Description
T2 Partners Berkshire Hathaway
An Analysis of Berkshire Hathaway
February 5, 2010
This presentation is posted at: www.tilsonfunds.com/BRK.pdf
T2 Partners Management L.P. Manages Hedge Funds and Mutual Funds and is a Registered Investment Advisor
145 E. 57th Street, 10th Floor New York, NY 10022 (212) 386-7160 [email protected] www.T2PartnersLLC.com
Disclaimer
THIS PRESENTATION IS FOR INFORMATIONAL AND EDUCATIONAL PURPOSES ONLY AND SHALL NOT BE CONSTRUED TO CONSTITUTE INVESTMENT ADVICE. NOTHING CONTAINED HEREIN SHALL CONSTITUTE A SOLICITATION, RECOMMENDATION OR ENDORSEMENT TO BUY OR SELL ANY SECURITY OR OTHER FINANCIAL INSTRUMENT. INVESTMENT FUNDS MANAGED BY WHITNEY TILSON AND GLENN TONGUE OWN STOCK IN MANY OF THE COMPANIES DISCUSSED HEREIN. THEY HAVE NO OBLIGATION TO UPDATE THE INFORMATION CONTAINED HEREIN AND MAY MAKE INVESTMENT DECISIONS THAT ARE INCONSISTENT WITH THE VIEWS EXPRESSED IN THIS PRESENTATION. WE MAKE NO REPRESENTATION OR WARRANTIES AS TO THE ACCURACY, COMPLETENESS OR TIMELINESS OF THE INFORMATION, TEXT, GRAPHICS OR OTHER ITEMS CONTAINED IN THIS PRESENTATION. WE EXPRESSLY DISCLAIM ALL LIABILITY FOR ERRORS OR OMISSIONS IN, OR THE MISUSE OR MISINTERPRETATION OF, ANY INFORMATION CONTAINED IN THIS PRESENTATION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND FUTURE RETURNS ARE NOT GUARANTEED.
-3-
Berkshire Hathaway: A High-Quality, Rapidly Growing 75-Cent Dollar
History • Berkshire Hathaway today does not resemble the company that Buffett bought into during the 1960s • Berkshire was a leading New England-based textile company, with investment appeal as a classic Ben Graham-style “net-net” • Buffett took control of Berkshire on May 10, 1965 • At that time, Berkshire had a market value of about $18 million and shareholder's equity of about $22 million
-4-
The Berkshire Hathaway Empire Today
Stakes in Public Companies Worth $1+ Billion
Company Coca-Cola Wells Fargo Burlington Northern Santa Fe Procter & Gamble American Express Kraft ConocoPhillips Johnson & Johnson Wal-Mart U.S. Bancorp Shares 200.0 313.4 76.8 96.3 151.6 138.3 57.4 36.9 37.8 69.0 Price Value ($B) $53.25 $27.39 $99.30 $61.20 $37.67 $28.20 $47.49 $62.81 $52.97 $24.01 $10.7 $8.6 $7.6 $5.9 $5.7 $3.9 $2.7 $2.3 $2.0 $1.7
Note: Stock prices as of 2/5/10; excl. GE, Goldman & Wesco
-5-
The Basics
• Stock price (2/4/10): $108,900 – $72.61 for B shares (equivalent to $108,915/A share) • Shares outstanding: 1.55 million • Market cap: $169 billion • Total assets (Q3 ‘09): $292 billion • Total equity (Q3 ‘09): $131 billion • Book value per share (Q3 ‘09): $81,247
-6-
Recent Performance of Key Business Units
Earnings Before Taxes and Minority Interests, By Year:
