Saturday, March 04, 2006
Berkshire Hathaway (BRKA, BRKB) annual report
I'm reading the report and will flag anything that might change my valuation, but I think it's safe to say that Berkshire is well run and that their financial statements reflect what's going on within the business. So all I'm going to do is a quick valuation estimate.
Earnings per share for 2005: $5,538
Excess cash on balance sheet: $13,000 (about $20 billion total)
Look-through earnings of relevant securities: $2,441
Let's estimate that the excess cash earned 2%, or $260 per share. We need to back this out of the look-through earnings because we're counting the excess cash separately.
Net look-through earnings of relevant securities: $2181
Now we have a problem that we're counting $3,719 per share of investment gains. I'm going to remove this entirely from my valuation since I'm already counting look-through earnings from stock held and excess cash. I believe this makes sense because I'm counting the value of stock held and the value of cash after selling the stock and I'm not assuming that Berkshire can sell stock at more than 15 times earnings, which is the market's historic value.
Earnings per share now becomes $1,819.
Ok, so let's add the $1,819 net earnings to the $2,181 look-through earnings for a total of exactly $4,000 in earnings. If we slap a P/E of 15 onto that, we end up with a value of $60,000. Next we add in the $13,000 of excess cash for a valuation of $73,000. This is based on a year with 3 monster hurricanes with a net cost of $3.4 billion. Show me a company where you can hit them with a world's record disaster like that on their primary business and then do a valuation based entirely on that one year and end up with something that's still pretty good.
I say that for a fair valuation, we should subtract at least half of that $3.4 billion back out. We'll assume an average of "only" 1.5 monster hurricanes. This adds $1,104 per share of earnings. If we assume a P/E of 15, that adds $16,560 to the valuation estimate for a resulting valuation of $89,560 which is pretty much what it's selling for now.
UPDATE same day: After finishing the annual report (or most of it, to be honest), I'll raise my valuation to $115,000.
The debate that I'm having currently, is whether or not I should even be holding BRK (b not a). I feel that I am holding for the wrong reasons, since it is blatantly obvious that there are deeper discounts and therefore greater returns for us elsewhere.
Do you even hold BRK? My guess would be no.