BRK MELT UP ahead ? potential drivers:

[Valuehalla]

IMO there are aspects which could soon cause a heavy Melt Up for Berkshire:

 

1) The Tax Reform

    - reduced deferred taxes will increase the BV app. 10 %

    - FCF will increase, because operative gains will be taxed lower

 

2) The existing cash pile of more than 100 B 

      - could lead to a mighty acquisition - up to 80 B -  maybe plus additional funds from 3G, KHC, BUD, QSR

      - depending on the details, this could increase the operating profit of BRK

        if 80 B are invested for just (!) 5 % this will increase the operating profit from 20 to 24 = 20 % increase!

      - could lead to an adjustment concerning the stock repurchase program

 

3) A broader market set back

    - maybe caused by TECHs / FANG: BRK could start a big wide range shopping

 

4) A heavy damage for the broader insurance businesses

    - after which strong BRK will exit in a better position than other weaker competitors

 

In case of a lucky quarter we can see a melt up of 40 % till end of 2017. (Taxreform + Acquisition)

 

 

[Dynamic]

The long term focus and patience - and the acceptance of lumpy profits or profits that don't get reported on the bottom line, has often seen a boost to Berkshire's true underlying future prospects when all seems doom and gloom for many other companies.

 

I would tend to anticipate 1 and 4 may add noticeable value in the next year or two, and be very unsure of the timing of events in 2 and 3.

 

Anyone who has held or watched BRK for a decade or more may recall a number of such occasions:

 

1. I'm not aware of any major US Corporate Tax Reform in the last couple of decades, but it could provide a one-off boost to the visible figures fairly soon and provide more tax-efficient flexibility in capital allocation depending on the specific details of the reforms.

 

2. Large cash piles turning into a huge deal has certainly happened many times, BNSF and Heinz being the biggest to date, and PCP being fairly significant, and numerous great deals during market or financial meltdowns (e.g. BAC 6% preferred+$7.14 warrants and other 'shows of belief' to repair balance sheets of sound enough companies or to provide funding for takeovers - e.g. Mars), but I wouldn't care to guess when the elephant gun will next be fired - I could see it taking anything from next week to 3-4 years before a huge acquisition putting $40-100bn of BRK cash to use, depending on whether lofty market valuations and low interest rates persist and keep more companies priced a little too richly compared to BRK's willingness to pay.

 

3. Again, I'd be less inclined than I guess you might, Valuehalla, to guess that a crash is imminent, though like you I hope it is, but we saw good value purchases after the dot-com/Y2K bubble burst and brought more valuations into sensible or cheap territory.

 

4. It could possibly happen this year or next if the hurricane season causes sufficient insured damage within the US. I've welcomed in the past, expectations of a 'hardening' market for reinsurance after megacats like hurricanes, giving at least a few years of rates where BRK can write a lot of reinsurance business at sensible prices and make up for the reduction in the current year's profits. Over the years we've also seen opportunities like taking on long-tail risks from distressed Lloyds Names, getting a long time to invest the float before paying out claims in future currency. I always feel that BRK is best prepared for the storm in terms of financial strength, underwriting discipline and risk limitation and can be opportunistic in picking up the pieces after the damage of statistical clustering hits its poorly-incentivised competitors.

 

I'd be happy to see a large acquisition tomorrow, or a broad market setback that makes prices more attractive.

 

Regarding the coming market crash, I read, I think it was the Semper Augustus letter about the thinning market, where only a handful of TMT stocks accounted for the index gains before the dot-com bubble finally burst. This time it seemed to be mostly the FANG stocks, but the imminent crash doesn't seem to have followed just yet. I liked their ideas and reasoning and thought it was plausible and worth making their clients aware of, but I just can't seem to predict when highly optimistic valuations will suddenly turn more realistic across the broader market. This market doesn't feel like the go-go year 2000 where everyone says they're making so much in tech stocks.

[Valuehalla]

+++++++++++ UPDATED ++++++++++

 

There are aspects which could soon cause a massiv increase in BV or a massiv increase of the operating profit.

