BRK Valuation

[bizaro86]

 

What is the upside of going all in in the march low? A few extra points of performance for the next few years?

What was the downside if the pandemic was worse or if the Fed wouldn't have acted the way it did?

Even now though the range of outcomes is narrowing, still there are lots of unknowns. And spend your cash doesn't seem to me like the best idea.

sense

 

There is a difference between going all in and adding a few extra percentage points of long exposure after a 30% drop. Especially when  you have a big cash position.

 

The reason the market has been negative on BRK is that the "story" in the stock was that the big cash position would provide huge upside after buying low during the next drop. And then I believe WEB was a net seller during the worst of the draw down.

 

If there is a second wave drop and he ends up deploying a big chunk of the cash that will be a double win - the profits on the investment plus the reputation gains (which flow to the multiple).

[Mephistopheles]

In March, during the depths of the crash when the Dow was falling thousands of points per day, what % of investors would have predicted that we would be at or near all times highs in a matter of months?

 

And if you guessed wrong that doesn't mean you are dumb. Assume the Fed failed to act as aggressively as they did. We would easily be in a very different scenario right now, both with the market and the economy. Imagine if the GOP and Dems couldn't agree on terms for the CARES Act? Imagine if the virus became deadlier and more transmissible. Note that the 2nd wave of the 1918 Flu Pandemic was significantly worse than the 1st wave.

 

Buffett said at the AGM that the range of probabilities included some very nasty outcomes. It is safe to say that the 40% market rebound within less than a quarter is likely the best possible outcome in that range. People don't give the man credit for preparing for a shitstorm that didn't happen but was at a high risk of happening. The game isn't over yet, he may be proven right once again.

[bizaro86]

In March, during the depths of the crash when the Dow was falling thousands of points per day, what % of investors would have predicted that we would be at or near all times highs in a matter of months?

 

I never would have thought the market would rebound as fast as it did, but I still meaningfully bought equities in late March. A big decline has generally been a good time to buy stocks and reduce cash weighting, and the perfect is the enemy of the good there. Even a simple re-balance would have seen a bunch of equities purchased.

[CorpRaider]

People are tripping.  BRK didn't announce the BNSF acquisition until like 6 months after the bottom in 2009. 

 

Pretty much every reputable voice acknowledges a high probability of another round of covid in the fall not even counting the continued blossoming in the South of the U.S.

[CorpRaider]

The Rational Walk on twitter posted this and I totally agree with this approach...its neat way to value BRK:

 

3/31/20: Cash & Investments = $349.5B + $33B gain in Q2 = $382B vs. Market Cap of $427B

 

Implied Value of $45B for non-insurance wholly owned subs (BNSF, GEICO, Clayton, PCP, Utility etc etc) .... man this thing is CHEAP

 

He also pegs P/BV at 1.08x

 

Thoughts?  It's an interesting way to triangulate valuation

 

Munger has commented on a similar way of approaching the question a number of times.  I noted one time he mentioned this maybe a week ago when I was watching an annual meeting on the cnbc archive.  I think I tweeted about what year it was.  I will see if I can find it.  He also has said before (essentially), "It used to be like shooting fish in a barrel, you could buy Berkshire below the book price of the marketable securities and get the insurance and the other wholly owned subs for free."

[ValueMaven]

The Rational Walk on twitter posted this and I totally agree with this approach...its neat way to value BRK:

 

3/31/20: Cash & Investments = $349.5B + $33B gain in Q2 = $382B vs. Market Cap of $427B

 

Implied Value of $45B for non-insurance wholly owned subs (BNSF, GEICO, Clayton, PCP, Utility etc etc) .... man this thing is CHEAP

 

He also pegs P/BV at 1.08x

 

Thoughts?  It's an interesting way to triangulate valuation

 

Munger has commented on a similar way of approaching the question a number of times.  I noted one time he mentioned this maybe a week ago when I was watching an annual meeting on the cnbc archive.  I think I tweeted about what year it was.  I will see if I can find it.  He also has said before (essentially), "It used to be like shooting fish in a barrel, you could buy Berkshire below the book price of the marketable securities and get the insurance and the other wholly owned subs for free."

 

Yes - would be interested in seeing this ... Thx

[AzCactus]

Buffett has said time and again that "it's better to be approximately right than precisely wrong."  I think it's less important to know whether Berkshire's intrinsic value is $235/$240 and more important to know that it's significantly higher than it's current market price today.

 

 

[LC]

Buffett has said time and again that "it's better to be approximately right than precisely wrong."  I think it's less important to know whether Berkshire's intrinsic value is $235/$240 and more important to know that it's significantly higher than it's current market price today.