2004 Insurance Group: GEICO General Re Berkshire Reinsurance Group Berkshire H. Primary Group Investment Income Total Insurance Oper. Inc. Non-Insurance Businesses: Finance and Financial products Marmon McLane Company MidAmerican/Utilities/Energy Shaw Industries Other businesses Total Non-Insur. Oper. Inc. Total Operating Income 970 3 417 161 2,824 4,375 2005 1,221 -334 -1,069 235 3,480 3,533 2006 1,314 523 1,658 340 4,316 8,151 2007 2008
1,113 916 555 342 1,427 1,324 279 210 4,758 4,722 8,132 7,514
584
822 1,157 1,006
228 217 229 232 237 523 1,476 1,774 466 485 594 436 1,787 1,921 2,703 3,279 3,302 3,968 6,159 6,727
787 733 276 2,963 205 2,809 7,773
7,677 7,501 14,310 14,859 15,287
-7-
Recent Performance of Key Business Units
Earnings Before Taxes and Minority Interests, By Quarter:
Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Insurance Group: GEICO General Re Berkshire Reinsurance Group Berkshire H. Primary Group Investment Income Total Insurance Oper. Inc. Non-Insurance Businesses: Finance and Financial products Marmon McLane Company MidAmerican/Utilities/Energy Shaw Industries Other businesses Total Non-Insur. Oper. Inc. Total Operating Income 312 358 237 314 311 288 407 308 295 325 335 158 186 298 246 186 148 111 200 30 230 157 138 42 102 54 144 -16 276 186 19 43 -389 -7 71 106 177 169 29 79 -166 1,382 203 -291 167 143 140 -1,635 283 94 137 735 692 553 356 183 335 154 49 63 77 90 25 81 -8 112 4 29 7 18 37 -10 190 35 43 108 787 851 900 942 1,018 1,102 1,103 1,093 1,078 1,236 1,217 1,227 1,089 1,204 1,074 1,355 1,298 1,422 1,348 1,279 1,429 -897 1,722 1,529 1,676 2,530 2,416 2,005 2,210 1,969 1,948 1,371 1,764 1,200 3,179 1,637 1,547 1,908
199
199
207
217
251
343
282
281
242
277
273
214
69 59 53 36 55 56 50 68 58 72 50 52 141 100 141 141 418 278 416 364 513 372 481 408 91 111 125 109 88 139 145 113 155 169 138 132 364 514 486 557 430 671 686 916 632 904 895 848 861 1,011 1,032 1,064 1,309 1,517 1,572 1,761 1,536 1,736 1,824 1,631 2,140 2,440
241 254 163 129 28 261 247 197 73 68 68 67 516 329 526 1,592 51 82 49 23 693 874 749 493 1,602 1,868 1,802 2,501
127 162 143 303 55 151 941
135 142 170 194 66 64 402 441 30 51 171 299 974 1,191
135 2,786 2,838 3,193 4,102 4,177 3,541 3,946 3,793 3,579 2,973 3,632 3,002 5,680 2,578 2,521 3,099
-8-
The Earnings of Berkshire’s Operating Businesses Have Grown at a Very High Rate – And Growth is Accelerating
Year 1965 1979 1993 2008
Per-Share Investments $4 $577 $13,961 $77,793
CAGR 42.8% 25.6% 12.1%
Per-Share Pre-Tax Earnings $4 $18 $212 $3,921
CAGR 11.1% 19.1% 21.5%
Berkshire is becoming less of an investment company and more of an operating business.
Note: CAGR: 1965-1979, 1979-1993, 1993-2008. EPS is pretax, net of minority interests and excludes profits of Berkshire’s insurance operations.
