BRK-A book value and intrinsic value

[scorpioncapital]

Very nice and concise write-up. Just wondering if the deferred taxes on the investment portfolio are in fact 50% if sold. Isn't the top corporate tax rate on income or capital gains 35%?

 

 

 

[Guest longinvestor]

I did a short BRK writeup on my blog http://www.slowappreciation.com/blog/2017/4/16/berkshire-hathaway-brkb for those who might be interested. Probably nothing too new or insightful for those here, as I try to write for a little bit of a wider audience, but thought I would share anyway.

 

Excellent Thanks for sharing.

 

Chuckling still over your suggestion for a new name for Berkshire Hathaway AI Biotech Cloud Data Inc  :)

 

 

[SlowAppreciation]

Very nice and concise write-up. Just wondering if the deferred taxes on the investment portfolio are in fact 50% if sold. Isn't the top corporate tax rate on income or capital gains 35%?

 

I should have presented this more clearly. I'm not saying the rate is 50%, but that BRK will likely pay 50% of the deferred amount currently listed on their BS. In other words, I don't believe BRK's current deferred liability will ever be paid in full; instead, Warren has a bit of a knack for reducing his tax bill (e.g., Graham holdings, Duracell, etc.)

[scorpioncapital]

Cool. I think everything except $27.8 billion is associated with unrealized investment gains. The other amounts might be included in the 10x valuation of the operating businesses if you choose to include it there.

Might be an extra $4.5 per B-share of IV!!!! :)

 

[John Hjorth]

... Just wondering if the deferred taxes on the investment portfolio are in fact 50% if sold. Isn't the top corporate tax rate on income or capital gains 35%?

 

scorpioncapital,

 

From the 2016 Annual Report, p.44, almost at the top of the page:

 

Deferred income tax assets and liabilities are computed on differences between the financial statement bases and tax bases of assets and liabilities at the enacted tax rates.

 

As we all know, most of the listed stock investments are held in the insurance companies. So the deferred tax on urealised gain on the listed stock investments is calculated in the group balance sheet for Berkshire as if all the stocks were sold at the date of the balance sheet at market prices, incurring the tax rate for realised gains on stocks for an insurance company for the most part.

[no_free_lunch]

Thanks for the write-up SlowAppreciation.  I have read much on Berkshire but there are so many parts it is always good to see it in a nice summary format.

[SlowAppreciation]

Thanks for the write-up SlowAppreciation.  I have read much on Berkshire but there are so many parts it is always good to see it in a nice summary format.

 

Sure thing and thanks for reading it.

[scorpioncapital]

Which makes me think: If Buffett here is trying like crazy to find stable , LONG term investments that he won't have to touch for ages (fingers crossed) this liability is most certainly a grey area, in that one could consider it as a deduction to equity or maybe not. What's the liability of a stock you hold for 100 years?

 

[gfp]

that's a pretty aggressive way to value Berkshire.  Backing out all of the cash and investments and then pretending like quite a bit of that capital isn't required to operate several of the companies in the 'operating' side.  The subs need some cash (obviously there is excess on a consolidated basis), the insurance co's need statutory capital - it's certainly not all free excess capital that can be separated and backed out of the valuation.

 

- there is also a blending of "pre-tax" earnings, which quickly becomes "earnings" and then mentions that BRK's businesses should trade at 20x "earnings", which are stated pre-tax.

 

- didn't see how you treaded investment income in your analysis, was it eliminated or included in the Insurance division earnings?

[John Hjorth]

SlowAppreciation,

 

Also thank you very much from me for sharing your piece. I have read it today. It's a great write-up.

 

At these market levels in the US, Berskhire is certainly a buy, compared to so much else, with S&P 500 at about a P/E ~ 25.

 

It actually made me check a few things today also: I haven't bought any North American stocks since 2015, with three exemptions:

 

1. Berkshire - quite some,

2. Markel - to fully build the long term position for the Lady of the House, in the autumn of 2016,

3. Fairfax - to fully build the long term position for the Lady of the House, in the autumn of 2016.

 

Berkshire is priced right now in the area of ~1.4 x BV. At these levels, I'll just continue to buy going forward, in small drips.

