Berkshire closed down to near book value

[LC]

Good question. Assuming I could get a decent price, I would probably trim shares. He’s had many opportunities to deploy capital: internally, repurchases, in private/takeover deals, and now in public markets. We can talk about the perils of activity just for activity’s sake, or how all of humanity’s problems stem from difficulty sitting in a room alone, but at some point you have to take risk to earn a reward.

[Okonomen]

So.. just doing some calculations. Seems like the BRK market pf has lost around 30 bn USD value as of late... So my dynamic BV still gets me to around 1,2x bv at 180/share. Any thoughts? However, BRK has lost close to 100 bn USD in market value. Some of it seems fair given that 2020 and maybe 2021 will significantly impact the earning power at subs

[Dynamic]

I think there will be opportunities and a lot of money will be invested well by Berkshire during the current crisis at decent returns, but it will not necessarily be the case that large purchases will have been made by the close of play tomorrow, which is the end of 2020Q1 that will be reported at the start of May, with the 13F-HR filings to follow on 15th May, 45 days after quarter end.

 

The crisis has only brought about attractive prices for around 2-5 weeks out of the 13 weeks or so in Q1 (depending where you draw the line), so that's not enough time for truly enormous activity to show up in their next report. In fact, strategically for a company as closely followed as Berkshire, the ability to avoid disclosing their purchases until 14th August instead of 15th May could be a sufficient advantage to hold off buying a potentially large new position until after Tuesday 31st March given that this market is likely to remain depressed for at least a month or two more and they will probably have an easier time picking up more shares at low prices between 1st April and 14th August if they don't buy any in the week or two leading up to 31st March.

 

Volumes in most stocks have been high enough during the crisis so far to allow quite substantial stock purchases without moving the market, so Berkshire could well be able to spend substantial sums buying stock from those running for the hills, but only in positions where they aren't required to report it immediately (i.e. those below 10%). They bought a little Delta Airlines until they exceeded 10% ownership then stopped and previously hit 10% in Bank of New York Mellon thanks to buybacks without new purchases and there's little else we've seen disclosed recently.

 

I'd agree that buybacks of BRK.A and BRK.B probably aren't as enticing as certain other stocks out there. And some stocks even though they're down a lot, aren't exactly at greatly enticing prices, Apple being an example. I can't guess the margin of safety Berkshire would want, but I wouldn't be surprised if they'd like a price in the region of $150-$220 per share for AAPL given that they can't easily go over 10% ownership without onerous reporting requirements, and only briefly Apple dipped close to the top of that range.

 

Certain stocks are already over 10% and that rules out for example quite a few of the banks where Berkshire is already a large owner, despite their beaten down prices being very attractive.

 

It seems that Wells Fargo was starting to be offloaded in 2019Q4 at a rate far higher than is necessary to stay below 10%. More likely than not, I would guess that the selling may have continued during January and until February 14th (13F-HR filing) or 24th (crash began). The large price drop after the rate cuts and the position size being well below 10% might actually be sufficient to reverse Berkshire's presumed selling activity, as there aren't many good banks that Berkshire can buy right now without going over 10%, but any such reversal would be hard to tease out of the reports from Q1, as it would be almost indistinguishable from just selling fewer shares (aside from cost basis and realized gains figures).

 

If there's a major deal in the offing at present with a 50%+ chance of spending many tens of billions or even $100bn+ on an elephant acquisition I could see other rational reasons for Berkshire to have extremely limited buying and buyback activity during Q1.

[rb]

I'll go ahead and say that he probably didn't do much. The S&P didn't get very cheap. He wasn't doing much buying when the S&P was around these levels previously. I don't think he's shooting his wad at 2600. When he was previously buying around these levels he was buying banks. But was pretty much loaded on those this time around.

 

What I think we'll see at most, a reversal in the WFC position (lucky break?), possibly some bigger buyback. I think the biggest surprise would probably be a large purchase of PSX.

 

As for me. I'll probably do nothing. Why would I sell at this price? It's not a good price and I have a massive tax liability on this position.

[John Hjorth]

So, theoretical question, but what exactly would folks here think if, when the next filings occur once this has passed, that WEB did NOTHING here but buyback stock at a similar clip to the previous quarters? By nothing I mean few new equity purchases, no major acquisition, not meaningful buybacks, and continued cash build?

 

The question by you certainly qualify, Greg,

 

Observing [later] what you hypothetically stated, would not cause any reaction from me. Mr. Buffett has earlier stated, that the first priority [with regard to capital allocation] is the needs for capital of the subs already owned [wholly]. We have both read posts here on CoBF about the "Big Four" [also the Berkshire "Black Box" : Precision Castparts Corp., Lubrizol, IMC, Marmon Holdings] and their prospects, which aren't exactly spring green on overall basis.

