of growth (without BRKs extraordinary CAPEX juice) of 5%. It's clear that even at that growth rate the economic depreciation at BRK is higher than the accounting one. So accounting depreciation is at 6.3B. Let's bump that to 8.5 - that would take down owner's earnings to $13.8B.

 

Now using a simple DDM with a 5% growth rate and a cost of equity of 8.5%, that gives a value to the operating side of 414B - 29% above the market cap plus you get the insurance business and the investments for free. If you want to use a 10% cost of equity (though that would be insane) then the operating business is worth 290. Either way you look at this thing it is severely undervalued. And this is based on just 5% growth rate.

 

On earnings of $13.8B, $414B equates to a multiple of 30x, and $290B equates to a multiple of 21x.

 

Does that make sense?

 

Perhaps if you apply your DDM to S&P500 and you can also conclude the whole market is very cheap.

 

I am not questioning BRK or S&P500 is cheap (possibly a little, unlikely a lot), but unsure of the implied multiple.

 

 

[rb]

On earnings of $13.8B, $414B equates to a multiple of 30x, and $290B equates to a multiple of 21x.

 

Does that make sense?

 

Perhaps if you apply your DDM to S&P500 and you can also conclude the whole market is very cheap.

 

I am not questioning BRK or S&P500 is cheap (possibly a little, unlikely a lot), but unsure of the implied multiple.

JBTC,

 

First of all, these are a bit of back of the envelope figures. Now, the 13.8B figure for Berkshire is owner's earnings. That accounts for CAPEX in excess of D&A to support growth. The reported earnings would be the $16B figure. That would give a multiple of about 26 at 8.5% discount rate and 18 at 10% discount rate. These are nice multiples but the businesses in Berkshire are also nice so they're not cheap.

 

As to applying this multiple to S&P, let's see.... I don't really wanna think about the S&P500 because that's a market value weighted index which has a number of distortions. Let's instead look at American business which the S&P500 is supposed to represent. Now inflation is running around 1.7% and real economic growth will probably be around 2%. So that gives a growth rate of about 3.7%. Add to that the fact that for American business owner earnings are around 70% of reported and plug it into the formula. What you get is a multiple of 15x at 8.5% discount rate and a multiple of 11.5x at 10% discount rate. That's not really out there.

[JBTC]

On earnings of $13.8B, $414B equates to a multiple of 30x, and $290B equates to a multiple of 21x.

 

Does that make sense?

 

Perhaps if you apply your DDM to S&P500 and you can also conclude the whole market is very cheap.

 

I am not questioning BRK or S&P500 is cheap (possibly a little, unlikely a lot), but unsure of the implied multiple.

JBTC,

 

First of all, these are a bit of back of the envelope figures. Now, the 13.8B figure for Berkshire is owner's earnings. That accounts for CAPEX in excess of D&A to support growth. The reported earnings would be the $16B figure. That would give a multiple of about 26 at 8.5% discount rate and 18 at 10% discount rate. These are nice multiples but the businesses in Berkshire are also nice so they're not cheap.

 

As to applying this multiple to S&P, let's see.... I don't really wanna think about the S&P500 because that's a market value weighted index which has a number of distortions. Let's instead look at American business which the S&P500 is supposed to represent. Now inflation is running around 1.7% and real economic growth will probably be around 2%. So that gives a growth rate of about 3.7%. Add to that the fact that for American business owner earnings are around 70% of reported and plug it into the formula. What you get is a multiple of 15x at 8.5% discount rate and a multiple of 11.5x at 10% discount rate. That's not really out there.

 

rb, just to play devil's advocate -

 

Right now the inflation is low and the US economic expansion is still soft, but taking a long view could the economy grow at 5% nominal? If so that number is more relevant.

 

So the owner earnings of American businesses were 30% less than reported. Could that have changed as well? It seems increasingly the US businesses are capital light - Apple, Google, Facebook...

 

It's hard for me to believe all of BRK's businesses are vastly superior to the market. Geico sure. But utilities? Railroad? They might be a little better but the difference is probably not huge.

 

For me the value of BRK still lies in WB doing great things occasionally and the returns from good businesses/stocks being leveraged by the float.

 

 

[Picasso]

For me the value of BRK still lies in WB doing great things occasionally and the returns from good businesses/stocks being leveraged by the float.

 

I think this is key.  Just look at the past five years of savvy WEB moves:

 

Getting BAC to give away massive amounts of shareholder returns to Berkshire.  Partnering with 3G to take Heinz private.  Partnering with 3G to fund QSR with very generous terms.  Partnering again with 3G to do a leveraged recap of Kraft.  Swapping assets tax-free with PG and PSX.  And there have been others.  Some of this is probably offset by weakness in large public positions like IBM.

