The Book Value (BV) of Berkshire Hathaway per 2013 AR (released 3/1/2014) is $134,973 per BRK.A share or $89.98 per BRK.B share. The stock currently trades at $115.78 or 128.67% of BV. Buffett’s repurchase criteria is 120% of BV or $107.98. The premium to book value has narrowed as the stock has not moved in the last nine months - also in January, the stock traded near Buffett's repurchase criteria. Net earnings at $11,850 per BRK.A share for a ttm-PE of 14.66. It is down from 16.93 this time last year.
Historical BV Growth: 18.2% vs 32.4% for S&P500 with dividends. CAGR 1965-2013 at 19.7% vs 9.8% for S&P500.
Earnings: $11,850 in 2013 vs $8,977 in 2012 and $6,215 in 2011 per BRK.A share. 32% YOY increase compared to 44% last year. The stunning increases in the last two years were due to the impressive cash generation of its operating entities. It was also helped by realized investment gains of $2.64B in 2013 and $1.35B in 2012. In 2011, they had $316M in losses. PE is 14.66 including investment gains - at this time last year, PE was at 16.93. Roughly a third of Berkshire earnings are realized gains historically and so the last few years have shown a divergence on that count.
Intrinsic Business Value: The two quantitative components of value:
Look-through earnings relevance: “Undistributed earnings of our investees, in aggregate, have been fully as beneficial to Berkshire as if they had been distributed to us”. So,
Selling businesses: No interest in selling good businesses Berkshire owns. Sub-par businesses are also not sold as long as they are able to generate at-least some cash and managers/labor relations are good. Capex decisions for the latter are made in a much more cautious fashion compared to the former - it is unlikely that sub-par businesses will see increased profitability with increased spending.
BV growth vs S&P 500 Performance Comparison: While this comparison is shown in the first page of the Annual Letter, it has become less meaningful over time. The reasoning has to do with how Berkshire’s business structure has evolved: equity holdings tend to move with S&P 500 and that is now a much smaller portion of overall value. Also S&P 500 gains are reported at 100% while Berkshire’s realized gains get reported at 65% because of taxes.
Also, there is another major shortcoming with this comparison: The carrying value of the businesses that are controlled by Berkshire is much more than their carrying value and so the BV far understates Berkshire’s Intrinsic Value. But, IV by definition (discounted value of cash that can be taken out during the remaining lifetime) is an estimate and so is not quoted in any of the releases.
Below is a YoY comparison of Berkshire Hathaway's largest equity investments:
Historical BV Growth: 18.2% vs 32.4% for S&P500 with dividends. CAGR 1965-2013 at 19.7% vs 9.8% for S&P500.
Earnings: $11,850 in 2013 vs $8,977 in 2012 and $6,215 in 2011 per BRK.A share. 32% YOY increase compared to 44% last year. The stunning increases in the last two years were due to the impressive cash generation of its operating entities. It was also helped by realized investment gains of $2.64B in 2013 and $1.35B in 2012. In 2011, they had $316M in losses. PE is 14.66 including investment gains - at this time last year, PE was at 16.93. Roughly a third of Berkshire earnings are realized gains historically and so the last few years have shown a divergence on that count.
Intrinsic Business Value: The two quantitative components of value:
- Per-share investments grew 13.6% to $129,253. This is compared to a 19.3% CAGR since 1970 and 6.6% in the 2000-2010 time period, and
- Pre-tax earnings from businesses other than insurance and investments increased 12.8% to $9,116 per share. This is compared to a 20.6% CAGR since 1970 and 20.5% in the 2000-2010 time period.
The third is a measure of the efficacy with which retained earnings will be deployed in the future - the subjective component.
Co-Managers: Todd Combs and Ted Weschler invest $7B each and they outperformed Buffett.
Long-term economic goal: maximize average rate of gain in intrinsic business value on a per share basis. Preference is to own a diversified group of businesses with consistent above-average ROC and second choice is to own parts of such businesses.
Look-through earnings relevance: “Undistributed earnings of our investees, in aggregate, have been fully as beneficial to Berkshire as if they had been distributed to us”. So,
- It is preferable to purchase $2 of earnings that are not reportable rather than $1 or reportable earnings for the same acquisition cost, and
- Look-through earnings realistically portray yearly gain from operations.
Use of leverage: “We use debt sparingly and, when we do borrow, we attempt to structure our loans on a long-term fixed-rate basis”
Selling businesses: No interest in selling good businesses Berkshire owns. Sub-par businesses are also not sold as long as they are able to generate at-least some cash and managers/labor relations are good. Capex decisions for the latter are made in a much more cautious fashion compared to the former - it is unlikely that sub-par businesses will see increased profitability with increased spending.
BV growth vs S&P 500 Performance Comparison: While this comparison is shown in the first page of the Annual Letter, it has become less meaningful over time. The reasoning has to do with how Berkshire’s business structure has evolved: equity holdings tend to move with S&P 500 and that is now a much smaller portion of overall value. Also S&P 500 gains are reported at 100% while Berkshire’s realized gains get reported at 65% because of taxes.
Also, there is another major shortcoming with this comparison: The carrying value of the businesses that are controlled by Berkshire is much more than their carrying value and so the BV far understates Berkshire’s Intrinsic Value. But, IV by definition (discounted value of cash that can be taken out during the remaining lifetime) is an estimate and so is not quoted in any of the releases.
Below is a YoY comparison of Berkshire Hathaway's largest equity investments:
ConocoPhillips (COP) and POSCO are not in the list as they no longer are among his largest investments - not because they have been completely sold out - see our Q4 2013 13F update for details on the current holdings in COP.
Below is a comparison of Berkshire Hathaway's asset distribution in the "Insurance & Other" area for the last five years:
The equity exposure at almost 58% is the largest in the last five years. So, it is apparent that Buffett is not that concerned about valuation of his holdings despite the rapid increase.
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1 comment :
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