2021 Q4 BV

[boilermaker75]

Since Buffett took control of BRK, there has never been a day when SPY was a better buy and today certainly is not that day.

[thepupil]

23 hours ago, RiskAdjReturn said:

no, not low nav stocks....just talking about buying stocks at spot (ie spy at market price)....vs paying for berks net asset at 1.4x

 

think you should take a closer look at Berkshire. only about $500-$600B / $960B of assets are financial (cash/t-bills/stocks/etc). 

 

There's also significant value in borrowing $90 billion for 0% with unknown but long duration (deferred tax liability). 

 

There's value in borrowing $75 billion of BNSF / BE bonds at very low rates for very long term, likewise with Berkshire corporate debt. 

 

Then there's the $150 billion of float, which is more complicated but likely not worth par as a liability (I'm not in the camp of adding it back). 

 

So if you have assets on the balance sheet that aren't marked to market and have liabilities that aren't worth their full accounting value, might Berkshire be worth a significant premium to book? Yes. YEs it might. 

 

I've seen you respond "well then where's the super high ROIC". Because book value is going up through stock appreciation, this clouds earnings power relative to book of the operations. Also, Berkshire Energy is not a super high ROE business, but it's a very stable / safe business with ltos of reinvestment opportunities. What would you pay for a sovereign perpetual with a coupon of 8%-10%? (I'm not saying it's risk free but the utility index does not trade at book in this rate environment). 

 

You can't cherry pick Apple (which is carried at about 84% of 12/31 market value by the way because of the DTL). You gotta look at the whole thing. 

[RiskAdjReturn]

thanks pupil, you are tracking my argument at least.

 

first: to some in this thread: for a big chunk of asset value here, at fmv, you are paying 1.4x that "nav" or "book" , whatever term you prefer. in the US, one buys a mutual fund, or etf, or stock, at "1x nav"......for Berk's same apples, one is paying 1.4x

 

then the focus shifts to how much "juice" or suppressed value there is on the operating assets side of house, which are you paying 1.4x accounting book for, to help compensate paying 1.4x for berk's securities and cash.

 

the math is the math, dispassionate, objectve, etc.

 

pupil.....come agin on the aapl 84%? in my mind, the gross fmv for apple and of course offset by the accrued taxable gain liability on books. but that is still 1x aaple in the nav nav captures the tax liability)

 

 

on the operating assets side....I still maintain, prima facie, that  if the operating earnings, relative to Berk's operating asset book capital (bnsf, bhe, etc) isn't attractively high ROE then the "juice" isn't most most think, unless earnings power is suppressed in gaap earnings relative to intrinsic value, in some unique way vs other companies.

 

value of float: how much can I make on $140B a year, with regulatory on restrictions of usage (stocks/cash etc). let's say 4% after tax which is me being nice in today's interest rate environment. that's $5.6 Billion of earnings from the "free float business".....put that in div discount model, at say 6% discount rate. that's $93B of value that is hidden and should be added to Berk. I concede this. (one can play with assumptions)

 

I appreciate the conversation, thanks all. 

 

 

[mcliu]

Another perspective, would a closed-end fund trade at NAV if it had an all-star manager with an excellent LT track record and ability to generate above market returns while taking on little risk and employing negative-interest-rate leverage?

 

[thepupil]

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pupil.....come agin on the aapl 84%? in my mind, the gross fmv for apple and of course offset by the accrued taxable gain liability on books. but that is still 1x aaple in the nav nav captures the tax liability)

 

Apple = $160 billion MV as of 12/31, $35 billion of cost. $125 billion unrealized gain. DTL = $125 B * 20% = $25 billion. 

 

Book Value = $135 billion ($160B - $25B). $135  Billion / $160 billion = 84%. The book value of Berkshire's stake in AAPL is equal to 84% of the market value gross of the deferred tax liability. I think total addback of the DTL is too aggressive, but also would not deduct the entire deduction. 

 

Berkshire has a $90 billion DTL.