 

Right. And I think you can get there looking at the cash + earnings/valuations of the wholly owned subs + the equity portfolio.

[aws]

My back of the envelope calculation has Q2 book value at 164.67, so based on today's closing price we would be trading at 1.08 times book.

 

This is based on a presumed 28.7b net increase in book value from the equity portfolio, estimated by the change in portfolio value since 3/31 after adjusting for the sales we know about and the additional deferred tax liability on the unrealized gains.  Not surprisingly the vast majority of the gains are from Apple, which alone increased in value 28b pretax.

 

Then I just assumed operating earnings would breakeven for the quarter.  That may be way too conservative, so you could maybe add another $1 or $2 per share but in any case it's not going to have anywhere near as big of an impact on book value as the much more obvious change in the stock portfolio.  The 28.7b stock represents a 11.81 EPS and that adds to the prior quarter ending book value of 152.86 gets me to the 164.67.

[wescobrk]

Buffett has said time and again that "it's better to be approximately right than precisely wrong."  I think it's less important to know whether Berkshire's intrinsic value is $235/$240 and more important to know that it's significantly higher than it's current market price today.

According to Buffett, it isn't trading at a discount to intrinsic value. He didn't buy any in March when it was cheaper than what it is now. If Buffett showed signs of dementia at the 2020 annual meeting, then it would be easy to dismiss him, but he was as sharp as he has been the last 10 years. I think Buffett knows more about intrinsic value for Berkshire than anyone else. I don't mean for that to come across as a criticism of your post, just that the man that created Berkshire and knows more about the company than anyone on the planet disagrees with you.

[aceskc]

BRK may have been priced lower but not necessarily cheaper relative to book, when marked to market. Even when Berkshire traded into the 160s, AAPL their biggest holding  was in the 220s. That one position alone reflects a difference of 35B or  b/w March lows and end of qtr mark to market.  Thats not to say buybacks are happening in volumes, cos that does seem unlikely given how the stock is trading but P/B <1.1 is cheap relative to history, relative to other securities and relative to Buffett's past comments , and may not be as conflicted as it may appear by his inaction through April lows, when his book has been decimated,  economy shutdown and acquisition opportunities front run by the actions of the Fed.

[kab60]

It seems the range of outcomes in March was higher than it is now. Covid19 has hardly been the deadly killer some feared though the economic impact of the close-downs are obviously hard to gauge. On that account I'd venture it's a much better risk/reward today than it was back then. And correct me if I'm wrong, but he did seem to indicate it was cheap at 160 - but also that it wasn't possibly to accumulate anything meaningfully since it just traded down for a short while. I really hope he took advantage of the price in Q2, but I'm not getting my hopes up based on his meager buyback track record. On the other hand, he's never had as much cash, and so little to deploy while at the same time Berkshire trades at a - relative to history - very low price.

[SwedishValue]

Buffett has said time and again that "it's better to be approximately right than precisely wrong."  I think it's less important to know whether Berkshire's intrinsic value is $235/$240 and more important to know that it's significantly higher than it's current market price today.

According to Buffett, it isn't trading at a discount to intrinsic value. He didn't buy any in March when it was cheaper than what it is now. If Buffett showed signs of dementia at the 2020 annual meeting, then it would be easy to dismiss him, but he was as sharp as he has been the last 10 years. I think Buffett knows more about intrinsic value for Berkshire than anyone else. I don't mean for that to come across as a criticism of your post, just that the man that created Berkshire and knows more about the company than anyone on the planet disagrees with you.

 

I think you make a very good point, but like Buffett said - Things change. Maybe Buffett considers the worst case scenarios to be far less likely today?

 

I’d argue that Berkshire could be considered cheaper at year-end 2019 than it was around the lows in march, and that Berkshire today is cheaper than it was at year-end 2019 again.

 

Covid aint going nowhere for now, but we have eliminated a lot of the worst case scenarios. If Buffett disagrees we’ll now soon enough.

[buffetteer1984]

Buffett has said time and again that "it's better to be approximately right than precisely wrong."  I think it's less important to know whether Berkshire's intrinsic value is $235/$240 and more important to know that it's significantly higher than it's current market price today.

According to Buffett, it isn't trading at a discount to intrinsic value. He didn't buy any in March when it was cheaper than what it is now. If Buffett showed signs of dementia at the 2020 annual meeting, then it would be easy to dismiss him, but he was as sharp as he has been the last 10 years. I think Buffett knows more about intrinsic value for Berkshire than anyone else. I don't mean for that to come across as a criticism of your post, just that the man that created Berkshire and knows more about the company than anyone on the planet disagrees with you.

 

I think you make a very good point, but like Buffett said - Things change. Maybe Buffett considers the worst case scenarios to be far less likely today?