-9-
Growth in Earnings of Berkshire’s Operating Businesses Has Slowed as Buffett Has Allocated More Capital to Investments in Recent Years
% Growth Rate* 24 10 14 18 8 26 9 27 14 6 9 13 9 n/a 22 19 3 48 11 11 28 202 9 16 14 14 Company Name Exxon Mobil Wal-Mart Procter & Gamble Microsoft General Electric AT&T Johnson & Johnson Chevron Berkshire Hathaway Pfizer IBM Cisco Systems Coca-Cola Google Hewlett-Packard Oracle Verizon Genentech Pepsico Intel ConocoPhillips Apple Abbott Labs McDonald's Amgen Median Market Cap $408,458 $219,741 $185,621 $184,672 $177,404 $166,772 $165,614 $157,159 $154,573 $120,024 $119,877 $104,162 $103,439 $102,180 $94,981 $92,799 $90,782 $88,371 $86,509 $85,488 $83,009 $82,689 $79,007 $69,258 $61,813
* 5-year compound annual growth rate of EBIT (earnings before interest and taxes) through Q3 07. Berkshire’s figure is pre-tax EPS excluding all income from investments.
Note: List of 25 largest companies (by market cap) that trades on U.S. exchanges Source: Capital IQ, through 1/6/09
-10-
The Burlington Northern Acquisition Dwarfs Anything Before It
30 25 20
Includes $26B for Burlington Northern
$B
15 10 5 0 (5) (10)
Acquisitions Net Stock Purchases
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q1-3 2009
• •
He’s doing a good job – but the cash is coming in so fast! – A high-class problem Markets have a way of presenting big opportunities on short notice – Current chaos, junk bonds in 2002 – Buffett has reduced average maturity of bond portfolio so he can act quickly
-11-
A Breakdown of Berkshire’s Capital Commitments in 2008
Investment/Commitment Mars/Wrigley Auction rate securities Goldman Sachs Constellation Energy stock and preferred Marmon Amount (Bn) $6.5 $6.5 $5.0 $5.7 $4.5 Q2 event; sold much in Q3 Plus $5B to exercise warrants Sold for a $1.1B gain incl. breakup fee The remaining 34.6% not owned by BRK will be purchased from 2011-14 Full year; net of sales Plus $3B to exercise warrants Q2 event; sold much in Q3 Iscar acquisition Plus sharing agreement Comment
General stock purchases Dow/Rohm & Haas General Electric Fed. Home Loan Disc. Notes Tungaloy Swiss Re unit ING reinsurance unit Other businesses purchased TOTAL
$3.3 $3.0 $3.0 $2.4 $1.0 $0.8 $0.4 $3.9 $46.0
Plus $8B to exercise GS & GE warrants
-12-
Note: Does not include capital committed to Berkshire’s new bond insurance business, Berkshire Assurance
Valuing Berkshire
“Over the years we've…attempt[ed] to increase our marketable investments in wonderful businesses, while simultaneously trying to buy similar businesses in their entirety.” – 1995 Annual Letter “In our last two annual reports, we furnished you a table that Charlie and I believe is central to estimating Berkshire's intrinsic value. In the updated version of that table, which follows, we trace our two key components of value. The first column lists our per-share ownership of investments (including cash and equivalents) and the second column shows our per-share earnings from Berkshire's operating businesses before taxes and purchase-accounting adjustments, but after all interest and corporate expenses. The second column excludes all dividends, interest and capital gains that we realized from the investments presented in the first column.” – 1997 Annual Letter
“In effect, the columns show what Berkshire would look like were it split into two parts, with one entity holding our investments and the other operating all of our businesses and bearing all corporate costs.” – 1997 Annual Letter
-13-
Buffett’s Comments on Berkshire’s Valuation Lead to an Implied Multiplier of Approximately 12
Pre-tax EPS Excluding All Year-End Intrinsic Implied Investments Income From Stock Investments Price Value Multiplier Year Per Share 1996 $28,500 $421 $34,100 $34,100 13 1997 $38,043 $718 $46,000 $46,000 11 1998 $47,647 $474 $70,000 $54,000 13 1999 $47,339 -$458 $56,100 $60,000
• • • • 1996 Annual Letter: “Today's price/value relationship is both much different from what it was a year ago and, as Charlie and I see it, more appropriate.” 1997 Annual Letter: “Berkshire's intrinsic value grew at nearly the same pace as book value” (book +34.1%) 1998 Annual Letter: “Though Berkshire's intrinsic value grew very substantially in 1998, the gain fell well short of the 48.3% recorded for book value.” (Assume a 1520% increase in intrinsic value.) 1999 Annual Letter: “A repurchase of, say, 2% of a company's shares at a 25% discount from per-share intrinsic value...We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated...Recently, when the A shares fell below $45,000, we considered making repurchases.”