 

$15B is related to BNSF. As long as Capex > Depr, this "never" comes due. You can see increase in the DTL as a consistent addback on BNSF's cash flow statement. For valuing Berkshire, this should be disregarded because it will be included in the valuation of BNSF. 

 

$13B is related to BE. Likewise, if you're valuing Berkshire Energy seperately, then you should not adjust for this at the Berkshire level. 

 

That leaves about $60 billion of DTL, most of which is related to unrealized appreciation like that of AAPL above. The most aggressive choice would be to ignore it entirely. The most conservative would be to pretend that Berkshire will sell all stocks immediately and realize that liability (ie it's worth full book).

 

For me the truth lies in between, but I think that full deduction of the securities related DTL is overly conservative. 

 

 

[RiskAdjReturn]

thanks...yeah that's an interesting thought process on the accrued taxes. I prefer backing it out fully but that's the credit investor in me. I see it as no different than long term debt, etc. because at end of day, I want to know that the asset value I'm buying, has a {xx] embedded tax bill. its just a question of NAV purity for me, and from there I can do my puts and takes. its of course pretty inefficient to own stocks in a c-corp for public investors, so I want to be intellectually honest about the fundamental reality of it

[thepupil]

33 minutes ago, RiskAdjReturn said:

 

 

 

on the operating assets side....I still maintain, prima facie, that  if the operating earnings, relative to Berk's operating asset book capital (bnsf, bhe, etc) isn't attractively high ROE then the "juice" isn't most most think, unless earnings power is suppressed in gaap earnings relative to intrinsic value, in some unique way vs other companies.

 

what do you think BNSF and BHE are worth? 

 

https://www.berkshirehathaway.com/BHE2021InvestPresent.pdf

 

This is a nice presentation on BHE. BHE is generating about $4 billion of utility earnings (not inclusive of BYD gains, includes tax benefits). I'd say this is worth about $100 billion. 25x earnings. The utility index average is 24x. I think BHE is far above average utility. BHE is an advantaged, ESG friendly growth utility. there are few like it. It's correct that its nominal ROE is unimpressive (also BYD is $7B / $50B of the equity so growth in that is obscuring the ROE a bit). But there's massive investment going on at high single digit/maybe even double digit ROE's. The ability to invest massive amounts of capital at HSD ROE's and create a very durable income stream (vs say a portfolio of bonds) is a an advantage for Berkshire and adds ballast to the ship that is Berkshire. If you think I'm too aggressive, 1.4x book which would be $70 billion or 17.5x earnings which I think would be fairly reasonable as well. Arguing for book value is tough not right IMO. 

 

BNSF is a bit simpler than BHE which is a complex utility holding company undergoing truly massive investment. BNSF is bigger but less profitable than UNP. BNSF made about $6 billion last year. UNP made about $6.5 billion. My extremely shorthand lazy man's way of getting a starting point for BNSF is 0.9x UNP. UNP is $156B. 0.9x = $140 billion; this would be 23x GAAP. Book value is $46 billion. 

 

Collectively these two have $90 billion of equity (take Rails and energy assets of $215B, subtract $97 billion of liabilitis in that section of the 10K and $30B of the DTL). I think they're worth about $240 billion or 2.6x book. Those aren't conservative, but I'm happy to own them at the prices implied by Berkshire. 

 

Then there's Manufacturing, Mclane, and Service/Retailing

 

Manufacturing made $10 billion pretax, Mclane made $230mm, S&R made $4.4Billion. So in total about $14.5 billion of pretax profit. I know these less well than the rest.  Allocate your corporate interest, goodwill, etc, apply taxes, do whatever. Morningstar in August 2021 came to a valuaiton of 144K / share regarding this which is just north of $200 billion, which would seem reasonable to me given the quality/growth/ etc. I haven't mapped out precisely how much equity is attributable to this segment but in total it has $140 billion of identifiable assets, so the implied P/B s likely quite high. 

