Q3 2012 Earnings

[dcollon]

http://www.berkshirehathaway.com/qtrly/3rdqtr12.pdf

 

[zarley]

Ah, thanks for the reminder dcollon; I managed to forget BRK was reporting today.  At first glance, it looks like a nice quarter -- buyback price is now close to $123,000 / A and $82 / B.  I'm sure Q4 will bring those back down a bit, due to Sandy, but Q3 was good.

[Palantir]

^ I was just thinking that as well. The buyback price is 81, it might be a good idea to watch closely, or better yet, sell puts near the target price.

 

Regarding Sandy, is it really a given though that BV will be lowered due to insurance losses? I would think that BV would grow (from Berk's other operations), but the growth would be offset by Sandy losses. Shouldn't we need an overall loss for the quarter to shrink BV?

[jeffmori7]

Good results. Is it the most cash that Berkshire has ever held? I wish Warren a new elephant!

[zarley]

^ I was just thinking that as well. The buyback price is 81, it might be a good idea to watch closely, or better yet, sell puts near the target price.

 

Regarding Sandy, is it really a given though that BV will be lowered due to insurance losses? I would think that BV would grow (from Berk's other operations), but the growth would be offset by Sandy losses. Shouldn't we need an overall loss for the quarter to shrink BV?

 

I suppose it's not a given that BV must be lower.  But, given the magnitude of the sandy related damages, I'd be surprised if BV didn't drop in Q4.  Honestly, it's just a mental asterisk I've put on the BV and buyback numbers. 

[Guest longinvestor]

Ah, thanks for the reminder dcollon; I managed to forget BRK was reporting today.  At first glance, it looks like a nice quarter -- buyback price is now close to $123,000 / A and $82 / B.  I'm sure Q4 will bring those back down a bit, due to Sandy, but Q3 was good.

 

Any thoughts around how Warren chose 110% of BV to buy back stock?  We read in the AR from last year an oblique suggestion that 110% BV = "discount to IV of 90 cent-$ or 85 cent-$ or 80 cent-$ or more..."  The "or more" just so that we don't let the salivation stop ;D One thing that I could not get over in the most recent Chairman's letter is how he reinforced the "conservatively calculated BV" over and over again by ending his traditional description of the wonderful businesses we own within BRK with how BV is likely significantly understated in each case. Warren seldom sends such a clear buy signal. He even said something like we would be buying back from "some of you who do not agree, you need to know how attractive the stock price is at 110% BV"

 

I'm not an accountant by profession, so a question about BV calculation I have is: As Berkshire continues to buy whole ever more non-insurance operating companies, does this not increase the above (implied) separation of BV from IV? So, five / ten years from now, 130%/150% of BV could be a buy back level?

 

Thoughts?

[Palantir]

BV is simply a reference point. It is not a proxy for IV, but rather a "floor".

[zarley]

Any thoughts around how Warren chose 110% of BV to buy back stock? 

 

I'm not an accountant by profession, so a question about BV calculation I have is: As Berkshire continues to buy whole ever more non-insurance operating companies, does this not increase the above (implied) separation of BV from IV? So, five / ten years from now, 130%/150% of BV could be a buy back level?

 

I'm not sure how WEB came up with 110% of BV as the buyback marker.  I guess I'd characterize it as a figure that WEB sees as currently (and most likely in the future) well below a reasonable estimate of IV.  It sets a clear signal to current owners, and perhaps future managers, as to what WEB sees as a safe and sensible place for BRK to retire shares (instead of finding other things to buy).

 

Your second point about the potential growth in the divergence of BV and IV is true, if the acquired operating companies are purchased at prices below IV.  If WEB or someone else goes on a binge buying businesses at prices above IV, then the difference between IV and BV will likely shrink, not grow.  Although, I guess you could take a bunch of impairment charges, reducing BV.  In that case, even if the IV:BV ratio doesn't change, they both go down together.

 

[treasurehunt]

I suppose it's not a given that BV must be lower.  But, given the magnitude of the sandy related damages, I'd be surprised if BV didn't drop in Q4.  Honestly, it's just a mental asterisk I've put on the BV and buyback numbers.

 

Berkshire earns close to 5 billion pre-tax each quarter, and it is very unlikely that damages due to Sandy will come close to that number. Buffett has mentioned five percent or so of insured losses as Berkshire's typical share. If that number holds, losses due to Sandy should be no more than a couple of billion and probably much less than that.

 

I think book value is much more sensitive to equity market levels. With 88 billion in stocks and the equity index puts on the balance sheet, a five percent decline in the S&P from Sep 30 levels could lead to Berkshire's book value going down.

[zarley]

Berkshire earns close to 5 billion pre-tax each quarter, and it is very unlikely that damages due to Sandy will come close to that number. Buffett has mentioned five percent or so of insured losses as Berkshire's typical share. If that number holds, losses due to Sandy should be no more than a couple of billion and probably much less than that.

 

I think book value is much more sensitive to equity market levels. With 88 billion in stocks and the equity index puts on the balance sheet, a five percent decline in the S&P from Sep 30 levels could lead to Berkshire's book value going down.

 

Both good points. All in all, I'm just being cautious in my expectations.  If BRK sees $1-2+ billion in losses from Sandy and doesn't see much impact to BV, so much the better.  Quite a testament to the BRK model that a storm like Sandy might have little noticeable impact on BRK's balance sheet.

 

 

[Guest longinvestor]

Any thoughts around how Warren chose 110% of BV to buy back stock? 

 

I'm not an accountant by profession, so a question about BV calculation I have is: As Berkshire continues to buy whole ever more non-insurance operating companies, does this not increase the above (implied) separation of BV from IV? So, five / ten years from now, 130%/150% of BV could be a buy back level? .

 

I'm not sure how WEB came up with 110% of BV as the buyback marker.  I guess I'd characterize it as a figure that WEB sees as currently (and most likely in the future) well below a reasonable estimate of IV.  It sets a clear signal to current owners, and perhaps future managers, as to what WEB sees as a safe and sensible place for BRK to retire shares (instead of finding other things to buy).

 

Your second point about the potential growth in the divergence of BV and IV is true, if the acquired operating companies are purchased at prices below IV.  If WEB or someone else goes on a binge buying businesses at prices above IV, then the difference between IV and BV will likely shrink, not grow.  Although, I guess you could take a bunch of impairment charges, reducing BV.  In that case, even if the IV:BV ratio doesn't change, they both go down together.

 

There we go! The divergence of IV from BV is no longer speculation with the new 120% buyback "floor". I was not expecting it this soon. When should we see the floor raised to 130% or 140%? What if the cash piles up from the current $47 B to the $70-80B range? If the elephant gun is unable to fire, they should get there with a couple of years. The amazing possibility with the copious amounts of cash flow at BRK is that both can happen. The elephant gun can fire and meaningful stock buybacks can happen as well! BRK stands alone in this regard.

[Palantir]

^We could also see a dividend then.