-14-
Estimating Berkshire’s Value: 2001 – 2009
Pre-tax EPS Excluding All Income From Intrinsic Value Investments1 Per Share -$1,289 $64,000 $1,479 $70,000 $2,912 $97,000 $3,003 $103,000 $3,600 $117,300 $5,200-$5,4002 $143,000-$144,400 3 $5,500-$5,700 $156,300-$158,700 $5,728 $123,617 (8 multiple) 4 $5,000 $142,500 (10 multiple) Subsequent Year Stock Price Range $59,600-$78,500 $60,600-$84,700 $81,000-$95,700 $78,800-$92,000 $85,700-$114,200 $107,200-$151,650 $84,000-$147,000 $70,050-$108,100 ?
Year End 2001 2002 2003 2004 2005 2006 2007 2008 2009 (est.)
Investments Per Share $47,460 $52,507 $62,273 $66,967 $74,129 $80,636 $90,343 $77,793 $92,500
Given compressed multiples at the end of 2008, we used an 8 rather than a 12 multiple. We bumped this to a 10 multiple at the end of 2009, still below the 12 multiple we believe Buffett uses.
1. Unlike Buffett, we include earnings from Berkshire’s insurance businesses. 2. Actual result was $6,492, but we reduce this to assume the 2nd-worst year ever for super-cat losses. 3. Actual result was $6,270 but we reduce the pre-tax, pre-investment-income margins of the insurance businesses by 400 basis points (from 14% to 10%) to reflect Buffett’s guidance in the Annual Report. 4. We have trimmed our estimate of normalized earnings to reflect the weak economy.
-15-
Even Using an 10 Multiple, Berkshire Is Nearly 25% Below Intrinsic Value
Intrinsic value estimate of $142,500 using 10 multiple Intrinsic value*
24% discount to intrinsic value
* Investments per share plus 12x pre-tax earnings per share (excluding all income from investments) for the prior year, except for YE 2008 (8 multiple) and YE 2009 (10 multiple).
-16-
12-Month Investment Return
• • • • •
Current intrinsic value: $142,500/share Plus 5% growth of intrinsic value of the business Plus cash build over next 12 months: $4,000/share Equals intrinsic value in one year of $153,600 41% above today’s price
-17-
Catalysts
• Recent inclusion in the S&P 500 (and S&P 100) means that index funds will have to buy an estimated $38 billion of stock
– The stock is widely held by insiders and long-term holders who are unlikely to sell much anywhere near today’s undervalued price
Continued earnings growth of operating businesses New equity investments Additional cash build Eventually, Berkshire could win back a AAA rating (not likely in the near term) • Potential for more meaningful acquisitions and investments – If there’s a double-dip recession, this becomes more likely
• • • •
-18-
Risks
• • • •
• • • •
A double-dip recession impacts Berkshire’s earnings materially Berkshire’s stock portfolio declines Investments in GE, Goldman and others turn out badly Losses in the shorter-duration derivatives such as credit-default swaps are larger than expected and/or mark-to-market losses mount among the equity index puts A major super-cat event occurs that costs Berkshire many billions Berkshire is downgraded further No catalyst occurs, so the stock sits there and doesn’t go up – Intrinsic value will likely continue to grow nicely Something happens to Buffett – In good health; turned 79 last Aug. 30th – Strong board and succession plan in place – Little Buffett premium in stock today