 

I think there is a high probability to see a Melt Up concerning the stock price soon:

 

1) The Tax Reform

    - reduced deferred taxes will increase the BV app. 10 %

    - in awareness of the repurchase program, an increase of BV shall drive the stock price immediately

    - FCF will increase, because operative gains will be taxed lower

 

2) The existing cash pile of more than 100 B 

      - could lead to a mighty acquisition - up to 80 B in standby -  maybe plus additional funds from 3G,

        KHC, BUD, QSR and / or leverage  ... the dream of a 250 B elephant could come true ....

      - depending on the details, this could increase the operating profit of BRK massivly

        if 80 B are invested for just (!) 5 % this will increase the operating profit from 20 to 24 = 20 % increase!

      - could lead to an adjustment concerning the stock repurchase program, which will also drive the stockprice

 

3) Higher interest rates

- 1 % higher interest rates means 1 B or slightly more profit on the 100 B: that s an increase of 5 % concerning

  a profit of app. 20B now

- Competition in insurance business will get more soft, higher prices could be realized

 

In the medium or long term:

 

4) A broader market set back

    - maybe caused by TECHs / FANG: BRK could start a big wide range shopping. 1 year after the 1th Feb 2000

      when the last bubble busted, BRK nearly doubled and TECHs were defeated. Will we see a DejaVu ?

 

5) A heavy damage for the broader insurance businesses

    - after which strong BRK will exit in a better position than other weaker competitors, higher prices could

      be realized

 

;D In case of a lucky quarter we can see a melt up of 40 % till end of 2017. (Taxreform + Acquisition)  ;D

[Valuehalla]

I like call attention to an article, published in Jan 2017

 

https://seekingalpha.com/article/4037907-berkshire-hathaway-potential-95-billion-book-value-growth-year-end-2017

 

If taxreform pass with 20 % corporate tax, we will get app 35 to 40 B in deffered tax reduction, which will increase the BV (End of Q3 2017 308,257 B) by app 12 %

[Valuehalla]

Here we go !  8)

 

Where is the elephant?

[BG2008]

Valuehalla, nothing against you personally.  I get a chuckle when the world meltup is used on a value blog.  I wouldn't be surprised if the price action agrees with you. 

[scorpioncapital]

meltup is value when inflation runs rampant. If it didn't , even a slow rise would actually be a big loss.

 

[Valuehalla]

We got our taxreform today:

 

On 28th Sept, when i have opened the "Melt Up" statement, BRK was at 182$, now 198 $, so 8 % increase till now.

A part of the meltup is done, but just 8 % is a joke, thats not all, we wait for:

 

Bookvalue at end of Q3 was 308,257 B, which is 124,957 $ per B share (not KHC adjusted)

 

Q4 till yearend, taxreform will come true now:

Operative gains less tax (conservative estimation)                              = app.  4,00 B

Portfolio gains (till today!) of more than 10 B less 21 % def. tax          = app.  8,00 B

KHC adj. MV 25,55B-15,3B=10,25B less 21% def. tax                        =        8,20 B

Taxreform: reduction of app. 86B def. taxliabilities end of Q3              = app. 37,00 B

 

leads to a bookvalue estimanted in total: 365,457 B (KHC adjusted) =  148,144 $ per B share

leads to a bookvalue estimated in total: 357,257 B (not adjusted) = 144,82 $ per B share

 

Todays 198 $ is a bargain price, just 33 % above BV (KHC adj) !

 

And we still wait for for the big 150B acquisition and / or the increase of the buyback level.

Or maybe a onetime dividend cause of taxreform..?

 

The Melt up just started.

[gfp]

again, $37 billion seems high for a one-time tax reform adjustment.  I have no problem with the general sales pitch that Berkshire is not overvalued, but there is no way to accurately compute the figure you list as $37 Billion without access to the books.  And the corporate tax rate will be 21% with no changes in state, local or foreign tax rates.

 

Berkshire will also get a large tax rate benefit for immediate depreciation for many capital expenditures, which will add to the after tax cash flow benefit of the new bill.

[Valuehalla]

For sure, all mentioned figures are just estimations. The gains of the portfolio as well. We dont know what happened during Q4. Its just an estimation and in my opinion the subject taxreform shall bring us app 10 % increase of bookvalue. Nobody outside BRK is able to calculate it exactly.

[ValueMaven]

Very, very interesting analysis!!

