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Value of Berkshire in 5 years?


redskin
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What is Berkshire Hathaway worth in 5 years?

 

The pre tax earnings of the non insurance businesses was $7,000/share in 2011.  Cash and investments was approximately $100,000/share.

 

Berkshire is generating $12 billion ($7,200/share) of free cash annually.

 

A few simple assumptions....

 

Cash and investments increase at a rate of 6% annually over next 5 years.  I would expect the investment portfolio to perform better but he is also holding a lot of cash at very low rates.

 

PV= 100,000

Rate= 6%

Periods= 5

FV= $134,000

 

Buffett is able to deploy the $12 billion of free cash in to wholely owned businesses with a hurdle rate of 10%. This would add approximately $720 annually to the pre tax earnings of non insurance businesses.  The non insurance businesses increase their pre tax earnings by 5% annually.

 

PV= 7,000

Payment= 720

Rate= 5%

Periods= 5

FV= 13,000

 

If you put a 10X multiple on the non insurance businesses you would get $130,000/share.  Add cash and investments and you get $264,000/share.  This would be an annual return of over 16% from the current price.

 

These numbers don't include the possibility of underwriting gains from the insurance businesses.  I also think the assumptions are very conservative.  While Buffett would prefer purchasing businesses entirely, it is likely he will use some of the incoming cash to increase his publicly traded securities, which I believe with current conditions he should be able to achieve the 10% hurdle rate.

 

I think the investment provides a very nice margin of safety.  Even if these conservative numbers turn out to be optimistic, the investment should still provide an adequate return.  I believe the returns will end up being significantly higher.

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I could be wrong but your assumptions seem reasonable.

 

Annual 16% return- I will take it - makes me think I should increase my allocation to BRK

 

I was thinking or hoping I would get a couple % more than market- say ~ 10%

 

 

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A couple questions, maybe you guys can answer

 

What is berkshires share of the earnings and interest income for their investments (not counting the interest on cash equiv.)?

 

Should the liabilities or at least a portion of the liabilities be subtracted out?

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A couple questions, maybe you guys can answer

 

What is berkshires share of the earnings and interest income for their investments (not counting the interest on cash equiv.)?

 

Should the liabilities or at least a portion of the liabilities be subtracted out?

 

If one values Berkshire as two businesses, the insurance business and the operating units, in order not to double count, I believe that one has to deduct the float i.e. liabilities from the insurance valuation.  Therefore, as it 31/12/2011, Berkshire had about $159bn of cash and investments in the insurance business with float of about $73bn giving a net value of about $86bn or $52,000/share.  The insurance business also generates underwriting profit so this would need to be added to the valuation.  Using a 2% underwriting profit and 5% investment income on the $30bn of premiums could give rise to a valuation of about $20bn, making the insurance business in total worth about $106bn or $64,000/share.  (One should note that when Berkshire purchased GEICO, it payed a premium of 1x premiums over book value)

 

Assuming the non insurance business generates about $12bn of pre tax earnings per year, an investor that assumes no growth in earnings and demands a 6% discount rate, would value that earnings stream at about $144bn or $87,000 per share. 

 

A no growth valuation of Berkshire equates to about $151,000 per share.  The question is how much can Berkshire grow earnings in the future for both the insurance and non insurance businesses.  If one assumes a 10% per annum growth rate  for the non insurance business for 5 years and then a 2% terminal growth rate, it would add another $100bn plus to the valuation or about $60,000 per share.  One should note that over the last 10 years Berkshire has increased its operating earnings for the non insurance units from $3.3bn in 2002 to over $12bn in 2011 implying a growth rate of 13.8% per annum.

 

At 120,000 per share, Berkshire looks cheap with a comfortable margin of safety!

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A couple questions, maybe you guys can answer

 

What is berkshires share of the earnings and interest income for their investments (not counting the interest on cash equiv.)?

 

Should the liabilities or at least a portion of the liabilities be subtracted out?

 

If one values Berkshire as two businesses, the insurance business and the operating units, in order not to double count, I believe that one has to deduct the float i.e. liabilities from the insurance valuation.  Therefore, as it 31/12/2011, Berkshire had about $159bn of cash and investments in the insurance business with float of about $73bn giving a net value of about $86bn or $52,000/share.  The insurance business also generates underwriting profit so this would need to be added to the valuation.  Using a 2% underwriting profit and 5% investment income on the $30bn of premiums could give rise to a valuation of about $20bn, making the insurance business in total worth about $106bn or $64,000/share.  (One should note that when Berkshire purchased GEICO, it payed a premium of 1x premiums over book value)

 

Assuming the non insurance business generates about $12bn of pre tax earnings per year, an investor that assumes no growth in earnings and demands a 6% discount rate, would value that earnings stream at about $144bn or $87,000 per share. 