-19-
Conclusion
• Cheap stock: 75-cent dollar, giving no value to recent investments and immense optionality • Extremely safe: huge cash and other assets provide downside protection • Powerful near-term catalyst
-20-
doc_380857836.pdf
T2 Partners Berkshire Hathaway
An Analysis of Berkshire Hathaway
February 5, 2010
This presentation is posted at: www.tilsonfunds.com/BRK.pdf
T2 Partners Management L.P. Manages Hedge Funds and Mutual Funds and is a Registered Investment Advisor
145 E. 57th Street, 10th Floor New York, NY 10022 (212) 386-7160 [email protected] www.T2PartnersLLC.com
Disclaimer
THIS PRESENTATION IS FOR INFORMATIONAL AND EDUCATIONAL PURPOSES ONLY AND SHALL NOT BE CONSTRUED TO CONSTITUTE INVESTMENT ADVICE. NOTHING CONTAINED HEREIN SHALL CONSTITUTE A SOLICITATION, RECOMMENDATION OR ENDORSEMENT TO BUY OR SELL ANY SECURITY OR OTHER FINANCIAL INSTRUMENT. INVESTMENT FUNDS MANAGED BY WHITNEY TILSON AND GLENN TONGUE OWN STOCK IN MANY OF THE COMPANIES DISCUSSED HEREIN. THEY HAVE NO OBLIGATION TO UPDATE THE INFORMATION CONTAINED HEREIN AND MAY MAKE INVESTMENT DECISIONS THAT ARE INCONSISTENT WITH THE VIEWS EXPRESSED IN THIS PRESENTATION. WE MAKE NO REPRESENTATION OR WARRANTIES AS TO THE ACCURACY, COMPLETENESS OR TIMELINESS OF THE INFORMATION, TEXT, GRAPHICS OR OTHER ITEMS CONTAINED IN THIS PRESENTATION. WE EXPRESSLY DISCLAIM ALL LIABILITY FOR ERRORS OR OMISSIONS IN, OR THE MISUSE OR MISINTERPRETATION OF, ANY INFORMATION CONTAINED IN THIS PRESENTATION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND FUTURE RETURNS ARE NOT GUARANTEED.
-3-
Berkshire Hathaway: A High-Quality, Rapidly Growing 75-Cent Dollar
History • Berkshire Hathaway today does not resemble the company that Buffett bought into during the 1960s • Berkshire was a leading New England-based textile company, with investment appeal as a classic Ben Graham-style “net-net” • Buffett took control of Berkshire on May 10, 1965 • At that time, Berkshire had a market value of about $18 million and shareholder's equity of about $22 million
-4-
The Berkshire Hathaway Empire Today
Stakes in Public Companies Worth $1+ Billion
Company Coca-Cola Wells Fargo Burlington Northern Santa Fe Procter & Gamble American Express Kraft ConocoPhillips Johnson & Johnson Wal-Mart U.S. Bancorp Shares 200.0 313.4 76.8 96.3 151.6 138.3 57.4 36.9 37.8 69.0 Price Value ($B) $53.25 $27.39 $99.30 $61.20 $37.67 $28.20 $47.49 $62.81 $52.97 $24.01 $10.7 $8.6 $7.6 $5.9 $5.7 $3.9 $2.7 $2.3 $2.0 $1.7
Note: Stock prices as of 2/5/10; excl. GE, Goldman & Wesco
-5-
The Basics
• Stock price (2/4/10): $108,900 – $72.61 for B shares (equivalent to $108,915/A share) • Shares outstanding: 1.55 million • Market cap: $169 billion • Total assets (Q3 ‘09): $292 billion • Total equity (Q3 ‘09): $131 billion • Book value per share (Q3 ‘09): $81,247
