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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 212919  
Subject: Two Column Date: 8/6/2012 3:20 PM
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The two column approach has some limitations but at the very least is a good checkpoint for other more subjective methods such as the float based valuation model and for more simplistic approaches like the simple price/book. I like to update the two column valuation each quarter based on four quarter trailing earnings.

Column 1: Non-Insurance Subsidiaries

According to my spreadsheets, the trailing four quarter pre-tax earnings of Berkshire's non-insurance subsidiaries is $13,443 million (Q3 2011: $3,217; Q4 2011: $3,522; Q1 2012: $3,201; Q2 2012: $3,503). These figures exclude both insurance underwriting profits and investment income with the underlying assumption being that Berkshire will average a combined ratio of 100 on a normalized basis and that including investment income would be double counting since we consider the value of cash and investments as part of Column 2.

Although there is room to debate whether $13.4 billion approximates "normalized" earnings, I think it is a reasonable assumption. I have used a 8x pre-tax multiple which I know many consider too low. At 8x, the non insurance subsidiaries would be valued at $107 billion (rounding down).

Column 2: Cash and consolidated investments

Cash and consolidated investments at 6/30/2012 were $166,891 million (excluding the railroad & utility and financial products groups).

Intrinsic value = Column 1 + Column 2 = $273.9 billion
Shares outstanding at 6/30/2012: 1,651,922
Intrinsic value per share: $165,800

The implied P/B multiple happens to be 1.54 which is near the median P/B since 2000 (a coincidence, I did not adjust anything to arrive at this number).

If we use a 10x pre-tax multiple for Column 1, we would get an intrinsic value of $182,400 putting the P/B at 1.7. Buffett reportedly suggested that a 10x multiple was appropriate based on comments at the last annual meeting.

I find it increasingly difficult to come up with reasonable IV estimates of Berkshire much lower than $160K or much higher than $190K. I would not be tempted to trim my position much, if at all, below $150K and I would probably only have a small remaining position above $200K. Obviously, much would depend on other alternatives available at the time of a contemplated sale. Right now, however, this is all academic since Berkshire is stupidly cheap at $128K and offers a risk/reward unlike anything else that I know of.
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