[longterminvestor]

Observation on BRK regarding buybacks and "real time" book value.  In the event BRK did purchase lets say $10B in its own shares, the asset cash account would be debited by $10B.  There is no offset on the liability account on balance sheet hence Book Value would actually decrease by $10B.  Its like the $10B evaporates from balance sheet however the equity owner's share is increased proportionally.  This observation occurred to me when I was looking at some companies who have aggressively re-purchased stock and have negative shareholder equity.

 

As owners, we all like the concept of ownership percentage rising without laying out a dime, however the cost is a reduction in Book Value.  Only way to dig out of the hole would be to have more net earnings.  I guess the other side of that coin is whatever the earnings are, the owner's have a higher percentage of those earnings and the reduction in Book Value is a trade off.

 

Anyone else have thoughts on this?

[LC]

Yes - I hate using book value and think it is an outdated metric. Maybe the exception is pure and simple financial companies but I would argue Berkshire is not in that category anymore.

 

Earnings power, replacement value, sum of the parts...I would use any of these methodologies before BV. Just my opinion!

[jeffsreng]

Funny how no one has a price target. Mine at $275. I don't own any shares.  I still prefer my short.

[LC]

If WB and CM died tomorrow and sold everything to Gates, I think a fair valuation would be around 600, 625B

 

Call it 250/sh.

[omagh]

Observation on BRK regarding buybacks and "real time" book value.  In the event BRK did purchase lets say $10B in its own shares, the asset cash account would be debited by $10B.  There is no offset on the liability account on balance sheet hence Book Value would actually decrease by $10B.  Its like the $10B evaporates from balance sheet however the equity owner's share is increased proportionally.  This observation occurred to me when I was looking at some companies who have aggressively re-purchased stock and have negative shareholder equity.

 

As owners, we all like the concept of ownership percentage rising without laying out a dime, however the cost is a reduction in Book Value.  Only way to dig out of the hole would be to have more net earnings.  I guess the other side of that coin is whatever the earnings are, the owner's have a higher percentage of those earnings and the reduction in Book Value is a trade off.

 

Anyone else have thoughts on this?

On the asset side, cash decreases by $10B

On the OE side, a combination of "Common Stock", "Capital in excess of par value", and "Retained Earnings" decreases by $10B. 

 

Starbucks is an example where so much common stock has been repurchased that their Retained Earnings has gone negative:

https://s22.q4cdn.com/869488222/files/doc_financials/2019/2019-Annual-Report.pdf

[longterminvestor]

Net Income for Energy & Railroad: $8.3B @ 16X P/E=      $133B

Cash =                                                                          $130B

Portfolio =                                                                    $200B    (Portfolio+Cash = rough valuation for insurance business of $330B)

Total =                                                                          $460B                                                                                                                   

Current Market Cap =                                                    $455B

 

 

LOOK WHAT YOU GET FOR FREE!!!

KHC (26% Ownership) mark to market is ~$9B

OXY Warrants – up in the air on value

All the operating Subs shown below with # of employees per subsidiary: (Conservative estimate of value for subsidiaries $125B )

MANUFACTURING BUSINESSES:

Acme ..............................................2,117

Benjamin Moore ............................1,848

Brooks Sports . . . . . . . . . . . . . . . . . .872

Clayton Homes ............................. 18,533

CTB ............................................... 2,910

Duracell ........................................ 2,659

Fechheimer . . . . . . . . . . . . . . . . . .. 431

Forest River ................................. 11,131

Fruit of the Loom ......................... 29,263

Garan ........................................... 5,311

H. H. Brown Shoe Group . . . . . . . . 960

IMC Int Metalworking Co …………. 13,414

Johns Manville ............................. 7,769

Justin Brands . . . . . . . . . . . . . . . . . 755

Larson-Juhl ................................... 1,193

LiquidPower Splty Products, Inc.. . 460

Lubrizol ......................................... 8,691

MiTek Inc. ..................................... 6,159

Precision Castparts ....................... 33,417

Richline Group ...............................2,668

Scott Fetzer Companies .................2,159

Shaw Industries ............................ 21,094

Marmon ....................................... 22,307

SERVICE AND RETAILING BUSINESSES:

Affordable Housing Partners, Inc.  . 21

Ben Bridge Jeweler . . . . . . . . . . . . . 923

Berkshire Hathaway Automotive .. 10,805

BH Media Group ........................... 2,793

Borsheims . . . . . . . . . . . . . . . . . . . . 151

Business Wire . . . . . . . . . . . . . . . .  . 472

Charter Brokerage . . . . . . . . . . . . .. 160

CORT .............................................. 2,735

Dairy Queen . . . . . . . . . . . . . . . . . . . 476

Detlev Louis ................................... 1,360

FlightSafety .................................... 4,872

Helzberg Diamonds ........................ 1,995

Jordan’s Furniture ......................... 1,092

McLane Company .......................... 25,820

Nebraska Furniture Mart ............... 4,634

NetJets ........................................... 6,476

Oriental Trading ............................. 1,438

Pampered Chef . . . . . . . . . . . . . . . .. 353

Precision Steel Warehouse . . . . . .  . 124

R.C.Willey Home Furnishings .......... 2,834

See’s Candies .................................. 2,488

Star Furniture . . . . . . . . . . . . . . . . . . 606

TTI, Inc. ........................................... 7,046

WPLG, Inc. . . . . . . . . . . . . . . . . . . .  . 190

XTRA . . . . . . . . . . . . . . . . . . . . . . . .. . 398

 

[LC]

I'm with you and I own LEAPs

[Xerxes]

The list of the stuff one gets for free is like the negative pricing on the barrel of oil.

Better left in the ground.

 

The value of those small businesses (cost against market value) to BRK I think is more akin to “marketing expense” for the greater BRK conglomerate. Marketing expense so that BRK can continue to advertise itself as the home of last resort to whoever wants to sell and that BRK will keep you whole. (I.e not a hedge fund)

 

So if the calculated number represents true intrinsic value, than the market  discount is justified and represents the “marketing cost”.

 

I probably don’t make sense but that is how I see it.

[AzCactus]

The list of the stuff one gets for free is like the negative pricing on the barrel of oil.

Better left in the ground.

 

The value of those small businesses (cost against market value) to BRK I think is more akin to “marketing expense” for the greater BRK conglomerate. Marketing expense so that BRK can continue to advertise itself as the home of last resort to whoever wants to sell and that BRK will keep you whole. (I.e not a hedge fund)

 

So if the calculated number represents true intrinsic value, than the market  discount is justified and represents the “marketing cost”.

 

I probably don’t make sense but that is how I see it.

 

Am I understanding right that you think all those businesses listed above have negative value cumulatively ?

 

[Xerxes]

There is a discount between market and IV.

 

The discount needs to be attributed to something. I chose to think that the discount attributed to the misc. list of small businesses that BRK carries. (All of which do have positive value on their own as stand-alones, but not collectively between the four walls of BRK)

 

Someone else might take the market value, deduct cash ($130B), deduct best estimate of the of the misc. list small businesses, deduct the market value of the larger portfolio companies ($200B) and arrive to the conclusion that the two major groves (i.e. railroad + MidAmerican) are undervalued. Therefore, i.e. $8.3B @ 10X P/E. instead of 16 multiple.

 

The discount is due to something, and I chose to believe is the due to the drag of misc. list of entities that are on "permanent display" on Buffet's canvas as a proof for future 'larger' opportunities that we are not a hedge-fund and that once in the family your are in the family. Therefore, that semi-permanent discount to me is akin to a "marketing expense".

 

BRK has traded at a premium against BV most of the time in the past 20 years (except at times of great market dislocation, I think). Can we also say that BRK has traded at a premium against intrinsic value most of the time in the past 20 years. By the way, I don't know the answer to that question, but I suspect the answer is either (1) no or (2) mostly no as we don't have a reliable data on intrinsic value as it is a range. If the discount is sufficiently very large, BRK will buy back its own shares.

 

If there is a strong belief that discount will close. Why there aren't major trading houses doing a long-short on BRK. Going long BRK and shorting the some of sub-assemblies, thus isolating the bet on the discount closure. Instead most folks tend to just go long BRK (like myself) thus seeing the discount (a big portion of which i believe is permanent) as a margin of safety then doing an isolated bet on narrowing the discount.

 

That is how I see it and I do realise what I written above could be seen as a stretch.

 

[LC]

Someone else might take the market value, deduct cash ($130B), deduct best estimate of the of the misc. list small businesses, deduct the market value of the larger portfolio companies ($200B) and arrive to the conclusion that the two major groves (i.e. railroad + MidAmerican) are undervalued. Therefore, i.e. $8.3B @ 10X P/E. instead of 16 multiple.

 

Interestingly, on a prior year earnings basis, UNP trades at 18x and the utilities sector is trading at 20x.

 

A 10x multiple for BNSF & MidAmerican would be quite a bargain in that context.