 

Sincerely,

ValueMaven

[rb]

I think a lot of these discussions about the tax bill impact on BV are flawed.

 

One reason why BRKs P/B is >1 is that the deferred tax liabilities (DTLs) are recorded at face value but there's basically no chance that they would be incurred tomorrow, or if ever. For this reason PV of DTLs<FV of DTLs. The tax bill will reduce the FV of DTLs and increase BV by the same amount. But the same logic will imply that there should be some compression in P/B. You shouldn't get the same bump in MV as you do in BV because PV<FV.

[LongTermView]

I think a lot of these discussions about the tax bill impact on BV are flawed.

 

One reason why BRKs P/B is >1 is that the deferred tax liabilities (DTLs) are recorded at face value but there's basically no chance that they would be incurred tomorrow, or if ever. For this reason PV of DTLs<FV of DTLs. The tax bill will reduce the FV of DTLs and increase BV by the same amount. But the same logic will imply that there should be some compression in P/B. You shouldn't get the same bump in MV as you do in BV because PV<FV.

 

I agree. While the tax changes increase both book value and intrinsic value, the higher percentage increase goes to book value which is just a crude proxy.

[bizaro86]

I think it's reasonable to expect market value as a multiple of intrinsic value to go up though, simply because the BRK investor base (including WEB) have been talking about P/B for so long.

 

[sleepydragon]

I am just thinking PNC may be in the similar situation.

PNC has a huge holding in blackrock, I think 20 billion.

The tax bill shall lower their deferred capital gain tax.

Plus PNC also get benefit of lower income tax rate, future higher interest rate, and participation of the passive index market (blackrock)

 

 

[scorpioncapital]

Let's think about this logically. Suddenly these companies have a lot more money, paying less tax. But this could have been done ages ago. Seems to me there is too much money swirling around chasing assets or returned to shareholders via dividends and buybacks. What's it called when too much money is chasing fewer assets or money is indirectly helicoptered to people who own stocks? :)

 

[Valuehalla]

Scorpioncapital, there is just one word for you to call it, the word is :  "AMEN"

[gfp]

I suspect he was going for “inflation”

[Valuehalla]

Securities are a good haven for heavy inflation.

 

See the the result in the great depression, most intensive December 2001 in Argentine, with collaps & riots etc."

 

Here is what the MERVAL did than:

 

https://de.wikipedia.org/wiki/MERVAL#/media/File:MERVAL.png

 

 

 

 

[scorpioncapital]

Securities are a good haven for heavy inflation.

 

See the the result in the great depression, most intensive December 2001 in Argentine, with collaps & riots etc."

 

Here is what the MERVAL did than:

 

https://de.wikipedia.org/wiki/MERVAL#/media/File:MERVAL.png

 

You can read Buffett's article , something along the lines of 'how inflation swindles the equity investor'. His thesis is that securities are not a good haven for inflation in the general sense. Only a select sub-group of all securities offer decent protection and it is the job of the intelligent investor to study his/her portfolio and think about whether the securities held offer this protection or are going to be below average.

 

[Valuehalla]

I totally agree. In generell a good investing is to choose an asset, which has higher buying power in the future than other assets, which you didnt choose. I feel comfortable to have more than 50 % in BRK of my invested assets.

[Cigarbutt]

"Let's think about this logically. Suddenly these companies have a lot more money, paying less tax. But this could have been done ages ago. Seems to me there is too much money swirling around chasing assets or returned to shareholders via dividends and buybacks. What's it called when too much money is chasing fewer assets or money is indirectly helicoptered to people who own stocks?"

Quote from above.

 

"I have just one question - where is the money coming from?"

Quote borrowed from the past.

 

I don't know or I don't want to know?

The nice thing about BRK is that the hurdle rate will stay the same even if there is more money in the wallet.

 

 

 

[Valuehalla]

When I started the MELT UP chapter on 27th Sept 2017 BRK.B was at 183 USD, today hitting 215 USD, so we have already 17,5 % MELT UP in 4 month.

 

One aspect which was not mentioned by me is, that the inthronisation of successors for WEB an CM could have a positive impact on the stockprice. I think this is an essential subject, for an equal valuation of the whole company in comparison to other, for example MKL.