 

I’d argue that Berkshire could be considered cheaper at year-end 2019 than it was around the lows in march, and that Berkshire today is cheaper than it was at year-end 2019 again.

 

Covid aint going nowhere for now, but we have eliminated a lot of the worst case scenarios. If Buffett disagrees we’ll now soon enough.

 

I agree with this assessment.  Warren said the difference between intrinsic value and price was not significantly greater during march crash than when he bought in q1 around 220.  Now the price is close to the march lows with a few variables that have changed.  One, less uncertainty around the pandemic and how the feds and markets would react.  Two, some of his bigger holdings have increased substantially in price from the lows namely apple, bnsf (i assume this one based on other rails) while brk stock has languished.  178 today is a better bargain than 178 in march imo and I'd be surprised if he didn't dip his toe into buybacks this time around.

[CorpRaider]

The Rational Walk on twitter posted this and I totally agree with this approach...its neat way to value BRK:

 

3/31/20: Cash & Investments = $349.5B + $33B gain in Q2 = $382B vs. Market Cap of $427B

 

Implied Value of $45B for non-insurance wholly owned subs (BNSF, GEICO, Clayton, PCP, Utility etc etc) .... man this thing is CHEAP

 

He also pegs P/BV at 1.08x

 

Thoughts?  It's an interesting way to triangulate valuation

 

Munger has commented on a similar way of approaching the question a number of times.  I noted one time he mentioned this maybe a week ago when I was watching an annual meeting on the cnbc archive.  I think I tweeted about what year it was.  I will see if I can find it.  He also has said before (essentially), "It used to be like shooting fish in a barrel, you could buy Berkshire below the book price of the marketable securities and get the insurance and the other wholly owned subs for free."

 

Yes - would be interested in seeing this ... Thx

 

He briefly mentioned it in the 1999 meeting in response to a question about how to value berkshire.  I think the other time I am rememebering was at a DJCO meeting, maybe a year or two ago, where he was kind of discussing why he's rich and you are not (haha) and he was really kind of like "duh, you could get BRK for less than securities portfolio and get operating businesses and negative cost float for free."

[UK]

https://www.barrons.com/articles/insurance-hot-again-allstate-kkr-deals-lemonade-ipo-51594226748

 

"Separately, KKR (KKR) said Wednesday it agreed to buy Global Atlantic Financial Group, which offers retirement, life and insurance products. KKR will pay 1.0x the insurer’s book value when the deal closes. Global Atlantic’s book value was $4.4 billion as of March 31. The deal is expected to close in the first quarter of 2021."

 

https://www.wsj.com/articles/chubbs-pandemic-estimate-could-buffer-insurers-11594202402

 

"But overall, the bar may be raised for earnings season. The S&P 500 property-and-casualty sector is now trading at an average of 1.3 times book, recovering from its slip below book value in March and just off its five-year average of 1.4 times. This suggests a less-scary downside from Covid-19 is already priced in. Investors’ focus should now be on whether insurers’ pricing and premiums can show signs of possible upside."

 

https://www.allstateinvestors.com/static-files/0e2153e0-b5ef-479c-98f6-b06cbe1dbed0

 

"Multiple of 11.9x last twelve months earnings and 1.78x book value as of March 31, 2020

Represents a 64% premium to closing stock price over the latest 30 trading days"

 

 

 

 

[Xerxes]

I ll propose a different perspective:

 

What if BRK trading low is not due to the investment portfolio dropping in Q1 nor Buffet not deploying the cash significantly not operating businesses underperforming But rather the drop is due to drop in the value of its “cash”.

 

Sounds weird but hear me out. 

 

Central bank balance sheet pre-COVID was at around $4 trillion.

Post COVID Fed balance sheet had expanded by several trillions.

 

In this giant sea of cash slushing around, the intrinsic value of BRK “cash” must go down, no ?

With it the value of optionality. 

[Guest longinvestor]

It’s amazing, the worry about the cash sloshing around in a world that is living on borrowed money of epic proportions!

 

We’ll see how this all ends

[gfp]

I would expect Berkshire's cash to be close to $150 Billion at quarter end.  I would also recommend factoring in a return to pre-Trump corporate tax rates and the associated increase in deferred tax liabilities/decrease in book value and intrinsic value.

 

That said, Berkshire is as cheap as it has been in a very long time and the insurance business looks very very well positioned.

 

disclosure, long BRK, short SPX

[wabuffo]

My own view is that Mr. Market is starting to clip BRK because of a likely increase in the US Federal tax rate from 21 to 28%.  This affects BRK two ways:

1) It clips book value due to the increase in deferred cap gains taxes (reducing book value)

2) It reduces the after-tax earnings of both the operating subs (like BNSF) as well as the look-through earnings of some of its stock holdings (eg banks).