[aws]

Post earnings these calculations of what you get for free are growing.  At 174/sh the market cap is 423b and cash is up to around 143b after selling the airlines, and the portfolio is in the 195b range.  You get everything else for 85b right now, and if there are a few more weeks like this one where the portfolio value keeps going up but Berkshire keeps going down, maybe you'd get the whole company for free.

[plato1976]

Isn’t the portfolio going down further? Banks are sliding day after day, trumping the apple gain

Post earnings these calculations of what you get for free are growing.  At 174/sh the market cap is 423b and cash is up to around 143b after selling the airlines, and the portfolio is in the 195b range.  You get everything else for 85b right now, and if there are a few more weeks like this one where the portfolio value keeps going up but Berkshire keeps going down, maybe you'd get the whole company for free.

[Xerxes]

Does anyone has a view of BK post-Q1 results on b-class shares ?

 

[LowIQinvestor]

BRK at close to BV is good enough for me!

( rather be roughly right than precisely wrong )

 

Railroad values holding up nicely ( see Union Pacific stock )

Apple on fire

tons of dry powder

 

Adding today very aggressively

 

have a great day!

[Viking]

Berkshire seems to be having a bit of an identity crisis. Why would someone buy it today? What is the catalyst (in the near term) for shares? Is Buffett too old?

 

Post Annual Meeting it looks like we are getting quite a few shareholders deciding it is time to move on. It will be interesting to see where the share price goes from here.

 

Since Jan 2, BRK is down 25% and S&P 500 is down 13%.

As of today BRK market cap is $420 billion. Cash is $140 billion = 33.3% of market cap (incl. airline sales)

Share Price = $172; BV = $152 (March 31); P/BV = 1.13

 

Buffett said on Saturday:

- the shares are not particularly undervalued even at $160 (the low they traded at in March). The value of some of Berkshires businesses have been impaired so the company as a whole is worth much less than it was 12 weeks ago.

- that investing in S&P 500 index would likely provide a better return than Berkshire moving forward.

- the company is being run more like a ‘trustee’ with capital preservation being paramount; focus is to look after existing wealth of large, long term shareholders.

- large cash balance will likely not be re-invested until the virus is under control (which may be 2 years away).

 

But how low can it go? How many more people are tired of waiting for Buffett to put some of the $140 billion cash hoard to work and decide to move on (which will drive shares lower).

 

PS: I do own shares :-)

[Mephistopheles]

Buffett is known to undersell and this may be another such instance.

 

He also stated that given the range of outcomes, brk isn't necessarily cheap.

 

If it turns out the virus behaves like the Spanish flu (second wave deadlier) or worse, or if it starts mutating more aggressively, or if we remain status quo and no vaccine for 18 months and not administered to everyone for another year after - you can assume the travel, entertainment, dining, and related industries will for sure be in a Great Depression, and most likely a recession in broad economy. Because as Bill Gates said, you can't force people to go out and ignore a pile of dead bodies.

 

What if government free money dries up? Then it's time for the old man to bring out his elephant gun.

 

If any of the above happens than Buffett will look like a hero and probably outperform s&p500. Lots of paths for this to happen.

[Viking]

Mephistophelese, Sam Zell said the current government bailout while necessary only likely buys the economy 60-90 days. If the economy is still in the toilet in a couple of months the government will not be able to do a second bailout. To your point, Buffett will be ready, able and willing :-)

 

I am wondering if we are not seeing Berkshire being re-valued as a true conglomerate. They are usually valued at a discount to BV.

 

In the past Buffett has talked about 1.2xBV as an important level for buybacks. His recent commentary almost sounded like he wasn’t interested in doing buybacks regardless of the price. Perhaps he spooked some investors.

 

The perception was Berkshire, largely due to its cash hoard, would provide investors some downside protection during the current downturn. That clearly has not happened with BRK down 25% and the S&P 500 only down 13% (from Jan 2 to now). Interesting...

[kab60]

I have a 23 pct. position and portfolio margin of 15 pct. currently. The upside isn't crazy, there is no catalyst, but I like the optionality of the large cash balance and the reinvestment opportunities in rail and renewable. I think of it somewhat as a HY bond (7-9 pct return) with IG credit and equity volatility - and now possibly a rerating down the road. Considering the broader rally and defensive positioning I think the risk/reward is great but I use margin because the upside is lower than I would usually go for.

[steph]

The entire insurance sector is taking a beating, which is not helping BRK stock either.  Chubb CEO said it is the biggest disaster the sector has ever witnessed.  I was surprised how little Buffett said about it.  He seemed quite relaxed about it all. The next months will be another great period to invest in insurers : BRK, FFH, Chubb, MArkel, WRBerkley,...