 

Part of me is worried by the current quality of the large value drivers.  Berkshire was built on several decades of growth in GDP per capita where there were very large secular tailwinds behind Coke, Sees Candy, Kraft, Gillette, Heinz, etc.  But now you have a pretty sluggish outlook where some of those businesses true economic costs don't show up on the net income statement.  Or there is massive disruption coming up in some of those businesses.  Coke has spent years attaching their brand to happy moments, but it puts a very large financial burden on other parts of the economy with health care costs.  It just seems to me that it will be a big fight for the next ten or twenty years for those guys.  Maybe someone else is more confident that twenty years from now, Coke will be "guzzled down the throats" of many more consumers.  A big part of Berkshire is built around these not-so-great for taxpayers type businesses.

 

WEB has repeatedly stated that many of these businesses are permanently housed at Berkshire almost no matter what.  I don't think the quality of some of these businesses are as perpetually attractive versus twenty years ago.  So comparing multiples on Berkshire to the past is sort of irrelevant for me. 

 

If WEB passes away in the near future, isn't it realistic to think that you are going to miss out on a lot of the important deals that have occurred due to his presence?  Won't that affect the earnings trajectory?  I don't know what the stock price will be but I bet it's going to get close to 1.2-1.3x book or perhaps lower without WEB.

 

After all, WEB is simply one of a kind.  So far no one is even close to building up a 50-60 year track record like he has.  When he's gone, I need to adjust to the reality of a new Berkshire.  I don't know what kind of Berkshire that is yet, but I probably want to pay closer to book value to compensate for that new uncertainty. 

 

At the current size Berkshire is now very similar to something like Apple.  Float isn't going to compound like it has in the past.  You may have great performance in the future, but the businesses are at a scale that makes it hard to pay beyond 1.3x book or 13x earnings.  It's not even law of large numbers, it's dealing with a cyclical business which Berkshire is today more than ever before.

 

You've also had a very long run of positive insurance combined ratio results.  You always have a point where they have a few bad years.  I'd argue we're much closer now and while they will likely become stronger as a result, you can expect Berkshire stock to become less valuable because we don't know how long that may take.

 

In the end I think some investors are overly enthusiastic about the share price at 1.3-1.4x book.  It's probably priced for high single digit returns on the most probable outcome.  Or maybe a bit more.  As much as I would like to see it, I don't see the easy 15% returns.  And I own a fair amount of the stock.

 

I guess I'm just stating the general market worries about Berkshire, but I happen to think those worries justify a more moderate valuation.  Which is fine because you won't have to worry about selling your stock anytime soon.  It just seems like almost everyone else is happy to disregard the downside of buying in when the master capital allocator is near the end of a storied career and several years of positive insurance tailwind. 

 

The last thing I will note is the behavioral finance behind Berkshire.  We're all so used to Berkshire with WEB that it's hard to give it a proper valuation since it's so easy to assume his presence or Berkshire's performance will always be there.  The thought process of investors when he is gone will change how people value the stock and they will probably want to see results before paying a fully priced valuation. 

 

But who knows, it's time to get back to finding other undervalued securities....

[jay21]

Point 1: KO is borderline irrelevant to BRK, they only have ~10b of equity allocated to it after adjusting for deferred taxes. On a >300b value it is <3% probably. Much more important are BNSF, PCP, etc, which have great outlooks.

 

This is why BRK is so great. The money flows to the best opportunities. Think about the KO position more deeply. You have an asset that started out as ~1.5b and grew to ~15b. As the MV increases, he gets to write more float against the asset and redeploy those funds elsewhere. So while he hasn't sold, allocating more funds elsewhere has lowered the impact on growth. Also, deferred taxes keep increasing, which also leverages the position.

 

Point 2: I think T&T will do fine as deal makers. They already have done ResCap, PCP, PSX asset swap, etc.

 

Point 3: It's tough to say exactly what the returns are going to be going forward but high single digits would be my low end and 15% my high end.

[Jurgis]

Great points Picasso.

[thepupil]

Picasso, it's hard for me to understand why Berkshire's businesses deserve to trade 5 multiple points lower than the S&P (you mentioned 13X earnings). If you weight the multiple according to their composition (just using last 6 months), I get to 15.8X (2.2 lower than the S&P) because the railroads have experienced a big re-rating downwards (coal volumes decline, oil, general economy, etc.).

