BRK Valuation

[ValueMaven]

https://www.wsj.com/articles/private-equity-firms-discuss-bid-for-kansas-city-southern-11596223106?st=anc0qqplbu68up3&reflink=article_copyURL_share

 

Private-Equity Firms Discuss Bid for Kansas City Southern

Blackstone’s infrastructure arm and Global Infrastructure Partners explore potential deal

 

Would love to see the multiple they put on this much lower quality rail and how that translates to BNSF ....

[Xerxes]

Naspers -700HK $32mm to $180B and the Louisiana Purchase are still kicking warrens ass but as far as $30B stock picks go, I’d agree.

 

I, for one, one would be very okay with some tax inefficient trimming, but knowing WEB, that probably won’t happen.

 

 

Purchase of Booking.com by Priceline

Purchase of Instagram by Facebook

Investment in Alibaba by Softbank

 

in the latter case, it wasn't so much about finding Jack Ma, i doubt there were many tech entrepreneur in China in the 90s, so that wasn't the hard part relatively speaking.

i think the hard part was holding unto it through IPO in 2014 and beyond.

 

[thepupil]

https://www.wsj.com/articles/private-equity-firms-discuss-bid-for-kansas-city-southern-11596223106?st=anc0qqplbu68up3&reflink=article_copyURL_share

 

Private-Equity Firms Discuss Bid for Kansas City Southern

Blackstone’s infrastructure arm and Global Infrastructure Partners explore potential deal

 

Would love to see the multiple they put on this much lower quality rail and how that translates to BNSF ....

 

Without getting too in the weeds, at current KSU multiples, I get to an implied BNSF equity value of $120-$130B

 

But a better comparable is probably already available in UNP which is very similarly sized and is at $117B equity value/ $145B EV

 

I think rails are potentially overvalued given the macro backdrop, but lazily plug in UNP as a BNSF proxy and then apply a lazy 0-whatever I’m feeling % discount

 

Note that Buffett has called Apple his third largest business in February 2020 and that’s worth $100B now, just one data point. I think he meant “3rd largest by value”. The insurance value includes all the others so by definition it’s the biggest. So I think Warren was saying “BNSF is worth more than 5.7% of AAPL”

https://www.google.com/amp/s/www.cnbc.com/amp/2020/02/24/warren-buffett-says-apple-is-probably-the-best-business-i-know-in-the-world.html

 

$100 bilsky’s ish is a nice simple market value for BNSF.

[ValueMaven]

yes - but my point was that if he really views it as Berk's 3rd largest biz - he is unlikely to sell anytime soon

[thepupil]

yes - but my point was that if he really views it as Berk's 3rd largest biz - he is unlikely to sell anytime soon

I agree, I don't see him trimming at all and would be surprised. Just commenting on how WB thinks about the relative value of something we know the market value off (5.7% of AAPL) and the private BNSF and providing some context on BNSF comps.

[scorpioncapital]

Holding stocks - even forever stocks like AAPL - in taxable accounts sucks.

 

But then I tax-efficient trimmed AAPL something like 20+% lower. So maybe the right thing is not to trim...  ::)

 

It all depends [ : - ) ] [on the local tax system].

 

You mean those deadbeat countries that are tax havens?

 

[Spekulatius]

RationalWalk posted this on twitter - interesting way to look at it

 

Every $BRKA share has an indirect position of ~153 $AAPL

Every $BRKB share has an indirect position of ~0.102 $AAPL

 

It's easy to calculate your indirect ownership interest in Apple.

 

Buffett owns ~248,741 BRKA, so he indirectly owns a bit over 38 million AAPL worth ~$16 bn

 

In my opinion, the one position BRK should Consider trimming is KHC. KHC seems like a secular loser that temporarily benefits from increased grocery demand. There wouldn’t be egregiously high taxes to pay either.

[aryadhana]

Continuing the convo from the Q2 thread...  A somewhat interesting, if obvious, fact about repurchasing shares at a discount: further repurchasing at a similar price becomes relatively more attractive. 

 

There's also a lifecycle to investing.  I don't know what the weighted average age of Berkshire investors ex-Buffet is (that is, the expected age of the owner of a randomly selected share outstanding), but I would guess it's a lot higher than the market average, which is already quite high, and the company might be abstaining from repurchasing now in contemplation of a secular increase in natural sellers of its stock.  My guess is that any hint of an increase in capital gains taxes would be a catalyst here, given how substantial unrealized gains on this company must be. 

 

 

[cheapguy]

>the Louisiana Purchase are still kicking warrens ass but as far as $30B stock picks go, I’d agree.

 

Louisiana Purchase is a theft of Native american lands without recognizing their rights.