 

A no growth valuation of Berkshire equates to about $151,000 per share.  The question is how much can Berkshire grow earnings in the future for both the insurance and non insurance businesses.  If one assumes a 10% per annum growth rate  for the non insurance business for 5 years and then a 2% terminal growth rate, it would add another $100bn plus to the valuation or about $60,000 per share.  One should note that over the last 10 years Berkshire has increased its operating earnings for the non insurance units from $3.3bn in 2002 to over $12bn in 2011 implying a growth rate of 13.8% per annum.

 

At 120,000 per share, Berkshire looks cheap with a comfortable margin of safety!

 

I think you are undervaluing the insurance subsiaries with your $85 billion estimate.  First, the insurance subsidiaries have a statuary surplus of $95 billion.  Second, I don't agree with deducting the float entirely.  By this logic, if float were to double to $140 billion it would add no value.  The float is a perpetual loan at 0% as long as they can maintain the current level of float while breaking even on underwriting.  If you were to discount the float, I don't think it would be by any more than what you would add to the valuation to account for the probability of an underwriting profit. 

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Guest longinvestor

A couple questions, maybe you guys can answer

 

What is berkshires share of the earnings and interest income for their investments (not counting the interest on cash equiv.)?

I

Should the liabilities or at least a portion of the liabilities be subtracted out?

 

If one values Berkshire as two businesses, the insurance business and the operating units, in order not to double count, I believe that one has to deduct the float i.e. liabilities from the insurance valuation.  Therefore, as it 31/12/2011, Berkshire had about $159bn of cash and investments in the insurance business with float of about $73bn giving a net value of about $86bn or $52,000/share.  The insurance business also generates underwriting profit so this would need to be added to the valuation.  Using a 2% underwriting profit and 5% investment income on the $30bn of premiums could give rise to a valuation of about $20bn, making the insurance business in total worth about $106bn or $64,000/share.  (One should note that when Berkshire purchased GEICO, it payed a premium of 1x premiums over book value)

 

Assuming the non insurance business generates about $12bn of pre tax earnings per year, an investor that assumes no growth in earnings and demands a 6% discount rate, would value that earnings stream at about $144bn or $87,000 per share. 

 

A no growth valuation of Berkshire equates to about $151,000 per share.  The question is how much can Berkshire grow earnings in the future for both the insurance and non insurance businesses.  If one assumes a 10% per annum growth rate  for the non insurance business for 5 years and then a 2% terminal growth rate, it would add another $100bn plus to the valuation or about $60,000 per share.  One should note that over the last 10 years Berkshire has increased its operating earnings for the non insurance units from $3.3bn in 2002 to over $12bn in 2011 implying a growth rate of 13.8% per annum.

 

At 120,000 per share, Berkshire looks cheap with a comfortable margin of safety!

 

I think you are undervaluing the insurance subsiaries with your $85 billion estimate.  First, the insurance subsidiaries have a statuary surplus of $95 billion.  Second, I don't agree with deducting the float entirely.  By this logic, if float were to double to $140 billion it would add no value.  The float is a perpetual loan at 0% as long as they can maintain the current level of float while breaking even on underwriting.  If you were to discount the float, I don't think it would be by any more than what you would add to the valuation to account for the probability of an underwriting profit.

In the 2011 annual report WEB has stated that the insur

ance float will most likely remain flat or decline slightly.

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A couple questions, maybe you guys can answer

 

What is berkshires share of the earnings and interest income for their investments (not counting the interest on cash equiv.)?

I

Should the liabilities or at least a portion of the liabilities be subtracted out?