 

I think your pushback will be that these are lazy comps based or secondary valuation or that they're too rich or not what you would pay. That's fine. My point is that there's lots of Berkshire that a market based or NAV based approach just won't be relevant. this has been the thesis for 10 years and has played out well in absolute terms (and more recently in relative terms as well)

[boilermaker75]

I wrote some 310-strike and 312.5-strike March 4 expiration puts on BRKB. Nice premiums and not a terrible price to pay for BRKB if I get put to.

[adesigar]

2 hours ago, thepupil said:

 

BNSF is a bit simpler than BHE which is a complex utility holding company undergoing truly massive investment. BNSF is bigger but less profitable than UNP. BNSF made about $6 billion last year. UNP made about $6.5 billion. My extremely shorthand lazy man's way of getting a starting point for BNSF is 0.9x UNP. UNP is $156B. 0.9x = $140 billion; this would be 23x GAAP. Book value is $46 billion. 

I would say BNSF is worth more than UNP. UNP is doing PSR which forces customers to adapt to the railroad so BNSF is taking market share and volume from UNP. It’s not that BNSF can’t do PSR, it’s choosing not to.

[thepupil]

3 minutes ago, adesigar said:

I would say BNSF is worth more than UNP. UNP is doing PSR which forces customers to adapt to the railroad so BNSF is taking market share and volume from UNP. It’s not that BNSF can’t do PSR, it’s choosing not to.

 

yes, that very well may be true. Just trying to demonstrate that book or 1.4x book is way off. 

[RiskAdjReturn]

pupil, good stuff. BHE is a blackbox to me. unclear if that is, fundamentally, a good or great business. regulated, with cost recovery, constant churning of capex, etc. who knows. the cash flows / earnings don't really jump out and wow me, net of all the capex that is plowed in.

 

let's focus on rail for a second: first, I think we need to tax-affect the $6 of "Earnings" don't we?. but before doing that...$6 on 46B of book. that's 13% ROE. let say capex and depreciation wash, such that earnings = FCF. unclear if that is really good assumption though. capex required to "run in place" may be higher than depreciation. Just saying, cash flow don't lie. thats a 13% ROE on book. if tax affected, you are closer to 10%. sure some premium to book may be warranted, but this isn't a high ROIC business.

 

 

[thepupil]

9 minutes ago, RiskAdjReturn said:

pupil, good stuff. BHE is a blackbox to me. unclear if that is, fundamentally, a good or great business. regulated, with cost recovery, constant churning of capex, etc. who knows. the cash flows / earnings don't really jump out and wow me, net of all the capex that is plowed in.

 

let's focus on rail for a second: first, I think we need to tax-affect the $6 of "Earnings" don't we?. but before doing that...$6 on 46B of book. that's 13% ROE. let say capex and depreciation wash, such that earnings = FCF. unclear if that is really good assumption though. capex required to "run in place" may be higher than depreciation. Just saying, cash flow don't lie. thats a 13% ROE on book. if tax affected, you are closer to 10%. sure some premium to book may be warranted, but this isn't a high ROIC business.

 

 

please see BNSF's 10K. $6 billion of net income after tax. 

 

average FCF for last 3 years is ~$5 billion. BNSF has had higher capex than depreciation. how one views that is dependent on how one views the attractiveness of the overall returns. 

 

this is critical infrastructure of the US of A.

 

at what multiple do you think BNSF should trade? 

 

 

 

[RiskAdjReturn]

24 minutes ago, thepupil said:

please see BNSF's 10K. $6 billion of net income after tax. 

 

average FCF for last 3 years is ~$5 billion. BNSF has had higher capex than depreciation. how one views that is dependent on how one views the attractiveness of the overall returns. 

 

this is critical infrastructure of the US of A.

 

at what multiple do you think BNSF should trade? 