-6-
Recent Performance of Key Business Units
Earnings Before Taxes and Minority Interests, By Year:
2004 Insurance Group: GEICO General Re Berkshire Reinsurance Group Berkshire H. Primary Group Investment Income Total Insurance Oper. Inc. Non-Insurance Businesses: Finance and Financial products Marmon McLane Company MidAmerican/Utilities/Energy Shaw Industries Other businesses Total Non-Insur. Oper. Inc. Total Operating Income 970 3 417 161 2,824 4,375 2005 1,221 -334 -1,069 235 3,480 3,533 2006 1,314 523 1,658 340 4,316 8,151 2007 2008
1,113 916 555 342 1,427 1,324 279 210 4,758 4,722 8,132 7,514
584
822 1,157 1,006
228 217 229 232 237 523 1,476 1,774 466 485 594 436 1,787 1,921 2,703 3,279 3,302 3,968 6,159 6,727
787 733 276 2,963 205 2,809 7,773
7,677 7,501 14,310 14,859 15,287
-7-
Recent Performance of Key Business Units
Earnings Before Taxes and Minority Interests, By Quarter:
Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Insurance Group: GEICO General Re Berkshire Reinsurance Group Berkshire H. Primary Group Investment Income Total Insurance Oper. Inc. Non-Insurance Businesses: Finance and Financial products Marmon McLane Company MidAmerican/Utilities/Energy Shaw Industries Other businesses Total Non-Insur. Oper. Inc. Total Operating Income 312 358 237 314 311 288 407 308 295 325 335 158 186 298 246 186 148 111 200 30 230 157 138 42 102 54 144 -16 276 186 19 43 -389 -7 71 106 177 169 29 79 -166 1,382 203 -291 167 143 140 -1,635 283 94 137 735 692 553 356 183 335 154 49 63 77 90 25 81 -8 112 4 29 7 18 37 -10 190 35 43 108 787 851 900 942 1,018 1,102 1,103 1,093 1,078 1,236 1,217 1,227 1,089 1,204 1,074 1,355 1,298 1,422 1,348 1,279 1,429 -897 1,722 1,529 1,676 2,530 2,416 2,005 2,210 1,969 1,948 1,371 1,764 1,200 3,179 1,637 1,547 1,908
199
199
207
217
251
343
282
281
242
277
273
214
69 59 53 36 55 56 50 68 58 72 50 52 141 100 141 141 418 278 416 364 513 372 481 408 91 111 125 109 88 139 145 113 155 169 138 132 364 514 486 557 430 671 686 916 632 904 895 848 861 1,011 1,032 1,064 1,309 1,517 1,572 1,761 1,536 1,736 1,824 1,631 2,140 2,440
241 254 163 129 28 261 247 197 73 68 68 67 516 329 526 1,592 51 82 49 23 693 874 749 493 1,602 1,868 1,802 2,501
127 162 143 303 55 151 941
135 142 170 194 66 64 402 441 30 51 171 299 974 1,191
135 2,786 2,838 3,193 4,102 4,177 3,541 3,946 3,793 3,579 2,973 3,632 3,002 5,680 2,578 2,521 3,099
-8-
The Earnings of Berkshire’s Operating Businesses Have Grown at a Very High Rate – And Growth is Accelerating
Year 1965 1979 1993 2008
Per-Share Investments $4 $577 $13,961 $77,793
CAGR 42.8% 25.6% 12.1%
Per-Share Pre-Tax Earnings $4 $18 $212 $3,921
CAGR 11.1% 19.1% 21.5%
Berkshire is becoming less of an investment company and more of an operating business.
Note: CAGR: 1965-1979, 1979-1993, 1993-2008. EPS is pretax, net of minority interests and excludes profits of Berkshire’s insurance operations.
