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BRK 2011 Valuation


twacowfca
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Quote from: Charlie on May 25, 2011, 12:57:51 PM

twacowfca, what do you think Berkshire is worth at the moment?

 

I have recently sold most of my other holdings and bought Berkshire Hathaway.

 

At P/B 1,2 and Berkshire coming out of recession the stock is too cheap to ignore.

 

I´m also looking at Munich Re, because in a recent interview Buffett said he is buying

 

a lot of shares of one stock.

 

 

Charlie,

 

 

BRK could be valued many ways:

 

By what the market is willing to pay for it.

 

As a sum of the parts if broken up and spun off or sold separately.  This, although unlikely, would probably be much higher than BRK's market price.  The current stock price reflects the lack of a Buffett Premium recently and the usual discount placed on conglomerates.

 

By Tilson's method which, if i'm not mistaken, mostly sums the value of net investments and puts a multiple on the pretax operating earnings of the subsidiaries.  Tilson's value was about $154K/A SH EOY 2010.

This is probably a conservative method that Warren would not disagree with because he expressed the opinion at the recent AGM that BRK's normalized pretax operating earnings were $17M.

 

Then there is Berkowitz' method that adds the idea of a growing stream of float as an interest free loan. His valuation in recent years has given a range of values that average perhaps as much as 20% higher than other valuations.  This is not unrealistic because there is very competent succession in place in BRK's insurance operations, and interest free float may continue to grow for many years.

 

Montross, Jain and others are exceptional managers, very loyal to BRK and its culture.  Hamburg is a very good de facto COO as well as CFO.  He would be an excellent interim CEO or permanent CEO, although some managers would rightly think he isn't the same soft touch as Warren.  He is probably the most underpaid large cap CFO in the country.  His continuing to work hard for relatively low pay shows great character.  Other potential CEOs have fallen on the altar of greed.  The BRK managers are used to reporting to him.  Therefore, there is a likelihood of a smooth succession of CEOs when the time comes.  This might not be the case with a different, successor CEO, no matter how talented.

 

My personal opinion is that all these valuations are on the low side.  I agree that BRK is the best large cap value in the current market.  During the last decade, BRK has  grown its book value per share nicely for a large cap.  Its diversification with many good businesses gives great stability.  Reserves are redundant.  The business cycle is expanding.  Many think a hard market for insurance premiums is at hand.  Most importantly, BRK's earnings are not hostage to underfunded pensions or generally needed for acquisition or reinvestment to maintain competitiveness as with most other companies.  They are potentially available for owners, allocated by stewards with regard to maximizing value for stockholders without the typical waste from the institutional imperative.  :)

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When you said "Charlie" - I thought Charlie Munger - apparently it is some one else.

 

"Charlie" username is an infrequent poster on this board.  This post was copied from another less appropriate thread at Sanjeev's suggestion and reloaded under the new, better heading.  :)

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Does anybody know why Marc Hamburg is not a reporting insider with the SEC?  I assume he owns at least some Berkshire stock, yet he doesn't report anything.

 

No Stock?  At other companies they at least show a dash for zero shares.

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  • 2 weeks later...

twacowfca, have you (or someone else! ;)) ever heard of the metric "70% of float + BV = IV" (where 70% is supposed to be véry conservative) for BRK?

Also, do you have any insight in the growth potential of premiums when we get into a hard market?

 

I have been talking to acquaintances both on- and offline and almost everyone gives BRK & Buffett zero credit. "Stock performance is terrible the last decade." "Buffett is getting to old." "It is trading at a premium to book value and therefore it is expensive." "Buffett overpaid for Burlington and BRK is becoming to big to handle." "BRK's PE is 17, that is very expensive!" etc.

 

My 3th order is about to be exercised, down to $100'000 we go! In a strange way here it feels very comfortable to average down. I like it!

 

“Today, however, Berkshire’s situation is reversed: Now, our book value [+- $100'000] far understates Berkshire’s intrinsic value, a point true because many of the businesses we control are worth much more than their carrying value.”
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*repetitive mode*

 

In ran into this reading the annual letters :

 

Share Repurchases

Recently, a number of shareholders have suggested to us that Berkshire repurchase its shares. Usually the requests

were rationally based, but a few leaned on spurious logic.

 

There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the

company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business

and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated. To this we add

a caveat: Shareholders should have been supplied all the information they need for estimating that value. Otherwise,

insiders could take advantage of their uninformed partners and buy out their interests at a fraction of true worth. We

have, on rare occasions, seen that happen. Usually, of course, chicanery is employed to drive stock prices up, not down.