 

 

[Jurgis]

>the Louisiana Purchase are still kicking warrens ass but as far as $30B stock picks go, I’d agree.

 

Louisiana Purchase is a theft of Native american lands without recognizing their rights.

 

If we look at it that way, pretty much all USA is like that.  ::)

[valueinvesting101]

Can WeChat ban announced by Trump lead to app getting removed from iPhone app store in China? China is important market for Apple and impact of iPhone demand will also have negative effects on other product and services demand.

 

I wonder if Buffett can see the impact of such changes to Apple valuation. It seems to be priced for perfection and can lead to quick haircut of 30-40% if demand in China tanks or similar change can occur.

[Xerxes]

I own Tencent for a few years now.

 

My view is that although the Tik-Tok move was fair game, after all the People's Republic doesn't allow Facebook in its dominion, the statement about Tencent's WeChat doesn't have much leg.

Fine, they can ban its use in the U.S., a minor market for Tencent anyways.

 

That said the nuclear option of forcing the WeChat off Apple's product (which is being asked here) and potentially [although this hasn't been said yet] asking Tencent divest its U.S. equity holdings* is in my opinion a line that would beg for a response from the Politburo. I can think of a number of U.S. companies whose growth is largely anchored on the China story, Starbucks, Tesla, Apple itself that would become fair play. So I don't think it will get there.

 

WeChat might be something that Navarro shoved it in at the last minute as the statement was being drafted.

 

*Tencent holdings includes: ~3% of Tesla, 5% of Activision Blizzard, 40% of Epic Games, 25% of Sea Limited (the south east Asian e-commerce listed in NYSE), 20% of JD-Com (which is actually a Chinese company but listed on NYSE)

 

 

 

[Xerxes]

Just a quick observation on the BRK buybacks, perhaps this is Buffet returning/sharing with us his windfall of his Apple trade, without him really selling it.

In his mind, "I'll just ramp-up the buybacks as long as it is within my price range".

 

Sadly, while the Apple trade has been great for BRK, the company, BRK shareholders would probably be rewarded in a greater disparity between market value and sum of the parts. How to fix that => ramp-up buybacks.

[gfp]

I don't understand anything you are saying here.  You seem to contradict yourself several times.

 

Just a quick observation on the BRK buybacks, perhaps this is Buffet returning/sharing with us his windfall of his Apple trade, without him really selling it.

In his mind, "I'll just ramp-up the buybacks as long as it is within my price range".

 

Sadly, while the Apple trade has been great for BRK, the company, BRK shareholders would probably be rewarded in a greater disparity between market value and sum of the parts. How to fix that => ramp-up buybacks.

[Xerxes]

Apologies, let me rephrase and add background.

 

July 18, 2018 - BRK said that buyback will be based on intrinsic value going forward, scrapping 20% BV rule.

Since then, BRK share price has mostly in between $195 and $215 save for the immediate period before Covid-19.

 

Why is that back then, BRK has not bought back significantly, when it had pockets of opportunities around $200. And I am not referring to the Feb-March drawdowns this year. That we can explain by not fully understanding the liabilities etc. etc. So what changed on the upside (as a positive) since July 2018 that makes BRK today more attractive than BRK back in summer of 2018 and most of 2019. The price range has not changed meaningfully.

 

Post-Q2 (in July), it is reported that: "Berkshire reported the equivalent of 1.59 million "A" shares outstanding as of July 30, a decline of about 8,500 shares from the 1.6 million shares outstanding on June 30. Assuming stock buybacks are behind the decline, Buffett and his team probably spent between $2.3 billion and $2.5 billion based on the trading range of Berkshire "A" shares in July."

 

ref: https://markets.businessinsider.com/news/stocks/warren-buffett-berkshire-hathaway-7-billion-stock-buybacks-3-months-2020-8-1029490985#

 

So what I am saying is that perhaps the one lever that affected Buffet in his calculus to ramp-up his buyback, something that he could have done also in 2018 and 2019 (again granted the price range is slightly better today), is the massive outperformance of Apple, which pushed intrinsic value (or sum of parts) further and further away from market value.

 

Something akin to 'wealth effect'; he feels better spending on buybacks now that he has good margin of safety build by Apple. Granted all unrealized.

 

Another point I think perhaps affected his calculus (just like any other investor) is that covid-19 provided a clear rebase-line for him (and others) to basket his assets in two camps: (1) performers (2) laggards impaired by covid-19. With that clarity and re-baseline, now clear in mind, he can now chart a new path for the conglomerate. For instance he clearly made up his mind that he is done with Wells Fargo and he like Bank of America. He is done with Airlines and quickly wrote off a third of PCP. We obviously don't know what he is thinking, but I believe although the total liabilities & secondary effects of Covid-19 remain unknown today, he probably has a much better sense of the overall picture, and where he wants to take the company, than the in the 2018-19 years before storm, when he was waiting for something to happen ... 