-9-
Growth in Earnings of Berkshire’s Operating Businesses Has Slowed as Buffett Has Allocated More Capital to Investments in Recent Years
% Growth Rate* 24 10 14 18 8 26 9 27 14 6 9 13 9 n/a 22 19 3 48 11 11 28 202 9 16 14 14 Company Name Exxon Mobil Wal-Mart Procter & Gamble Microsoft General Electric AT&T Johnson & Johnson Chevron Berkshire Hathaway Pfizer IBM Cisco Systems Coca-Cola Google Hewlett-Packard Oracle Verizon Genentech Pepsico Intel ConocoPhillips Apple Abbott Labs McDonald's Amgen Median Market Cap $408,458 $219,741 $185,621 $184,672 $177,404 $166,772 $165,614 $157,159 $154,573 $120,024 $119,877 $104,162 $103,439 $102,180 $94,981 $92,799 $90,782 $88,371 $86,509 $85,488 $83,009 $82,689 $79,007 $69,258 $61,813
* 5-year compound annual growth rate of EBIT (earnings before interest and taxes) through Q3 07. Berkshire’s figure is pre-tax EPS excluding all income from investments.
Note: List of 25 largest companies (by market cap) that trades on U.S. exchanges Source: Capital IQ, through 1/6/09
-10-
The Burlington Northern Acquisition Dwarfs Anything Before It
30 25 20
Includes $26B for Burlington Northern
$B
15 10 5 0 (5) (10)
Acquisitions Net Stock Purchases
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q1-3 2009
• •
He’s doing a good job – but the cash is coming in so fast! – A high-class problem Markets have a way of presenting big opportunities on short notice – Current chaos, junk bonds in 2002 – Buffett has reduced average maturity of bond portfolio so he can act quickly
-11-
A Breakdown of Berkshire’s Capital Commitments in 2008
Investment/Commitment Mars/Wrigley Auction rate securities Goldman Sachs Constellation Energy stock and preferred Marmon Amount (Bn) $6.5 $6.5 $5.0 $5.7 $4.5 Q2 event; sold much in Q3 Plus $5B to exercise warrants Sold for a $1.1B gain incl. breakup fee The remaining 34.6% not owned by BRK will be purchased from 2011-14 Full year; net of sales Plus $3B to exercise warrants Q2 event; sold much in Q3 Iscar acquisition Plus sharing agreement Comment
General stock purchases Dow/Rohm & Haas General Electric Fed. Home Loan Disc. Notes Tungaloy Swiss Re unit ING reinsurance unit Other businesses purchased TOTAL
$3.3 $3.0 $3.0 $2.4 $1.0 $0.8 $0.4 $3.9 $46.0
Plus $8B to exercise GS & GE warrants
-12-
Note: Does not include capital committed to Berkshire’s new bond insurance business, Berkshire Assurance
Valuing Berkshire
“Over the years we've…attempt[ed] to increase our marketable investments in wonderful businesses, while simultaneously trying to buy similar businesses in their entirety.” – 1995 Annual Letter “In our last two annual reports, we furnished you a table that Charlie and I believe is central to estimating Berkshire's intrinsic value. In the updated version of that table, which follows, we trace our two key components of value. The first column lists our per-share ownership of investments (including cash and equivalents) and the second column shows our per-share earnings from Berkshire's operating businesses before taxes and purchase-accounting adjustments, but after all interest and corporate expenses. The second column excludes all dividends, interest and capital gains that we realized from the investments presented in the first column.” – 1997 Annual Letter
“In effect, the columns show what Berkshire would look like were it split into two parts, with one entity holding our investments and the other operating all of our businesses and bearing all corporate costs.” – 1997 Annual Letter
-13-
Buffett’s Comments on Berkshire’s Valuation Lead to an Implied Multiplier of Approximately 12
Pre-tax EPS Excluding All Year-End Intrinsic Implied Investments Income From Stock Investments Price Value Multiplier Year Per Share 1996 $28,500 $421 $34,100 $34,100 13 1997 $38,043 $718 $46,000 $46,000 11 1998 $47,647 $474 $70,000 $54,000 13 1999 $47,339 -$458 $56,100 $60,000
• • • • 1996 Annual Letter: “Today's price/value relationship is both much different from what it was a year ago and, as Charlie and I see it, more appropriate.” 1997 Annual Letter: “Berkshire's intrinsic value grew at nearly the same pace as book value” (book +34.1%) 1998 Annual Letter: “Though Berkshire's intrinsic value grew very substantially in 1998, the gain fell well short of the 48.3% recorded for book value.” (Assume a 1520% increase in intrinsic value.) 1999 Annual Letter: “A repurchase of, say, 2% of a company's shares at a 25% discount from per-share intrinsic value...We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated...Recently, when the A shares fell below $45,000, we considered making repurchases.”