The business “needs” that I speak of are of two kinds: First, expenditures that a company must make to maintain

its competitive position (e.g., the remodeling of stores at Helzberg’s) and, second, optional outlays, aimed at business

growth, that management expects will produce more than a dollar of value for each dollar spent (R. C. Willey’s

expansion into Idaho).

 

When available funds exceed needs of those kinds, a company with a growth-oriented shareholder population can

buy new businesses or repurchase shares. If a company’s stock is selling well below intrinsic value, repurchases usually

make the most sense. In the mid-1970s, the wisdom of making these was virtually screaming at managements, but few

responded. In most cases, those that did made their owners much wealthier than if alternative courses of action had been pursued.

Indeed, during the 1970s (and, spasmodically, for some years thereafter) we searched for companies that were

large repurchasers of their shares. This often was a tipoff that the company was both undervalued and run by a

shareholder-oriented management.

 

That day is past. Now, repurchases are all the rage, but are all too often made for an unstated and, in our view,

ignoble reason: to pump or support the stock price. The shareholder who chooses to sell today, of course, is benefitted

by any buyer, whatever his origin or motives. But the continuing shareholder is penalized by repurchases above intrinsic

value. Buying dollar bills for $1.10 is not good business for those who stick around.

 

Charlie and I admit that we feel confident in estimating intrinsic value for only a portion of traded equities and

then only when we employ a range of values, rather than some pseudo-precise figure. Nevertheless, it appears to us that

many companies now making repurchases are overpaying departing shareholders at the expense of those who stay. In

defense of those companies, I would say that it is natural for CEOs to be optimistic about their own businesses. They

also know a whole lot more about them than I do. However, I can’t help but feel that too often today’s repurchases are

dictated by management’s desire to “show confidence” or be in fashion rather than by a desire to enhance per-share

value.

 

Sometimes, too, companies say they are repurchasing shares to offset the shares issued when stock options granted

at much lower prices are exercised. This “buy high, sell low” strategy is one many unfortunate investors have employed

— but never intentionally! Managements, however, seem to follow this perverse activity very cheerfully.

 

Of course, both option grants and repurchases may make sense — but if that’s the case, it’s not because the two

activities are logically related. Rationally, a company’s decision to repurchase shares or to issue them should stand on

its own feet. Just because stock has been issued to satisfy options — or for any other reason — does not mean that stock

should be repurchased at a price above intrinsic value. Correspondingly, a stock that sells well below intrinsic value

should be repurchased whether or not stock has previously been issued (or may be because of outstanding options).

 

You should be aware that, at certain times in the past, I have erred in not making repurchases. My appraisal of

Berkshire’s value was then too conservative or I was too enthused about some alternative use of funds. We have

therefore missed some opportunities — though Berkshire’s trading volume at these points was too light for us to have

done much buying, which means that the gain in our per-share value would have been minimal. (A repurchase of, say,

2% of a company’s shares at a 25% discount from per-share intrinsic value produces only a ½% gain in that value at

most — and even less if the funds could alternatively have been deployed in value-building moves.)

 

Some of the letters we’ve received clearly imply that the writer is unconcerned about intrinsic value considerations

but instead wants us to trumpet an intention to repurchase so that the stock will rise (or quit going down). If the writer

wants to sell tomorrow, his thinking makes sense — for him! — but if he intends to hold, he should instead hope the

stock falls and trades in enough volume for us to buy a lot of it. That’s the only way a repurchase program can have

any real benefit for a continuing shareholder.

 

We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value,

conservatively calculated. Nor will we attempt to talk the stock up or down. (Neither publicly or privately have I ever

told anyone to buy or sell Berkshire shares.) Instead we will give all shareholders — and potential shareholders — the

same valuation-related information we would wish to have if our positions were reversed.

 

Recently, when the A shares fell below $45,000, we considered making repurchases. We decided, however, to

delay buying, if indeed we elect to do any, until shareholders have had the chance to review this report. If we do find

that repurchases make sense, we will only rarely place bids on the New York Stock Exchange (“NYSE”). Instead, we

will respond to offers made directly to us at or below the NYSE bid. If you wish to offer stock, have your broker call

Mark Millard at 402-346-1400. When a trade occurs, the broker can either record it in the “third market” or on the

NYSE. We will favor purchase of the B shares if they are selling at more than a 2% discount to the A. We will not

engage in transactions involving fewer than 10 shares of A or 50 shares of B.

 

Please be clear about one point: We will never make purchases with the intention of stemming a decline in

Berkshire’s price. Rather we will make them if and when we believe that they represent an attractive use of the

Company’s money. At best, repurchases are likely to have only a very minor effect on the future rate of gain in our

stock’s intrinsic value.