 

And I realize that when you plug in (S&P multiple) for large portions of it, you'll get a result that is close to S&P multiple, but 50% is BNSF and BE which have more precise comps. I don't really see any reason for 13X. Apple gets 80% of its profits from 1 thing. I can understand why some would discount that earnings stream more heavily than the S&P (no strong opinions on what that discount should be).

 

But 5 lower than S&P seems egregiously conservative.

 

And as someone mentioned, who cares about coke? He hasn't bought KO since like 1992, right? BNSF and BE together are worth at least 5.5X KO pre-tax.

 

Run rate post tax GAAP earnings for non insurance is $13-$14B

 

                % of operating earnings Market Multiple

railroad                         35%                         14    (UNP, CSX, NS trade around 14.5X, KSU at 20X)

manufacturing                 28%                         18    (S&P)

utility                                 14%                         17    (just looked at a few utes, seemed to be between 15 and 20X)

finance and financial         11%                         12    banks are around 10-12X, this is mostly the trailerpark manufacture and de facto  slumlord finance biz, which seems to be defensive and deserve decent

service and retailing         10%                         18    (S&P)

mclane                           3%                         18    (S&P)

weighted avg                                               15.8

 

 

[Picasso]

Sorry I was respectively referring to Apple as a cyclical but great business that trades at 13x. i wasn't referring to Berkshire in that aspect.

[Guest longinvestor]

Point 1: KO is borderline irrelevant to BRK, they only have ~10b of equity allocated to it after adjusting for deferred taxes. On a >300b value it is <3% probably. Much more important are BNSF, PCP, etc, which have great outlooks.

 

This is why BRK is so great. The money flows to the best opportunities. Think about the KO position more deeply. You have an asset that started out as ~1.5b and grew to ~15b. As the MV increases, he gets to write more float against the asset and redeploy those funds elsewhere. So while he hasn't sold, allocating more funds elsewhere has lowered the impact on growth. Also, deferred taxes keep increasing, which also leverages the position.

 

Point 2: I think T&T will do fine as deal makers. They already have done ResCap, PCP, PSX asset swap, etc.

 

Point 3: It's tough to say exactly what the returns are going to be going forward but high single digits would be my low end and 15% my high end.

 

That'll do! Especially since "going forward" is in all likelihood 20+ years. " That'd be "quite satisfactory" in Ben Graham's terms.

[Jurgis]

Picasso, it's hard for me to understand why Berkshire's businesses deserve to trade 5 multiple points lower than the S&P (you mentioned 13X earnings). If you weight the multiple according to their composition (just using last 6 months), I get to 15.8X (2.2 lower than the S&P) because the railroads have experienced a big re-rating downwards (coal volumes decline, oil, general economy, etc.).

 

"Deserve" is a wrong word. No, it probably does not "deserve". BRK is somewhat cheap while S&P is quite expensive at current multiples. So really the expectation is that S&P might rerate lower rather that BRK would rerate higher. Although some mix is possible.

 

In other words, I'm interested to buy BRK (or similar great/good business) at 13X, but I am not that interested to buy S&P at 18X.

[thepupil]

Picasso, it's hard for me to understand why Berkshire's businesses deserve to trade 5 multiple points lower than the S&P (you mentioned 13X earnings). If you weight the multiple according to their composition (just using last 6 months), I get to 15.8X (2.2 lower than the S&P) because the railroads have experienced a big re-rating downwards (coal volumes decline, oil, general economy, etc.).

 

"Deserve" is a wrong word. No, it probably does not "deserve". BRK is somewhat cheap while S&P is quite expensive at current multiples. So really the expectation is that S&P might rerate lower rather that BRK would rerate higher. Although some mix is possible.

 

In other words, I'm interested to buy BRK (or similar great/good business) at 13X, but I am not that interested to buy S&P at 18X.

 

well if you want to buy berkshire at 12X and with the investments for 30% discount to current price, and not pay any premium to book for the insurance (ie count the float fully), you'll have to wait for another 18% down. I'm personally not so patient. I think you are articulating that the S&P is absolutely expensive and that Berkshire is relatively cheap to the S&P.

 

I'm inclined to agree with that but something that has 18% downside to a pretty bearish scenario, to me, is absolutely cheap, low risk and compelling.

 

One funny thing is that Picasso mentioned he owns the stock. When I was the guy arguing for less bullish valuations, I also owned the stock...we need more negative thoughts from non-owners!!!

 

Bear (recession*) : 30% discount to investments ($112B) + Dry Powder ($15B) + 12X Post tax Operating Earnings ($171B) + Insurance Book ($-36B) = $262B  (18% downside, 110% of current book)

[Jurgis]

I'm not that patient either, though I might have dry powder if it gets there.

 

Take care