longterminvestor Posted February 19, 2020 Share Posted February 19, 2020 Traditionally BRK's proxy for fair value has been Book Value. Buffet himself said BV is not a good proxy for valuation for BRK moving forward however market is still using. Recent example of market changing its valuation methodology is AAPL. AAPL had no material change in YOY earnings however market just doubled the multiple because revenue for Services has large run-rate and renewed love for iPhone revenues. Post from earlier this week talking about the goodwill value on balance sheet of businesses acquired years ago being outdated got me thinking - When does BRK get "Re-Rated"? What are the catalysts for this re-rating? Reasons why BRK has not been re-rated: #1 - Market sees BRK as an insurance business with operating subsidiaries rather than operating business with insurance subsidiaries #2 - Permanent Owners in public market: The share float in BRK does not trade like other public companies. I estimate there is an overwhelmingly large amount of forever holders. Homegamers, Institutional Funds, and Berkshire Insiders have no interest in selling. IE - there is no exit price on my shares that I own - I am looking to buy more. On the other hand, Bill Ackman's Pershing Square probably has an exit price. So stock just sits where it sits. #3 – Dead money: cash earning nothing is a HUGE drag on ROE #4 – Size hinders growth #5 – Market loves leverage. Only leverage on balance sheet is insurance company float and regulated leverage on balance sheet of utility/railroad not hypothecated to parent. #6 – Insanely low interest rate environment: low borrow costs allow acquirers to buy businesses that otherwise couldn’t afford or didn’t have cash to sit at the table Reasons why BRK could be re-rated: #1 - Dividend: with a dividend mutual funds with requirements for dividend payers could be owners #2 - Significant re-purchases of shares #3 - Large Acquisition that puts an exclamation point on BRK being an operating business with insurance subsidiaries #4 – Market values investees “look through earnings” as a real number (Big thanks to Dynamic for spreadsheet – man do I look at that a lot) #5 – Market understands Berkshire has become the “World Bank” of public markets. I view BRK as a bank of sorts (this comment does bring BV back to conversation on how to value). BRK is willing to finance any transaction to a size that would make most BOD’s of banks skin crawl – and FAST! #6 – ORGANIC GROWTH: If Able/Jain look inward to BRK and figure a way to incentivize managers for internal organic growth would be a monster boast #7 - Market figures out a way to value earnings on a multiple basis taking into account for the change in stock portfolio mark to market running through Income Statement I don't believe enough work has been done on #7, hoping someone can help me better understand implications of this change (I am no accounting expert - I know enough to be dangerous). Could BERK ever trade using a new valuation method that would cause a significant change in value of the business? Other public companies would hire teams of consultants and advisers to educate the public on why they should value their business using the classic "Multiple of Eyeballs" & “Adjusted EBITDA”. Part of me thinks Buffet intentionally lulling the market to sleep and will buy back 30% of the outstanding shares after his eventual departure from firm. The more I write the more I think of Charlie Munger laughing at me saying “we are not gonna change” and I totally understand sloth like management has gotten BRK to where it is today. Hoping to strike interesting conversation here with people who follow inner workings. I am ultimate fanboy and have humility to say so. I just hear the same people saying the same things about BRK on TV or annual letters and hoping to discover new ways to think about valuation and learn how to read the tea leaves. Poke holes in above - enjoy the fun of valuation - really interesting exercise. I would talk for hours about valuation with anyone just to learn and get better. Cheers! Link to comment Share on other sites More sharing options...
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