 

This would imply that in 2000 Buffett & Munger thought BRK at $45'000 was at least 25% under IV.

Adding in 11 years the BV growth at this starting point of $45'000 gives a price of around $113'500.

Then Add 33,33% to make up for the 25% discount to come to conservative IV which would be almost $151'000. Seems like a fair MOS.

 

This is when we would say that at $45000 Buffett believed BRK to be undervalued by just 25% and not more. The stock was up more than 70% from its low at $41'300 in 9 months or almost 60% from $45000. The same result in 2-3 years would already make me thrilled (versus the risk involved), adding in time as the friend of a wonderful business!

 

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I'm buying shares here, but one thing you can count on is that Buffett won't announce any sort of share buyback while the WSC deal is pending.  It would look too much like jawboning the share price up during the period when the average price determines the exchange ratio.  He's definitely not happy about the price he will be issuing shares for WSC, though!  And BRK had to eat WSC minority shareholders' share of the Q1 insurance losses.

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I'm buying shares here, but one thing you can count on is that Buffett won't announce any sort of share buyback while the WSC deal is pending.  It would look too much like jawboning the share price up during the period when the average price determines the exchange ratio.  He's definitely not happy about the price he will be issuing shares for WSC, though!  And BRK had to eat WSC minority shareholders' share of the Q1 insurance losses.

 

He won't ever buy back a share. All he has to do is announce that he will buy back shares and the price will adjust, overnight. That's what happened last time he announced intentions. It quickly became more fairly valued. mission accomplished.

 

I agree. Chances are history will repeat itself and if not IV will keep compounding while we wait. :)

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He won't ever buy back a share. All he has to do is announce that he will buy back shares and the price will adjust, overnight. That's what happened last time he announced intentions. It quickly became more fairly valued. mission accomplished.

 

I agree that that's how it used to work - but the market is not too responsive to his valuation hints these days.  It used to be that Munich Re would have gone up with folks learning that Buffett was over 10% and "it is intended to acquire more", but that didn't happen.

 

There used to be a premium in the stock price for the skills of Warren Buffett.

 

Now there is a large amount of supply every day and the general S&P index effects pushing it down on weak days for the overall market.  I could see a buyback actually getting done with sentiment on Berkshire where it is these days.

 

A huge contingent of longtime Berkshire shareholders are in the philanthropic phase of their lives - that's a lot of supply.

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What is a little surprising to me is how BRK is selling off at the same time it appears insurance/re-insurance rates may be in the process of hardening. Lets hope both those trends continue (as I only have a small position in BRK and would be happy to make it larger). :)

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twacowfca, have you (or someone else! ;)) ever heard of the metric "70% of float + BV = IV" (where 70% is supposed to be véry conservative) for BRK?

Also, do you have any insight in the growth potential of premiums when we get into a hard market?

 

I have been talking to acquaintances both on- and offline and almost everyone gives BRK & Buffett zero credit. "Stock performance is terrible the last decade." "Buffett is getting to old." "It is trading at a premium to book value and therefore it is expensive." "Buffett overpaid for Burlington and BRK is becoming to big to handle." "BRK's PE is 17, that is very expensive!" etc.

 

My 3th order is about to be exercised, down to $100'000 we go! In a strange way here it feels very comfortable to average down. I like it!

 

“Today, however, Berkshire’s situation is reversed: Now, our book value [+- $100'000] far understates Berkshire’s intrinsic value, a point true because many of the businesses we control are worth much more than their carrying value.”

 

 

 

The 70% of float + BV = IV rule of thumb may reflect the idea that there are some restrictions on the use of float having to do with liquidity to meet obligations to pay claims.  Otherwise, Warren's observation that growth in interest free "permanent" float is better than an equal increase in pretax earnings is accurate.  Berkowitz' method of valuing a growing stream of float from good underwriting as an interest free

loan is perhaps better than that rule of thumb, given the strength of BRK's culture.  :)

 

 

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Is it me or BRK is nearly priced at 1x investment per share only?! It means that not a lot of value is given to all the great operating companies among BRK? If I remember correctly (I am writing rapidly here, without looking at the numbers), investment per share was around 95k$/share and now the stock is as 111k$, so 16$k for the operating portion of BRK, which means, 1 or two times operating earnings maybe?

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twacowfca, have you (or someone else! ;)) ever heard of the metric "70% of float + BV = IV" (where 70% is supposed to be véry conservative) for BRK?

Also, do you have any insight in the growth potential of premiums when we get into a hard market?

