Money and Finance
It seems to be pretty clear to most value investors that Berkshire Hathaway is a bargain. But, how big of a bargain is it and how much can we expect to make over the next few years by purchasing a stake in Warren Buffett's masterpiece today?
I view the value of Berkshire as consisting of 2 parts: (1) the investments per share (which includes a massive amount of cash on hand and also includes part ownership of some of the best businesses in the world -- Coca-Cola, American Express, Washington Post, etc.), and (2) the value of the operating businesses.
So what are the 2 parts worth? Total cash and investments per share should be a little over $80,000 per share at the end of 2006, so we'll value these at the market value of $80,000. Now, pre-tax income is going to be very good in 2006 because there was very little hurricane activity. Since we are going to be putting a multiple on these earnings, it is necessary that we normalize them. If we assume that 2004 was a normal year, which I feel is conservative because this was the second worst year ever (after 2005) for hurricane losses, then normalized earnings this year should still be about $5,000 per share. So what is a conservative multiple for these earnings? I think considering the quality of the businesses producing these earnings and the current interest rate environment, a 12 multiple on the pre-tax earnings is a safe number, especially since Berkshrire is still one of the fastest growing large caps in the world. So $80,000 in investments per share + ($5,000*12) = $140,000 value per A share ($4,667 per B share).
So, if we assume investments per share grow at an average rate of 8% over the next 3 years and operating earnings grow at an average rate of 10% over the next 3-5 years (both of which I feel are very conservative -- but remember, Berkshire's growth can be a little lumpy), then we get a value 3 years out of about $180,000 per share and 5 years out of about $215,000 per share. This would yield an annual rate of return of about 15-20% per year over the next 3-5 years by purchasing shares around today's price of $108,000 per A share ($3,600 per B share).
What's the best part about this investment? No, it's not that you are getting a very attractive return and the chance to buy into a business with huge competitive advantages and a rock-solid balance sheet at a 20-30% discount to intrinsic value (although that is very nice). The best part about this investment is that you are getting that 20-30% discount without having to pay a penny in premium for the capital allocating ability of Warren Buffett. You're getting a great business, at a very good price, and you're getting "The Great One" for free.
*This is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.
- Analysis Of Berkshire Hathaway
The paragraphs below are from an article by Whitney Tilson in November of last year when people were worried about Berkshire's index puts. T2's full analysis of Berkshire is available HERE. As Mr. Tilson pointed out, the worries were overblown...
- The Effect Of Discount Rates On Intrinsic Value
The discount rate you use in a discounted cash flow valuation can have a big effect on an intrinsic value calculation. To illustrate, let's use an example based on the following assumptions:-Earnings Per Share Year 0: $1.00Growth Years 1-5: 12%Growth...
- Wanted: Castles, Gold And Benevolent Rulers
Interview With Gifford Combs, Managing director and portfolio manager, Dalton Investments Q: Given that context, where are you focused? Berkshire Hathaway [ticker: BRK.A]. Think of it as the Rodney Dangerfield of companies in America. The operating...
- How Yummy Is Yum Brands' Valuation?
Last week I updated my valuation of McDonald's Corporation (MCD) and the price appears to offer a decent value. You can read the full analysis here. As more of a growth play I wanted to take a look at its largest competitor YUM! Brands,...
- The Long Case For The Coca-cola Company
The Coca-Cola Company (KO) will be announcing earnings on Tuesday, so what better time than the present to get an update on its current valuation. There's not much needed to be said about a company as great as Coca-Cola. It has the number...
Money and Finance
So, What's Berkshire Worth Anyway?
It seems to be pretty clear to most value investors that Berkshire Hathaway is a bargain. But, how big of a bargain is it and how much can we expect to make over the next few years by purchasing a stake in Warren Buffett's masterpiece today?
I view the value of Berkshire as consisting of 2 parts: (1) the investments per share (which includes a massive amount of cash on hand and also includes part ownership of some of the best businesses in the world -- Coca-Cola, American Express, Washington Post, etc.), and (2) the value of the operating businesses.
So what are the 2 parts worth? Total cash and investments per share should be a little over $80,000 per share at the end of 2006, so we'll value these at the market value of $80,000. Now, pre-tax income is going to be very good in 2006 because there was very little hurricane activity. Since we are going to be putting a multiple on these earnings, it is necessary that we normalize them. If we assume that 2004 was a normal year, which I feel is conservative because this was the second worst year ever (after 2005) for hurricane losses, then normalized earnings this year should still be about $5,000 per share. So what is a conservative multiple for these earnings? I think considering the quality of the businesses producing these earnings and the current interest rate environment, a 12 multiple on the pre-tax earnings is a safe number, especially since Berkshrire is still one of the fastest growing large caps in the world. So $80,000 in investments per share + ($5,000*12) = $140,000 value per A share ($4,667 per B share).
So, if we assume investments per share grow at an average rate of 8% over the next 3 years and operating earnings grow at an average rate of 10% over the next 3-5 years (both of which I feel are very conservative -- but remember, Berkshire's growth can be a little lumpy), then we get a value 3 years out of about $180,000 per share and 5 years out of about $215,000 per share. This would yield an annual rate of return of about 15-20% per year over the next 3-5 years by purchasing shares around today's price of $108,000 per A share ($3,600 per B share).
What's the best part about this investment? No, it's not that you are getting a very attractive return and the chance to buy into a business with huge competitive advantages and a rock-solid balance sheet at a 20-30% discount to intrinsic value (although that is very nice). The best part about this investment is that you are getting that 20-30% discount without having to pay a penny in premium for the capital allocating ability of Warren Buffett. You're getting a great business, at a very good price, and you're getting "The Great One" for free.
*This is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.
- Analysis Of Berkshire Hathaway
The paragraphs below are from an article by Whitney Tilson in November of last year when people were worried about Berkshire's index puts. T2's full analysis of Berkshire is available HERE. As Mr. Tilson pointed out, the worries were overblown...
- The Effect Of Discount Rates On Intrinsic Value
The discount rate you use in a discounted cash flow valuation can have a big effect on an intrinsic value calculation. To illustrate, let's use an example based on the following assumptions:-Earnings Per Share Year 0: $1.00Growth Years 1-5: 12%Growth...
- Wanted: Castles, Gold And Benevolent Rulers
Interview With Gifford Combs, Managing director and portfolio manager, Dalton Investments Q: Given that context, where are you focused? Berkshire Hathaway [ticker: BRK.A]. Think of it as the Rodney Dangerfield of companies in America. The operating...
- How Yummy Is Yum Brands' Valuation?
Last week I updated my valuation of McDonald's Corporation (MCD) and the price appears to offer a decent value. You can read the full analysis here. As more of a growth play I wanted to take a look at its largest competitor YUM! Brands,...
- The Long Case For The Coca-cola Company
The Coca-Cola Company (KO) will be announcing earnings on Tuesday, so what better time than the present to get an update on its current valuation. There's not much needed to be said about a company as great as Coca-Cola. It has the number...