[Guest longinvestor]

For the umpteenth time, someone asked a question about the relevance of Book Value in Berkshire's valuation. Buffett said (I think for the first time that I've heard) that BV is a "rough starting point" for valuation but that it has become less meaningful over time given the proportional reduction of marketable securities. Someone else asked him if the buyback threshold would be raised should some more big shareholders need to liquidate their holdings. "Depends on the market price at the time", they may do it in close proximity to the threshold. What I "heard" was, "no, we have not yet given up on a $150B deal"; In fact they even threw that number out. To me, it is abundantly clear that the buyback is the next guy's gig. Buffett and Munger are still wearing elephant goggles.;D

 

I thought Munger had a very interesting comment " We've traded liquid securities for illiquid ones and it's much better". They talked about getting to know more good people because of that. The opportunity to learn about the microeconomics of such a large palette of businesses is much greater now. Bigger easel for their painting.

 

As examples,

- It is not a stretch to think that the data they get from owning McLane lead them to dump WMT.

- Similarly how Watson is or is not working out at Geico.

- Consumer response to sales promotions on electronics (versus smartphones) at NFM lead to the purchase of AAPL; Buffett mentioned this.

- Surely Precision Castpart's book of business had something to do with the about-face on airlines; Plus they also sell flight fare protection insurance.

 

I think that the access to really significant business data that never gets reported out publicly is a new edge for Berkshire Hathaway. All it is going to take is for Buffett / Combs / Weschler to keep reading. That they do!! 

 

As I sat in the AGM, it dawned on me that the world is still fixated on the securities they own, WFC, BOA, IBM, KO and ones everyone feels they missed, AMZN, GOOG. The number of questions relating to the securities is still very high at the AGM. Securities are 20% of value and dropping off!

 

Buffett is telegraphing that the new train has left the station,

- Addition of MV to the performance comparison table

- New earnings table

- The disappearance of the Intrinsic Value section

- Clarification of principle #11 that owned biz is permanent but the securities always available for sale

 

Berkshire has moved on and the market is anchored in the past. Why we even talk about BV.

[marazul]

Couldn´t agree more with the previous comment. Access to valuablñe info and exposure to so many businesses provides a huge but fair edge/advatange.

[LongTermView]

- The disappearance of the Intrinsic Value section

 

I was surprised that no one asked about this.

[Guest longinvestor]

- The disappearance of the Intrinsic Value section

 

I was surprised that no one asked about this.

 

The earnings table (1999-present) is more useful. Anyway, that's what they are primarily focused on.

 

Plus, the market value over the very long term is the single best estimate of IV.

 

So, we can guesstimate what IV might be based on earnings and the appropriate multiple; But we have to wait for the market to tell us what it was, ha!

[cubsfan]

Longinvestor - great comments today.

[Valuehalla]

2nd Quarter is done.

 

31.3.2017

BV per B-share was 118,715 US$

Price B-share was 166,68 US$

MarketCap 411,95 B

BV 293,4 B

 

3 month till today 30.6.2017

Estimated Operative Gains: 5 B

Estimated Gains Portfolio: 2,77 B

results in:

BV = 301,17 B

BV B-share = 121,859 US$

 

KHC adjustment: 27,887B (marketvalue today) - 15,3B (BV KHC) = + 12,587 B

results in:

BV = 313,757 B

BV B-share = 126,952 US$

 

B-share closingprice today 169,37 US$, so we are 1,33 above KHC adjusted BV

                                                                  and 1,39 above published BV by BRK

 

(The BAC WT gains are included in all figures)

 

Please comment folks...