 

I have been talking to acquaintances both on- and offline and almost everyone gives BRK & Buffett zero credit. "Stock performance is terrible the last decade." "Buffett is getting to old." "It is trading at a premium to book value and therefore it is expensive." "Buffett overpaid for Burlington and BRK is becoming to big to handle." "BRK's PE is 17, that is very expensive!" etc.

 

My 3th order is about to be exercised, down to $100'000 we go! In a strange way here it feels very comfortable to average down. I like it!

 

“Today, however, Berkshire’s situation is reversed: Now, our book value [+- $100'000] far understates Berkshire’s intrinsic value, a point true because many of the businesses we control are worth much more than their carrying value.”

 

 

 

The 70% of float + BV = IV rule of thumb may reflect the idea that there are some restrictions on the use of float having to do with liquidity to meet obligations to pay claims.  Otherwise, Warren's observation that growth in interest free "permanent" float is better than an equal increase in pretax earnings is accurate.  Berkowitz' method of valuing a growing stream of float from good underwriting as an interest free

loan is perhaps better than that rule of thumb, given the strength of BRK's culture.  :)

 

 

Thanks for the explanation twacowfca, makes a lot of sense. :)

 

Is it me or BRK is nearly priced at 1x investment per share only?! It means that not a lot of value is given to all the great operating companies among BRK? If I remember correctly (I am writing rapidly here, without looking at the numbers), investment per share was around 95k$/share and now the stock is as 111k$, so 16$k for the operating portion of BRK, which means, 1 or two times operating earnings maybe?

 

;) Around 2-3x normalized earnings without counting underwriting results (8 straight years of profit now and a hardening market could be on its way...) and investment income (duh) yes. That is for earnings that are growing at 20% annually on average...

 

I checked and doubled checked valuations based on investments + share, float + BV, BV, history, ... and can't find any reason for a valuation under $150k. $155-165k seems a conservative guess of IV.

 

Tilson is explaining his bull thesis for BRK since a couple of months now in his presentations (http://www.tilsonfunds.com/BRK.pdf). Funny thing is the same undervaluation happened in 2000 when Tilson told the same thing : http://www.fool.com/boringport/2000/boringport000214.htm

 

Buffett announcing a possible share buyback or plainly stating that he feels BRK is undervalued could once again be a major catalyst for the stock price if the stock stays depressed a little longer.

 

I bought more yesterday under $75.

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Intrinsic Value – Today and Tomorrow

"Though Berkshire’s intrinsic value cannot be precisely calculated, two of its three key pillars can be

measured. Charlie and I rely heavily on these measurements when we make our own estimates of Berkshire’s

value.

The first component of value is our investments: stocks, bonds and cash equivalents. At yearend these

totaled $158 billion at market value.

 

.....Berkshire’s second component of value is earnings that come from sources other than investments and

insurance underwriting. These earnings are delivered by our 68 non-insurance companies, itemized on page 106.

In Berkshire’s early years, we focused on the investment side. During the past two decades, however, we’ve

increasingly emphasized the development of earnings from non-insurance businesses, a practice that will

continue."

 

The first component is $158 billion.  You need to make your own estimate of normalized earnings for the second component.  Just remember, Buffett paid $40 billion for BNSF and it is working out better than he expected.  $158 billion + $40 billion = $198 billion.  Current market cap of BRK is $183B.

 

I think you can safely say there is a nice margin of safety in the current valuation. 

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  • 4 weeks later...

BRK is well positioned for those who want exposure to:

1.) insurance/re-insurance: market looks to be in the process of bottoming

2.) peak oil: BNSF will benefit should oil prices continue to go higher

3.) US housing: many BRK op co's will benefit when things improve

 

Bottom line, BRK looks cheap based on current earnings; given the types on businesses BRK is exposed to earnings should grow nicely over the next 3 to 5 years. Looks like a solid holding (in place of a bond).

 

For all the talk about the risk of Buffett and his age, I am surprised more people are not talking about Ajit and the size of the business he manages... what if Ajit is hit by a bus one day (god forbid of course!)?

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:) Well, I am new to investing so I like to keep it simple. I actually have around 15% extra cash at hand but it is a waste to keep it all on my brokers account. It's more cash than I want but I have time, one step at a time.

 

In case of BRK, when you know BRK holds a $14b investment in KO, almost $10b in WFC, $2b in WMT, ... Those 3 things for example add up to 14% of BRK's current market valuation. Which means my portfolio has a 7% combined 'share' in KO, WFC & MWT and a lot more in many other companies. What's not to like if you believe in the current undervaluation?

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