 

This was a big factor on the way up in 2017-2018 as the tax rate fell from 35% to 21%.  While at this point, its not a certainty that the Federal tax rate will increase, its becoming a higher probability (and thus a headwind to BRK).

 

wabuffo

[Xerxes]

It’s amazing, the worry about the cash sloshing around in a world that is living on borrowed money of epic proportions!

 

We’ll see how this all ends

 

Agreed.

Technically speaking though the money created by Fed is not borrowed money.

 

They are an investor in US Gov debt. It is US Gov that is borrowing on an epic proportions from various investors (China, Japan, US public, and the including Fed). 

 

BRK cash is also partially borrowed money (float)

[plato1976]

why the insurance business is very well positioned?

low interest rate in general impairs the insurance business in overall

 

I would expect Berkshire's cash to be close to $150 Billion at quarter end.  I would also recommend factoring in a return to pre-Trump corporate tax rates and the associated increase in deferred tax liabilities/decrease in book value and intrinsic value.

 

That said, Berkshire is as cheap as it has been in a very long time and the insurance business looks very very well positioned.

 

disclosure, long BRK, short SPX

[wabuffo]

Technically speaking though the money created by Fed is not borrowed money.

 

When the Fed buys Treasury debt in the open market, it swaps new bank reserves in exchange for them.  These bank reserves are assets of the commercial banks BUT liabilities of the Federal Reserve.  The Fed even pays interest on those reserve liabilities. 

 

When looking at the Federal government from the point of view of the private sector, one has to consolidate the Federal Reserve and US Treasury.  So whether its Treasury bonds, bank reserves on deposit at the Fed, or even currency in circulation - these are all liabilities of the Federal government.

 

wabuffo

[aryadhana]

Is the big problem here not all the uninvested cash, but all the equity investments they do have in excess of whatever is reasonably required to cover potential insurance liabilities?  And cash flow from their operating businesses should count towards what's available for payouts as well.  It seems remarkably tax inefficient to hold equities that don't serve any operating purpose, such as being available for sale to service liabilities, in an entity subject to a corporate tax (one that will likely increase by 33 percent in the near future). 

 

It would be an entirely different story if they actually acquired the same companies they hold equity in since intercorporate cash allocation bypasses any tax.  It would also be a different story if they were uniquely situated to make these investments, which may be true in some cases but not at all the case for most of the publicly traded stock in their portfolio.  Their reports make it seem like deferred tax liabilities on all their unrealized gains are in fact an asset, in the form of a free loan on taxes that would otherwise be owed.  Had there been distributions of all this excess, of course, shareholders would have owned the same stock in their own name without owing any corporate tax on the gains at all. 

 

The cash they hold technically suffers from the same problem -- why pay corporate taxes on interest from Treasuries? -- but rates are very low.  Putting that cash in equity increases the required return from their assets as a whole (now riskier) but the excess return they can expect to realize over time from doing so doesn't increase commensurately by definition since market prices are not set between people who are double taxed on that investment.  This is probably much more dramatically an issue over the past 3-5 years than it was before, since in the past they probably didn't hold in public equities so much in excess of what was necessary. 

[DooDiligence]

Is the big problem here not all the uninvested cash, but all the equity investments they do have in excess of whatever is reasonably required to cover potential insurance liabilities?  And cash flow from their operating businesses should count towards what's available for payouts as well.  It seems remarkably tax inefficient to hold equities that don't serve any operating purpose, such as being available for sale to service liabilities, in an entity subject to a corporate tax (one that will likely increase by 33 percent in the near future). 

 

It would be an entirely different story if they actually acquired the same companies they hold equity in since intercorporate cash allocation bypasses any tax.  It would also be a different story if they were uniquely situated to make these investments, which may be true in some cases but not at all the case for most of the publicly traded stock in their portfolio.  Their reports make it seem like deferred tax liabilities on all their unrealized gains are in fact an asset, in the form of a free loan on taxes that would otherwise be owed.  Had there been distributions of all this excess, of course, shareholders would have owned the same stock in their own name without owing any corporate tax on the gains at all. 

 

The cash they hold technically suffers from the same problem -- why pay corporate taxes on interest from Treasuries? -- but rates are very low.  Putting that cash in equity increases the required return from their assets as a whole (now riskier) but the excess return they can expect to realize over time from doing so doesn't increase commensurately by definition since market prices are not set between people who are double taxed on that investment.  This is probably much more dramatically an issue over the past 3-5 years than it was before, since in the past they probably didn't hold in public equities so much in excess of what was necessary.

 

I think WEB just likes picking stocks, but unfortunately not enough to have taken advantage of last March.