 

 

 

Thanks for clarification on it being after tax thats good

 

on the mulitple... I am not familiar enough with the earnings stability/cyclicality of rail, though I see your UNP comp mid 20s. So yeah that gets you your 2.4x ish. I take it the earnings power is very stable, repeatable, and has growth trajectory, to trade over 4 percent FCF yield ( unp)

 

 

 

[thepupil]

Yes I’m not a rails expert. I don’t think we should accepts the market’s appraisal of UNP as absolutely the right multiple for BNSF. But generally it’s an irreplaceable duopoly that can earn reasonable returns on large amounts of capital while also distributing a fair bit to its owner per year. It’s deserving of a low cap rate/ high multiple IMO.
 

Whether that’s 15x 20x or 25x (1.5-2.5x book) or whether the company is “underearning”

by not choosing to adopt PSR, we can have reasonable debate about those but big picture, but I think we can agree that it’s worth much more than book.

Edited March 1, 2022 by thepupil

[thepupil]

Also, I know you want to put BHE aside, but 

 

2009 - 2011: $1.1B --> $1.3B NI, investing about $2.5B / year. $14B equity in 2011

2019- 2021:  ~$4B NI, investing about $6.5- $7B / year. $47B equity in 2021

 

there's some inorganic in there (bought NV IIRC) but it's not really about huge ROE's so much as it as about deploying massive amounts of capital with safety/durability at decent regulated (low risk) returns. 

[thepupil]

On 3/1/2022 at 11:07 AM, RiskAdjReturn said:

thanks...yeah that's an interesting thought process on the accrued taxes. I prefer backing it out fully but that's the credit investor in me. I see it as no different than long term debt, etc. because at end of day, I want to know that the asset value I'm buying, has a {xx] embedded tax bill. its just a question of NAV purity for me, and from there I can do my puts and takes. its of course pretty inefficient to own stocks in a c-corp for public investors, so I want to be intellectually honest about the fundamental reality of it

 

I would argue ownership of Berkshire is very tax efficient. I pay a 4 handle marginal tax rate on any income that touches me. 

 

Berkshire pays 21% on an accrual basis and far lower on a cash basis (because of the DTL). Even if Berkshire paid cash for all its expense, keeping my money in Berkshire would be more tax efficient than pass through vehicle to me. In the past 3 years, Berkshire has booked $268 billion of pretax income, accrued $52 billion of income tax expense (19%), and paid $16 billion of cash taxes (6%). The power of tax deferral should not be underestimated. paying cash taxes equivalent to 6% of pretax income is not that bad. The cash taxes amount to 18% of the last 3 years operating earnings from non insurance subs. 

 

 

 

Of course, there's the fact that Berkshire needs to return its earnings via divvy to me or i need to sell (both of which trigger tax at my level) in order to monetize Berkshire.

 

I solve that through borrowing against it rather than selling and do not foresee having any reason to sell, particularly given the diversification and business quality (unless it became egregiously overvalued) 

 

I understand what you are saying regarding holding stocks in a C Corp is presumably tax inefficient because there are two layers of tax. But this isn't a high turnover mutual fund of stocks w/ C corp tax treatment. Very large portions of the portfolio of businesses are permanent or quasi permanent holdings. If one has a long term time horizon and doesn't intend to sell, holding Berkshire is very tax efficient at both the berkshire and investor level. Just look at the gross sales over the last 3 or so years. Buffett is selling $15-$16B / year on a $350B stock portfolio and $600-$800B portfolio of businesses; my own personal turnover is far higher. There iwll be some turnover, but Berkshire is not forced to sell anything because of $140B of cash and $30B of operating earnings. 

 

in theory, I think your idea of tax inefficiency has merit. in practice, i don't think it does. 

 

 

 

 

[gfp]

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but Berkshire is not forced to sell anything because of $140B of cash and $30B of operating earnings

 

Don't forget $9 Billion of avg. annual float growth

 

[RiskAdjReturn]

25 minutes ago, thepupil said:

 

I would argue ownership of Berkshire is very tax efficient. I pay a 4 handle marginal tax rate on any income that touches me. 