 

If one values Berkshire as two businesses, the insurance business and the operating units, in order not to double count, I believe that one has to deduct the float i.e. liabilities from the insurance valuation.  Therefore, as it 31/12/2011, Berkshire had about $159bn of cash and investments in the insurance business with float of about $73bn giving a net value of about $86bn or $52,000/share.  The insurance business also generates underwriting profit so this would need to be added to the valuation.  Using a 2% underwriting profit and 5% investment income on the $30bn of premiums could give rise to a valuation of about $20bn, making the insurance business in total worth about $106bn or $64,000/share.  (One should note that when Berkshire purchased GEICO, it payed a premium of 1x premiums over book value)

 

Assuming the non insurance business generates about $12bn of pre tax earnings per year, an investor that assumes no growth in earnings and demands a 6% discount rate, would value that earnings stream at about $144bn or $87,000 per share. 

 

A no growth valuation of Berkshire equates to about $151,000 per share.  The question is how much can Berkshire grow earnings in the future for both the insurance and non insurance businesses.  If one assumes a 10% per annum growth rate  for the non insurance business for 5 years and then a 2% terminal growth rate, it would add another $100bn plus to the valuation or about $60,000 per share.  One should note that over the last 10 years Berkshire has increased its operating earnings for the non insurance units from $3.3bn in 2002 to over $12bn in 2011 implying a growth rate of 13.8% per annum.

 

At 120,000 per share, Berkshire looks cheap with a comfortable margin of safety!

 

I think you are undervaluing the insurance subsiaries with your $85 billion estimate.  First, the insurance subsidiaries have a statuary surplus of $95 billion.  Second, I don't agree with deducting the float entirely.  By this logic, if float were to double to $140 billion it would add no value.  The float is a perpetual loan at 0% as long as they can maintain the current level of float while breaking even on underwriting.  If you were to discount the float, I don't think it would be by any more than what you would add to the valuation to account for the probability of an underwriting profit.

In the 2011 annual report WEB has stated that the insur

ance float will most likely remain flat or decline slightly.

 

2011 Annual Report....

 

"It’s unlikely that our float will grow much – if at all – from its current level. That’s mainly because we

already have an outsized amount relative to our premium volume. Were there to be a decline in float, I will add,

it would almost certainly be very gradual and therefore impose no unusual demand for funds on us."

 

This is how I look at the float.  What would you pay to have $70 billion interest free and the ability to have Buffett, Combs and Weschler invest the money for you? 

 

If Berkshire can make a 8% return on that interest free loan and you use a discount rate of 10% it would be worth $56 billion ($5.6B/.10).  Obviously, if you discount the return with current interest rates or are more optimistic about the returns that can be achieved it would be worth a lot more.

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A couple questions, maybe you guys can answer

 

What is berkshires share of the earnings and interest income for their investments (not counting the interest on cash equiv.)?

I

Should the liabilities or at least a portion of the liabilities be subtracted out?

 

If one values Berkshire as two businesses, the insurance business and the operating units, in order not to double count, I believe that one has to deduct the float i.e. liabilities from the insurance valuation.  Therefore, as it 31/12/2011, Berkshire had about $159bn of cash and investments in the insurance business with float of about $73bn giving a net value of about $86bn or $52,000/share.  The insurance business also generates underwriting profit so this would need to be added to the valuation.  Using a 2% underwriting profit and 5% investment income on the $30bn of premiums could give rise to a valuation of about $20bn, making the insurance business in total worth about $106bn or $64,000/share.  (One should note that when Berkshire purchased GEICO, it payed a premium of 1x premiums over book value)

 

Assuming the non insurance business generates about $12bn of pre tax earnings per year, an investor that assumes no growth in earnings and demands a 6% discount rate, would value that earnings stream at about $144bn or $87,000 per share. 

 

A no growth valuation of Berkshire equates to about $151,000 per share.  The question is how much can Berkshire grow earnings in the future for both the insurance and non insurance businesses.  If one assumes a 10% per annum growth rate  for the non insurance business for 5 years and then a 2% terminal growth rate, it would add another $100bn plus to the valuation or about $60,000 per share.  One should note that over the last 10 years Berkshire has increased its operating earnings for the non insurance units from $3.3bn in 2002 to over $12bn in 2011 implying a growth rate of 13.8% per annum.

 

At 120,000 per share, Berkshire looks cheap with a comfortable margin of safety!

 

I think you are undervaluing the insurance subsiaries with your $85 billion estimate.  First, the insurance subsidiaries have a statuary surplus of $95 billion.  Second, I don't agree with deducting the float entirely.  By this logic, if float were to double to $140 billion it would add no value.  The float is a perpetual loan at 0% as long as they can maintain the current level of float while breaking even on underwriting.  If you were to discount the float, I don't think it would be by any more than what you would add to the valuation to account for the probability of an underwriting profit.