 

 

 

 

[gfp]

3 month till today 30.6.2017

Estimated Operative Gains: 5 B

Estimated Gains Portfolio: 2,77 B

results in:

BV = 301,17 B

BV B-share = 121,859 US$

 

KHC adjustment: 27,887B (marketvalue today) - 15,3B (BV KHC) = + 12,587 B

results in:

BV = 313,757 B

BV B-share = 126,952 US$

 

Seems like you should take taxes into account if you are going to adjust book value for estimated gains

[Guest longinvestor]

What's the likely impact of them exercising the BOA warrants on the Q2 financials?

[John Hjorth]

longinvestor,

 

I can't even find it using advanced search here on the board, - I'm soo dumb navigating this board - but I actually asked this question here on CoBF some time ago  and a helpful fellow CoBF member answered me [i have forgotten who] - with specific reference to the BRK financials, that the warrants in the BRK book are booked at MtM of the underlying common shares minus the 5 B as payment for doing the swap.

 

So the accounting effect of doing the swap as such is basically zero on earnings and book value, but USD 5 B cash will get reallocated from cash to investments, at the time when the swap is done.

 

Naturally the dividends going forward will change from the point in time where the swap happen.

[Valuehalla]

John is right:

 

The profit of the BAC WT deal is already included in the BV that is published by BRK, so no massive impact on the Q2 results.  The impact is just the change in marketprice of BAC from end of Q1 (16,513B)  till end of Q2 (16,982B) = 0,469 B. The question here is about the tax situation (I have no idea about that), if taxes need to be paid on the whole profit by doing the swap. So maybe exercising is cashflow negative.

 

See page 49:

 

http://www.berkshirehathaway.com/2016ar/2016ar.pdf

 

In opposite to this matter, the KHC profit is NOT included in the published BV. KHC is in the books for 15,3B, buying price was just 9,8 B and marketvalue yesterday was 27,887 B. So 12,587 B to add on the BV, minus deffered tax.

 

See page 18 and 19:

 

http://www.berkshirehathaway.com/letters/2016ltr.pdf

[John Hjorth]

Great, thank you for finding the facts and sharing them with us here, Valuehalla.

[gfp]

They won't owe cash taxes on the BAC shares until they are sold. It is possible that something may pass through the income statement on it, I don't know. Also, $5 billion will not come out of cash, as it is a cashless transaction inasmuch as the BAC preferred shares are being swapped and cancelled to exercise the warrants. $5 billion will come out of "other investments".  There may be a redemption premium that gets booked as a profit on the pref shares, I haven't looked at the purchase agreement in a long time. All the others had kickers on redemption. I wonder why warren wouldn't continue to hold the 6% preferred with so much excess capital earning 1%. I guess it would be counted at over 10% ownership since the pref is technically equity.

 

Also, there may be some small step up in the book carrying value of BAC if they were using an illiquidity discount in addition to black scholes to mark the warrants to "market". They will now be a level one asset vs an un-traded derivative asset.

[CanadianMunger]

I wonder why warren wouldn't continue to hold the 6% preferred with so much excess capital earning 1%. I guess it would be counted at over 10% ownership since the pref is technically equity.

 

 

gfp,

 

I thought the same.  I'm speculating that this speaks to WEB's discipline in not accepting a return below whatever his hurdle rate is, even with 100B in his wallet  ;)

 

-CM 

[aws]

I wonder why warren wouldn't continue to hold the 6% preferred with so much excess capital earning 1%. I guess it would be counted at over 10% ownership since the pref is technically equity.

 

 

gfp,

 

I thought the same.  I'm speculating that this speaks to WEB's discipline in not accepting a return below whatever his hurdle rate is, even with 100B in his wallet  ;)

 

-CM 

 

After the warrants were exercised, if he still held the preferred stock (meaning he paid cash to exercise) then he would have lost any optionality in redeeming the preferred.  It would have simply been a 6% perpetual fixed return redeemable at the bank's discretion and not his.  It's a nice return for the time being, but I'm sure he doesn't want that capital tied up indefinitely.

[SlowAppreciation]

 

Has anyone come across this?