 

Here is again the updated text from 27th Sept 2017:

 

+++++++++++ UPDATED ++++++++++

 

There are aspects which could soon cause a massiv increase in BV or a massiv increase of the operating profit.

 

I think there is a high probability to see a Melt Up concerning the stock price soon:

 

1) The Tax Reform DONE

    - reduced deferred taxes will increase the BV app. 34,4 B = app 10 %

    - in awareness of the repurchase program, an increase of BV shall drive the stock price immediately

    - FCF will increase, because operative gains will be taxed lower

 

2) The existing cash pile of more than 110 B 

      - could lead to a mighty acquisition - up to 80 B in standby -  maybe plus additional funds from 3G,

        KHC, BUD, QSR and / or leverage  ... the dream of a 250 B elephant could come true ....

      - depending on the details, this could increase the operating profit of BRK massivly

        if 80 B are invested for just (!) 5 % this will increase the operating profit from 20 to 24 = 20 % increase!

      - could lead to an adjustment concerning the stock repurchase program, which will also drive the stockprice

 

3) Higher interest rates: positive for cash holders  ONGOING

- 1 % higher interest rates means 1 B or slightly more profit on the 100 B: that s an increase of 5 % concerning

  a profit of app. 20B now

- Competition in insurance business will get more soft, higher prices could be realized

 

4) Naming successors for WEB and CM  DONE

 

In the medium or long term:

 

5) A broader market set back

    - maybe caused by TECHs / FANG: BRK could start a big wide range shopping. 1 year after the 1th Feb 2000

      when the last bubble busted, BRK nearly doubled and TECHs were defeated. Will we see a DejaVu ?

 

6) A heavy damage for the broader insurance businesses

    - after which strong BRK will exit in a better position than other weaker competitors, higher prices could

      be realized

 

All this factors will provide a more surging stockprice of BRK in 2018

[Spekulatius]

During the last few month, i have opportunistically added significant positions in AXS, RE and AHL. All of them trade close to or below book value. RE is the highest quality of the above and I bought it at a small premium to book.

[Valuehalla]

When I started the MELT UP chapter on 27th Sept 2017 BRK.B was at 183 USD.

 

One aspect which was not mentioned by me is, that the inthronisation of successors for WEB an CM could have a positive impact on the stockprice. I think this is an essential subject, for an equal valuation of the whole company in comparison to other, for example MKL.

 

Here is again the updated text from 27th Sept 2017:

 

+++++++++++ UPDATED ++++++++++

 

There are aspects which could soon cause a massiv increase in BV or a massiv increase of the operating profit.

 

I think there is a high probability to see a Melt Up concerning the stock price soon:

 

1) The Tax Reform DONE

    - reduced deferred taxes will increase the BV app. 34,4 B = app 10 %

    - in awareness of the repurchase program, an increase of BV shall drive the stock price immediately

    - FCF will increase, because operative gains will be taxed lower

 

2) The existing cash pile of more than 110 B 

      - could lead to a mighty acquisition - up to 80 B in standby -  maybe plus additional funds from 3G,

        KHC, BUD, QSR and / or leverage  ... the dream of a 250 B elephant could come true ....

      - depending on the details, this could increase the operating profit of BRK massivly

        if 80 B are invested for just (!) 5 % this will increase the operating profit from 20 to 24 = 20 % increase!

      - could lead to an adjustment concerning the stock repurchase program, which will also drive the stockprice DONE

 

3) Higher interest rates: positive for cash holders  ONGOING

- 1 % higher interest rates means 1 B or slightly more profit on the 100 B: that s an increase of 5 % concerning

  a profit of app. 20B now

- Competition in insurance business will get more soft, higher prices could be realized

 

4) Naming successors for WEB and CM  DONE

 

In the medium or long term:

 

5) A broader market set back

    - maybe caused by TECHs / FANG: BRK could start a big wide range shopping. 1 year after the 1th Feb 2000

      when the last bubble busted, BRK nearly doubled and TECHs were defeated. Will we see a DejaVu ?

 

6) A heavy damage for the broader insurance businesses

    - after which strong BRK will exit in a better position than other weaker competitors, higher prices could

      be realized

 

All this factors will provide a more surging stockprice of BRK in 2018