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Berkshire intrinsic value after Q3


shalab
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I'll take a stab at it.

 

From the 2008 annual report, WEB mentions that pre-tax operating earnings (ex-investment income & gains) of around $4,000 per share in both 2007 & 2008.  Assuming that is normalized, and applying what WEB would suggest is a reasonable multiple of 10 times, I get a value of $40,000 per share from operating subsidiaries (probably low-ball considering the economic climate and the prospective addition of BNI).

 

As at Q3 2009, investments per share were around $92,000.  These investments have come at no cost over time.  In fact, cost of float has been slightly negative, on average, over the last 11+ years (going back to and including 1998).

 

These two figures added together suggest an IV of $132,000 per share. 

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1.5 x bv < conservative intrinsic value < 1.7 x bv

 

so a range of 122 k to 138 K per A share is a conservative appraisal. Actual intrinsic is probably north of 150, particularly given the idle funds pouring into higher yielding BNI (the elephant catch) and despite wholly owned slow down.

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I get a value of $40,000 per share from operating subsidiaries

 

Somebody on this board recently (last 2 weeks) told us that Bill Gates thinks the operating subsidiaries are worth more than the equities portfolio at Berkshire.  Who was that boardmember?  I remember the comment, but I can't find it.

 

 

 

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I guess it was the Gates interview on BBC. It is @ the 2 minute mark that this comment is made. A good interview never the less.

 

http://news.bbc.co.uk/2/hi/business/8322950.stm

 

 

 

You're right, that's it.  Gates says the operating companies are now worth more than the "investment portfolio".

 

IV > 2x investments (according to Gates).  I guess that puts IV > 184,000 per share (according to Gates).

 

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It could be argued that he meant more value in acquiring entire businesses vs. buying portions via the stock market.

 

It would be nice to think the operating businesses had a higher value but that might mean normalized pre-tax operating profits of $13,000+ per share.  I am pretty sure they are nowhere near that mark, even in the rosiest of outlooks.

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Shalab, I think so too.

 

Looked at another way, much the same result appears.

 

Assume investments per share grow at 10% per annum (some from increasing float and other from after-tax investment results). Between $9 and $10 billion in investments is produced.

 

Take Shalab's $10 billion in pre-tax operating earnings, close to $7 billion after-tax.

 

These two figures add to book value as no new capital is required to earn them.  With these layup assumptions, book value grows by almost $16 billion in a normal year, or $10,300 per share.  That equates to a 13% average growth rate, using Q3 book value.  The figure of 13% can also be called Comprehensive ROE. 

 

Assuming BRK trades at the long-term average 7% earnings yield of the S&P 500, the price to book value (based on comprehensive ROE) should come in around 1.8X. 

 

IV comes close to $146,000 per share.

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I've been using 16 billion dollars for earning power and a 1.6 multiple which gives you 25 billion in value creation per year or a 16% return at the current price.  The Burlington deal will bring earning power to around 18 billion over the next 5 years. 

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Shalab...you're mixing investment income and operating income.  If you look at Note 17 in the BRK 3Q2009, you'll see that investment income is $4109 and $3400 for first 9 months of 2009 and 2008 which you've probably gone ahead and annualized.  You need to back those out of the operating income.  It's a form of double counting in the valuation model.  The investments and the operating businesses should be valued separately.  The market cap of the equities and fixed maturity investments is based on the income streams that they generate, so assign them to the valuation of the investments.

 

That should make your model cleaner...

 

-O

 

returnoncapital,

 

Your thinking is sound. The dividend + interest income is producing around 5.4 billion per year (before tax) currently. The dividend+interest was at 4.7 billion last year. Though the payments from Dow Chemical, Wrigley, GS and GE helped the results this year, I think a rate of 5 billion/year should be somewhat easy and the remaining investments should appreciate 4 - 5 billion in value, should be doable.

 

 

cheers!

Shalab

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