-14-
Estimating Berkshire’s Value: 2001 – 2009
Pre-tax EPS Excluding All Income From Intrinsic Value Investments1 Per Share -$1,289 $64,000 $1,479 $70,000 $2,912 $97,000 $3,003 $103,000 $3,600 $117,300 $5,200-$5,4002 $143,000-$144,400 3 $5,500-$5,700 $156,300-$158,700 $5,728 $123,617 (8 multiple) 4 $5,000 $142,500 (10 multiple) Subsequent Year Stock Price Range $59,600-$78,500 $60,600-$84,700 $81,000-$95,700 $78,800-$92,000 $85,700-$114,200 $107,200-$151,650 $84,000-$147,000 $70,050-$108,100 ?
Year End 2001 2002 2003 2004 2005 2006 2007 2008 2009 (est.)
Investments Per Share $47,460 $52,507 $62,273 $66,967 $74,129 $80,636 $90,343 $77,793 $92,500
Given compressed multiples at the end of 2008, we used an 8 rather than a 12 multiple. We bumped this to a 10 multiple at the end of 2009, still below the 12 multiple we believe Buffett uses.
1. Unlike Buffett, we include earnings from Berkshire’s insurance businesses. 2. Actual result was $6,492, but we reduce this to assume the 2nd-worst year ever for super-cat losses. 3. Actual result was $6,270 but we reduce the pre-tax, pre-investment-income margins of the insurance businesses by 400 basis points (from 14% to 10%) to reflect Buffett’s guidance in the Annual Report. 4. We have trimmed our estimate of normalized earnings to reflect the weak economy.
-15-
Even Using an 10 Multiple, Berkshire Is Nearly 25% Below Intrinsic Value
Intrinsic value estimate of $142,500 using 10 multiple Intrinsic value*
24% discount to intrinsic value
* Investments per share plus 12x pre-tax earnings per share (excluding all income from investments) for the prior year, except for YE 2008 (8 multiple) and YE 2009 (10 multiple).
-16-
12-Month Investment Return
• • • • •
Current intrinsic value: $142,500/share Plus 5% growth of intrinsic value of the business Plus cash build over next 12 months: $4,000/share Equals intrinsic value in one year of $153,600 41% above today’s price
-17-
Catalysts
• Recent inclusion in the S&P 500 (and S&P 100) means that index funds will have to buy an estimated $38 billion of stock
– The stock is widely held by insiders and long-term holders who are unlikely to sell much anywhere near today’s undervalued price
Continued earnings growth of operating businesses New equity investments Additional cash build Eventually, Berkshire could win back a AAA rating (not likely in the near term) • Potential for more meaningful acquisitions and investments – If there’s a double-dip recession, this becomes more likely
• • • •
-18-
Risks
• • • •
• • • •
A double-dip recession impacts Berkshire’s earnings materially Berkshire’s stock portfolio declines Investments in GE, Goldman and others turn out badly Losses in the shorter-duration derivatives such as credit-default swaps are larger than expected and/or mark-to-market losses mount among the equity index puts A major super-cat event occurs that costs Berkshire many billions Berkshire is downgraded further No catalyst occurs, so the stock sits there and doesn’t go up – Intrinsic value will likely continue to grow nicely Something happens to Buffett – In good health; turned 79 last Aug. 30th – Strong board and succession plan in place – Little Buffett premium in stock today
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Conclusion
• Cheap stock: 75-cent dollar, giving no value to recent investments and immense optionality • Extremely safe: huge cash and other assets provide downside protection • Powerful near-term catalyst
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