In the 2011 annual report WEB has stated that the insur

ance float will most likely remain flat or decline slightly.

 

2011 Annual Report....

 

"It’s unlikely that our float will grow much – if at all – from its current level. That’s mainly because we

already have an outsized amount relative to our premium volume. Were there to be a decline in float, I will add,

it would almost certainly be very gradual and therefore impose no unusual demand for funds on us."

 

This is how I look at the float.  What would you pay to have $70 billion interest free and the ability to have Buffett, Combs and Weschler invest the money for you? 

 

If Berkshire can make a 8% return on that interest free loan and you use a discount rate of 10% it would be worth $56 billion ($5.6B/.10).  Obviously, if you discount the return with current interest rates or are more optimistic about the returns that can be achieved it would be worth a lot more.

 

redskin, in my valuation appraisal I was trying to separate out the insurance business valuation, the operating units and the value one puts on WB growing earnings.  In valuing the insurance business, I just looked at two aspects, the cash/investments and the profitability of the insurance operations.  These two aspects come to at least $106bn.  This valuation does not include anything for WBs ability to generate earnings from retained profits.  I tried to give an idea of what this might be worth by showing how the operating units might grow in the future and how much that would be worth.  Maybe that was not clear from what I had written.

 

You are right that the float has some value which is why I applied a 5% investment income to the annual premiums in arriving at a combined value of the insurance assets.  However, the 5% is a normalised figure and is probably high currently as Berkshire's float is about $70bn with $33bn in cash and $31bn is fixed interest securities.  I think that WB has been very cautious investing float which has resulted in the float being invested mainly in cash and fixed interest securities.  If one looks back at 2001, float was about $45bn with cash and fixed interest investments at $42bn. 

 

On the other hand, Berkshire has invested retained earnings from its insurance business and non insurance businesses extremely well over the years.  Estimating how much this is worth is very subjective but it is definitely worth quite a lot.  I tried to give a feel for how much this might be worth by stating that a 10% growth rate with a 2% terminal growth could add about $100bn to the valuation.

 

redskin, we probably arrive at a similar valuation but I may be attributing the value slightly differently.

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What Berkshire is worth and what it will return are two different things;

 

I could be wrong but your assumptions seem reasonable.

 

Annual 16% return- I will take it - makes me think I should increase my allocation to BRK

 

I was thinking or hoping I would get a couple % more than market- say ~ 10%

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What Berkshire is worth and what it will return are two different things;

 

I could be wrong but your assumptions seem reasonable.

 

Annual 16% return- I will take it - makes me think I should increase my allocation to BRK

 

I was thinking or hoping I would get a couple % more than market- say ~ 10%

 

good point...

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A couple questions, maybe you guys can answer

 

What is berkshires share of the earnings and interest income for their investments (not counting the interest on cash equiv.)?

I

Should the liabilities or at least a portion of the liabilities be subtracted out?

 

If one values Berkshire as two businesses, the insurance business and the operating units, in order not to double count, I believe that one has to deduct the float i.e. liabilities from the insurance valuation.  Therefore, as it 31/12/2011, Berkshire had about $159bn of cash and investments in the insurance business with float of about $73bn giving a net value of about $86bn or $52,000/share.  The insurance business also generates underwriting profit so this would need to be added to the valuation.  Using a 2% underwriting profit and 5% investment income on the $30bn of premiums could give rise to a valuation of about $20bn, making the insurance business in total worth about $106bn or $64,000/share.  (One should note that when Berkshire purchased GEICO, it payed a premium of 1x premiums over book value)

 

Assuming the non insurance business generates about $12bn of pre tax earnings per year, an investor that assumes no growth in earnings and demands a 6% discount rate, would value that earnings stream at about $144bn or $87,000 per share. 

 

A no growth valuation of Berkshire equates to about $151,000 per share.  The question is how much can Berkshire grow earnings in the future for both the insurance and non insurance businesses.  If one assumes a 10% per annum growth rate  for the non insurance business for 5 years and then a 2% terminal growth rate, it would add another $100bn plus to the valuation or about $60,000 per share.  One should note that over the last 10 years Berkshire has increased its operating earnings for the non insurance units from $3.3bn in 2002 to over $12bn in 2011 implying a growth rate of 13.8% per annum.

