Berkshire is a complicated company with main segments in insurance and 50-plus other operating businesses, utilities and energy, and finance and financial products. Getting to a correct valuation for the company can be daunting, with a multitude of considerations.The insurance operation is the biggest part, and may be the toughest to evaluate. As of September 30, Berkshire's insurance operation held $36,905 million in cash, $24,283 million in bonds, and $55,564 million in equities. That's $116,752 million in all, or 75,763 per share. Such a valuation for Berkshire's insurance operations involves implicit assumptions concerning the value of the float. Float totaled approximately $49.7 billion at September 30, 2006, $49.3 billion at December 31, 2005 and $48.9 billion at September 30, 2005. The cost of float, as represented by the ratio of pre-tax underwriting gain or loss to average float, was negative in both the first nine months of 2006 and for the full year of 2005 as Berkshire's insurance businesses generated pre-tax underwriting gains. If Berkshire earned only the risk-free rate on insurance float going forward, and those earnings were discounted back to the present at that same risk-free rate, a conservative $49.7 billion estimate of the value of float would result. If the insurance operations are valued at only 75,763 per share, then they are worth only 13.2 times the $5,738 insurance group pre-tax earnings for the first nine months of 2006. That seems too cheap to me, especially in light of the fact that the industry multiple falls in the range of 12 times annual earnings. Segment data for the third quarter suggests that Berkshire's noninsurance operations brought in pre-tax earnings of $1,572 million in 2006, up 52.3 percent from $1,032 in 2005. Nobody seems focused on how rapidly the noninsurance operations are growing, but I think it is noteworthy. Buffett says he looks for acquisitions selling for seven times pretax earnings or eleven times after-tax earnings. Using that criterion for the overall company, Berkshire's noninsurance operations should be worth $44,016 million. However, few diversified companies can boast such rapid, high margin growth. At a market multiple of 18 times net earnings, Berkshire's noninsurance operations would be worth $75, 456 million, or 48,966 per share.On the basis of these too-conservative assumptions, Berkshire has a minimum value of 124,729 per share. However, that's a very cheap price based upon earnings. For example, assume the insurance operations merely breaks even in the fourth quarter, 2006 earnings per share would still come in at roughly $8,500. That a cheap P/E of only 14.67 times. In fact, that's too cheap.A valuation of $135,000 to $150,000 seems about right at this juncture.Mark
Mark:I think you're on to something! :-)Regards, OtterPater
On reflection, my earnings number of $8,500 looks a bit high.For the first nine months of 2006, Berkshire reported $7,432 million in net earnings, or about $4,821 per share. Reasonable guesses put that after-tax figure for 2006 in the range of $6,300 or $6,400 per share.To that amount I would add look-through earnings for Berkshire holdings. For 2005, that after-tax amount was $1,061 million (about $688 per share). I'm guessing that amount will grow by about 18 percent this year to about $811 per share.For details see:http://www.loschmanagement.com/Berkshire%20Hathaway/Financial%20Tables/Look-through%20Earnings%202002.htm That puts my best guess of 2006 after-tax operating earnings plus look-through earnings per share at roughly $7,100 to $7,200 per year. At today's 107,500, BRK.A is trading at about 15 times earnings. That still looks cheap to me.Mark
Mark, I agree with your comment that "Nobody seems focused on how rapidly the noninsurance operations are growing, but I think it is noteworthy." There is a reason WEB chose to give us the two part table in the 2005 AR. He says, "Before we look at our individual businesses, however, let's review two sets of figures that show where we've come from and where we are now." Everyone is familiar with the 40 year compound growth rates of 28% for Per Share Investments and 17.2% for Per Share Earnings of non-insurance businesses. He then points to the past 10 year growth rates of 13% for investments and 30.2% for per share earnings, commenting: "As you can see from the two tables, the comparative growth rates of Berkshire's two elements of value have changed in the last decade, a result reflecting our ever-increasing emphasis on business acquisitions." Shortly after that he says, "Over the years, our current businesses, in aggregate, should deliver modest growth in operating earnings. But they will not in themselves produce truly satisfactory gains. We will need major acquisitions to get that job done." I believe one can think of buying BRK today as buying two companies one called INCO and one called OPCO (investments and operating) and two streams of earnings. I know their past 10 year growth rates as well as the first 9 months of this year. I know the acquisitions so far this calendar year, at least two of which would qualify as "major", Iscar and Pacific Corp. INCO's growth is effectively "brought to market" each quarter so there is some relationship to book value. OPCO's earnings have little to do with book value and their IV is reflected in the growth of OPCO's eps (Reminder: 30.2% past 10 years.) When I calculate a range of intrinsic values for BRK, the dissociation from the price to BV of the past is clearly evident....and growing.
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