Berkshire Hathaway 2017 Annual Letter & Report - Notes



The Book Value (BV) of Berkshire Hathaway per 2017 AR (released 2/2018) is $211,750 per BRK.A share or $141.17 per BRK.B share compared to $172,108 per BRK.A share or $114.74 per BRK.B share in the last AR. The stock ended the year at $295,755 or 140% of BV - the premium over book value has remained relatively steady over the last year as that percentage was at 142% ($244,102 share price) EOY 2016. Buffett’s repurchase criterion is 120% of BV or $254,100. The premium to book value remained somewhat steady as the stock rose ~21% over the last year compared to book value growth of ~23%. Net earnings are at $27,326 per BRK.A share. Excluding one-time gain due to tax changes, the earnings are $9,659 per BRK.A share for a ttm-PE of ~31. This is compared to a ttm-PE of ~17 last year and ~13 the year before.

Historical Book Value (BV) and Market Value Growth:

Book Value CAGR 1965-2017 is at 19.1% and for 2016 it is 23%.
Market Value CAGR 1965-2016 is at 20.9% vs 9.9% for S&P 500. For 2017, it is ~21% which is around the same as the performance of the S&P 500 index.

Earnings per Share (EPS):

Excluding one-time tax gain, earnings at $9,659 for 207 vs $14,645 in 2016 vs $14,656 in 2015 vs $12,092 in 2014 vs $11,850 in 2013 and $8,977 in 2012 per BRK.A share.  One-third decrease compared to marginal YOY increase last year and 21% YOY increase the year before. Roughly a third of Berkshire earnings are realized gains (after tax) historically. For 2017, that figure was $1.4B.

Intrinsic Business Value

Plans to continue building Berkshire’s per-share intrinsic value by:

1.      Focusing on increasing earning power at subsidiaries both organically and through bolt-on acquisitions,
2.      Growth of equity investments,
3.      Repurchasing when there is meaningful discount to intrinsic value,
4.      Making acquisitions while rarely issuing new shares.

Co-Managers:

·         2017: they now manage $25B. Teva Pharmaceuticals positon is a purchase by one of them.
·         2016: Together, they now manage $21B. Apple & American Airlines were first established by one of them.
·         2015: Precision Castparts acquisition partly credited to Todd Combs. In their investment management roles, Todd Combs and Ted Weschler are each managing $9B each.
·         2014: their roles were expanded to also include running businesses - they took over as Chairman of one business each - combined, those businesses are very small earning around $100M annually - Buffett’s way of developing a deep-bench!
·         2013: Todd Combs and Ted Weschler invested $7B each and they outperformed Buffett in 2013.


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 (security ownership of Berkshire’s insurance subsidiaries).

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,
  1. It is preferable to purchase $2 of earnings that are not reportable rather than $1 of reportable earnings for the same acquisition cost, and
  2. Look-through earnings realistically portray yearly gain from operations.
Use of leverage:

Buffett dedicated a section basically discouraging investors from using leverage.

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 (IV). 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:



·         A huge increase in the Apple position and the drop in the large stake in International Business Machines are the main changes.
·         Bank of America is new in this year’s list as their warrants at strike $7.14 were exercised.
·         Bank of New York Mellon, BYD Company, and General Motors came into the list as their market values have made them one of the top investments in Berkshire’s portfolio. Sanofi, United Continental Holdings and USG Corporation slipped out of the list for the same reason. International Business Machines on the other hand was sold out.


Below is a comparison of Berkshire Hathaway's asset distribution in the "Insurance and Other" area for the last three years: 



The equity exposure is at ~54%. Debt holdings have dropped from ~21% in 2012 to just ~7% in 2017.  Berkshire has been on record consistently to state the relative valuation edge for equities compared to bonds in the current low-interest rate environment. Cash on the other hand has gone up from 24% to 34%. It is probable that Berkshire would look to allocate some of that cash this year.

Warren Buffett's writings (pdfs) are a treasure trove of information and are a very good option for anyone starting out on individual investing.

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