 

[mattee2264]

 

I think the buybacks are a reflection of realizing that his businesses were holding up a lot better than expected and that is shown in the Q2 numbers. And of course the gains on Apple helped to prevent a decline in book value. So Buffett was probably buying back stock at around 1.1x book value and past form shows that is the level where he is willing to do an aggressive buyback. And of course he raised some cash through selling airlines and trimming banks so the buybacks haven't really reduced the cash cushion he is keen to maintain.

 

Also buybacks are a residual use of capital so I think they also indicate that as he said in the AGM even after the market decline he didn't really see that many attractive opportunities out there.

[ValueMaven]

Let me throw this out to the group - how does your valuation of BERK change if 1) They start paying an annual 2% dividend, and/or 2) state that they will be more active on the buyback front.  Since Buffett worships at the memory of Singleton, I cant help to think how Teledyne developed throughout the years (no divy for 25yrs and then started paying one, and specials etc before being broken-up).  Frankly, I still think the stock is cheap here. 

[brycepeterson]

I think the shares are relatively cheap here and Berkshire should be buying some now ($210 per B or below).  Berkshire's recent share buybacks have effectively decreased the diluted share count, which is the first fact I analyze when judging buybacks. If Berkshire was a more aggressive buyer of its stock when markets were down, that would be favorable to me.  For example, if Berkshire bought back $10-$50 billion of stock in March-June 2020, and consistently bought back during down quarters / years, I think the market would award the company with higher multiples.

 

 

A 2% dividend wouldn't change my opinion.

[WneverLOSE]

I'm trying to understand the power of Berkshire float, I have a basic understanding of how it helps, if investor A has 100$ invested at 10% at the end of the year he will make 10$ (or 10%) and if investor B has 100$ and he gets 20$ from a friend who tells him "Hold this money for me for a year and I will pay you 1$ for it" he has 120$ to invest and he earned 13$ that year (12$ with a 10% return and 1$ from "underwriting profit") for a 30% advantage due to float.

 

But in the real world things are not so simple, in order to get float you have to have some of the 100$ invested in the operation of getting float, you have to buy a building, office chairs, computers and so on in order to generate this float and underwriting profit, so if you invest out of the original 100$ something like 30$ to generate 20$ of float you only have 90$ to invest so I was wondering if someone here can walk me through Berkshires historical numbers and how much capital is invested in the insurance businesses in order to generate how much float and how much "leverage" that float generated for Berkshire.

[Cigarbutt]

I'm trying to understand the power of Berkshire float, I have a basic understanding of how it helps, if investor A has 100$ invested at 10% at the end of the year he will make 10$ (or 10%) and if investor B has 100$ and he gets 20$ from a friend who tells him "Hold this money for me for a year and I will pay you 1$ for it" he has 120$ to invest and he earned 13$ that year (12$ with a 10% return and 1$ from "underwriting profit") for a 30% advantage due to float.

 

But in the real world things are not so simple, in order to get float you have to have some of the 100$ invested in the operation of getting float, you have to buy a building, office chairs, computers and so on in order to generate this float and underwriting profit, so if you invest out of the original 100$ something like 30$ to generate 20$ of float you only have 90$ to invest so I was wondering if someone here can walk me through Berkshires historical numbers and how much capital is invested in the insurance businesses in order to generate how much float and how much "leverage" that float generated for Berkshire.

Think of the return on equity invested in insurance operations as a function of 1-underwriting gains, 2-investment income from fixed income and 3-'income' from investments in equities, net of financial leverage.

1-includes the insurance losses and the underwriting expenses required to maintain operations and maintain or build float. Once a steady-state is reached, the float is typically a multiple of equity (2-3:1).

Look at the following (pages 8 and 27):

https://www.tilsonfunds.com/BRK.pdf

-BRK has produced low but consistent underwriting gains (negative cost of float contributing to return).

-BRK has produced low returns from fixed income (size more or less balances float reserves) because of low interest rates and a staunch resistance to reach for yield.

-BRK has produced market-like return on the equity portfolio side (not shown in pages 8 or 27).

So, overall, the return on equity on the insurance side has been satisfactory (especially compared to P+C industry peers). The magic here is the growth in underlying operations. Since 2004, float reserves have have compounded at 21.3% and premiums earned at 23.7%.

It can be a powerful combination and BRK is positioned to benefit in pretty much any scenario.

Hope this helps.

[rmeurer]

So what is the fat pitch price based on guesses on Q3 2020 BV?