 

At 120,000 per share, Berkshire looks cheap with a comfortable margin of safety!

 

I think you are undervaluing the insurance subsiaries with your $85 billion estimate.  First, the insurance subsidiaries have a statuary surplus of $95 billion.  Second, I don't agree with deducting the float entirely.  By this logic, if float were to double to $140 billion it would add no value.  The float is a perpetual loan at 0% as long as they can maintain the current level of float while breaking even on underwriting.  If you were to discount the float, I don't think it would be by any more than what you would add to the valuation to account for the probability of an underwriting profit.

In the 2011 annual report WEB has stated that the insur

ance float will most likely remain flat or decline slightly.

 

2011 Annual Report....

 

"It’s unlikely that our float will grow much – if at all – from its current level. That’s mainly because we

already have an outsized amount relative to our premium volume. Were there to be a decline in float, I will add,

it would almost certainly be very gradual and therefore impose no unusual demand for funds on us."

 

This is how I look at the float.  What would you pay to have $70 billion interest free and the ability to have Buffett, Combs and Weschler invest the money for you? 

 

If Berkshire can make a 8% return on that interest free loan and you use a discount rate of 10% it would be worth $56 billion ($5.6B/.10).  Obviously, if you discount the return with current interest rates or are more optimistic about the returns that can be achieved it would be worth a lot more.

 

redskin, in my valuation appraisal I was trying to separate out the insurance business valuation, the operating units and the value one puts on WB growing earnings.  In valuing the insurance business, I just looked at two aspects, the cash/investments and the profitability of the insurance operations.  These two aspects come to at least $106bn.  This valuation does not include anything for WBs ability to generate earnings from retained profits.  I tried to give an idea of what this might be worth by showing how the operating units might grow in the future and how much that would be worth.  Maybe that was not clear from what I had written.

 

You are right that the float has some value which is why I applied a 5% investment income to the annual premiums in arriving at a combined value of the insurance assets.  However, the 5% is a normalised figure and is probably high currently as Berkshire's float is about $70bn with $33bn in cash and $31bn is fixed interest securities.  I think that WB has been very cautious investing float which has resulted in the float being invested mainly in cash and fixed interest securities.  If one looks back at 2001, float was about $45bn with cash and fixed interest investments at $42bn. 

 

On the other hand, Berkshire has invested retained earnings from its insurance business and non insurance businesses extremely well over the years.  Estimating how much this is worth is very subjective but it is definitely worth quite a lot.  I tried to give a feel for how much this might be worth by stating that a 10% growth rate with a 2% terminal growth could add about $100bn to the valuation.

 

redskin, we probably arrive at a similar valuation but I may be attributing the value slightly differently.

 

I think I would value the insurance business higher than your estimates.  There could be a case made for adding back 100% of the float liability if Berkshire is able to maintain the current level of float over time and has breakeven underwriting.

 

Here is a quote from Buffett's 1997 annual letter.....

 

"Since 1967, when we entered the insurance business, our float has grown at an annual compounded rate of 21.7%. Better yet, it has cost us nothing, and in fact has made us money. Therein lies an accounting irony: Though our float is shown on our balance sheet as a liability, it has had a value to Berkshire greater than an equal amount of net worth would have had."

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I think I would value the insurance business higher than your estimates.  There could be a case made for adding back 100% of the float liability if Berkshire is able to maintain the current level of float over time and has breakeven underwriting.

 

Here is a quote from Buffett's 1997 annual letter.....

 

"Since 1967, when we entered the insurance business, our float has grown at an annual compounded rate of 21.7%. Better yet, it has cost us nothing, and in fact has made us money. Therein lies an accounting irony: Though our float is shown on our balance sheet as a liability, it has had a value to Berkshire greater than an equal amount of net worth would have had."

 

I have tossed around the same question.  What is a $70 billion dollar loan, at a 0% interest rate, for an indefinite term, non callable, really worth?  Better yet, what is the value of that loan in the hands of Warren Buffett?  I estimated it's value at $70 billion.  Obviously Buffett feels it is worth more than $70 billion.

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  • 2 months later...

I'm not skilled enough to value BRK...what rough BV multiple do you guys feel it's worth?

 

I tend not to think of BRK in terms of what is an appropriate BV multiple.  Using a modified version of the two column approach, my current IV estimate for BRK is around $165,000 per A share.  As a multiple of BV that is somewhere near 1.5x.

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