 

Berkshire pays 21% on an accrual basis and far lower on a cash basis (because of the DTL). Even if Berkshire paid cash for all its expense, keeping my money in Berkshire would be more tax efficient than pass through vehicle to me. In the past 3 years, Berkshire has booked $268 billion of pretax income, accrued $52 billion of income tax expense (19%), and paid $16 billion of cash taxes (6%). The power of tax deferral should not be underestimated. paying cash taxes equivalent to 6% of pretax income is not that bad. The cash taxes amount to 18% of the last 3 years operating earnings from non insurance subs. 

 

 

 

Of course, there's the fact that Berkshire needs to return its earnings via divvy to me or i need to sell (both of which trigger tax at my level) in order to monetize Berkshire.

 

I solve that through borrowing against it rather than selling and do not foresee having any reason to sell, particularly given the diversification and business quality (unless it became egregiously overvalued) 

 

I understand what you are saying regarding holding stocks in a C Corp is presumably tax inefficient because there are two layers of tax. But this isn't a high turnover mutual fund of stocks w/ C corp tax treatment. Very large portions of the portfolio of businesses are permanent or quasi permanent holdings. If one has a long term time horizon and doesn't intend to sell, holding Berkshire is very tax efficient at both the berkshire and investor level. Just look at the gross sales over the last 3 or so years. Buffett is selling $15-$16B / year on a $350B stock portfolio and $600-$800B portfolio of businesses; my own personal turnover is far higher. There iwll be some turnover, but Berkshire is not forced to sell anything because of $140B of cash and $30B of operating earnings. 

 

in theory, I think your idea of tax inefficiency has merit. in practice, i don't think it does. 

 

 

 

 

I hear ya. Kinda like the margin idea here to get liquidity in lieu of selling berk (given the diversity/ballast nature)....what's your % advance max against your position that you used as a guardrail? ie whats % of berk holding would you "access" for personal liquidity without feeling aggressive

[thepupil]

4 minutes ago, RiskAdjReturn said:

I hear ya. Kinda like the margin idea here to get liquidity in lieu of selling berk (given the diversity/ballast nature)....what's your % advance max against your position that you used as a guardrail? ie whats % of berk holding would you "access" for personal liquidity without feeling aggressive

 

i mean it's all one account, but Berkshire is the anchor tenant in my taxable account w/ IBKR. IT's about 30% of that account, which currently has no margin outstanding because i'm getting ready to send a boat load of money to uncle sam in april. if i choose to sell nothing and pay that with margin, I'd be about 20% levered in that account and <10% overall (including IRA's and stuff). 

 

I think margin usage is a very individual choice and one should potentially include the cost of "disaster puts" (way OTM) in order to prevent forced sales. 

 

In the past, I've used a general guideline of Buy $100 of Berkshire, Buy 30% OTM long term puts for 1-2%/yr, borrow $40 against the berkshire for general pupil purposes. that way i could always sell for a 30% loss and still be in line with general margin guidelines. 

 

IBKR would let me go nucking futs with margin. i could be 300% long if i wanted to. 

Edited March 2, 2022 by thepupil

[ValueMaven]

wow - the OXY 8% preferred plus 10yr warrents @ $60 is turning into one hell of a deal for Berkshire!  

[RiskAdjReturn]

would love it if those who follow the name closely could try to calibrate where they thing NAV would be, here, today on May 21....unless a CEF, I can't easily tracke the premium to book for Berk. but feel like I need a refresh during the big selloff and of course AAPL fall.

[adesigar]

3 hours ago, RiskAdjReturn said:

would love it if those who follow the name closely could try to calibrate where they thing NAV would be, here, today on May 21....unless a CEF, I can't easily tracke the premium to book for Berk. but feel like I need a refresh during the big selloff and of course AAPL fall.

No way to tell what Buffett did with the market drop. He could have spent anywhere from 5-50+ Billion on stocks/Buybacks. He was buying AAPL at 150 and BRK at 320.
 

My best guess is Stocks + Cash is down by about $55B which is about 10%. Last book value was $230 per B share so new book value is probably about $207. So I think BRK is trading at about 1.47x BV. 

[aryadhana]

the sources of Berkshire's "synergetic value", what makes it worth more than the sum of its parts are:

 

1)  It can acquire businesses for cheap using its stock, in ways few other corporations can since selling for stock isn't a realization event.  Doesn't work with companies most people wouldn't feel comfortable having their entire net worth invested in, forcing some degree of realization.  So Berkshire can buy for call it 25-30 percent less than other bidders, and that doesn't include the value of remaining involved if you so choose.  

 

2)  Cash flow is worth as much as the best reinvestment opportunity you have, with the highest incremental ROE.  Theoretically, you can just dividend your real earnings and the cash will find itself put to its best use.  In practice, there's a 23.8 percent tax on getting money out the door and a venture fund or investment banker involved in matching that dollar with its best corporate use.  This might cost 20 percent of what you have left over.  Which comes to a ~40 percent tax.  the work the banker and funds do might mean the allocation is a little better than what Berkshire can accomplish on average, but chances are you don't get to invest in Sequoia or at IPO price either.  

 

3)  A culture of spending money wisely, in shareholders' best interest, with management well-aligned, or at least acting and behaving like they are well-aligned.  You just don't get this with most other businesses, and have to suffer shared ownership with index funds run by people who actively hate shareholders.  A relatively engaged shareholder base and a management who thinks there is a relatively engaged shareholder base is worth a lot.  

 

4)  The science of how and why Berkshire works isn't a secret, but they are good at herding cats and other people are not.  How exactly are the managers of the businesses under the umbrella compensated?  How exactly do you reallocate cash from one to another?  Etc.  A lot to be had from doing this for decades, and it's not like you can find the answers to these questions online.  Probably only a few people that actually know.  

 

Each of these constitute durable sources of excess return that probably scale until Berkshire is an order of magnitude bigger than it already is.  And none of them require any better-than-market investing prowess, though it is likely that the people investing at Berkshire are better than average, so you would benefit from that as well.  Question is the extent to which this is priced in.  At 1.5x price-to-book, I think the answer is "nowhere near fully".  After all, a lot of the book value is considerably below replacement cost.  Hard to compare it to the market-weighted median or mean S&P 500 price-to-book given tech companies with balance sheets that do not reflect the very real assets created by their research, development, and engineering -- and other accounting oddities.  

 

THAT SAID- if it's going to be perpetually cheaper than it is worth, it has to pay a dividend (and not just a token) or commit to repurchasing itself when it is less than fully priced.  Otherwise going to be a bad investment.  

 

[Blugolds]

7 hours ago, aryadhana said:

 

 

THAT SAID- if it's going to be perpetually cheaper than it is worth, it has to pay a dividend (and not just a token) or commit to repurchasing itself when it is less than fully priced.  Otherwise going to be a bad investment.  

 

 

Haven't they shown this to be the case? There have been times when it seems as though they should have been buying and were not, but I think that was due to an unusual amount of market uncertainty at the time and Omaha will always error on the side of caution...but the buybacks of recent have been on the aggressive side historically. 

[aryadhana]

Yeah, I guess.  I’d like to see more in the way of a tender.  Or they can dividend out inverse warrants to shareholders to put the stock back on them, or sell the puts.  And I think they could have started buying back much sooner and more aggressively, but were hoping for an opportunity to make a big acquisition.  
 

Fine if they want to err on the side of caution, but that’s why I’d like to see a dividend.  There are a lot of people out there who reasonably see this as worth a lot more than the price, and I don’t think that gap is going to be closed with buybacks at the level they are comfortable with.  Dividends are a good way of ensuring that intrinsic value is actually realized over time, whatever happens to the price. 
 

Dividends are the only way a strategy of “I don’t care about the price, so long as I can keep buying it for less than it is worth” actually ever works out.

 

And it’s pretty clear the value of the marginal dollar to them really is very low, and in this case that marginal dollar is earning interest that is unnecessarily being double taxed.