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Monday, June 20, 2011

Berkshire Hathaway

 Not exactly a pink sheet stock.

So what does $113,000 buy for one share of stock?

I spent some time poring over the financial statements of Berkshire trying to get a gut sense of an answer as the stock price has been dropping.

There's a large amount of excess cash and easily-liquified assets standing across the balance sheet from the insurance liabilities.  The net might be something like $30,000 if I understand correctly, but I haven't done a detailed calculation recently.  The total cash and investment assets in the insurance segment are staggering, around $90,000 per share.

All sorts of methods have been tried when attempting to value Berkshire stock.  For a long time, Buffett was advocating look-through earnings in the holdings, which makes a lot of sense as long as you correctly avoid double counting or under counting anything.

Interest, dividend, and other investment income in the insurance segment is only about $3,180 per share.  So you can pull that out of the earnings, and then treat the cash/investments/etc. as partially restricted assets (somewhere between $30,000 and $90,000 is unrestricted, probably closer to $30,000).  Of course, you can still keep the gains on the full amount, assuming you have gains and not losses beyond the point where you'd need to cough up more assets to meet insurance obligations.

all of these include interest, dividend, and other investment income
Earnings:
2009: $3,224 per share
2010: $5,193 per share
2011: $7,928 per share

But then there's this: cash flow from operations minus capex
2009: $5,114 per share
2010: $10,909 per share
2011: $11,915 per share

This is during a housing-bust based economic downturn and a lot of these companies are selling carpets, jewelry, modular housing, furniture, etc.

The comprehensive income includes unrealized investment gains, foreign currency gains/losses, and some other unusual stuff.  2008 killed them on unrealized investment losses that took two more years to overcome.

I believe it's a good deal at $113,000 per A share (you'd be silly to buy A shares even if you were buying $113,000 worth of stock in one account because you'd have to break it up into B shares to sell just part of it later on and the A shares are traditionally worth more due to the increased voting rights... if that's still in place after they did the B share split).  I'm waiting for it to cross below $100K, which might not ever happen again.  Who knows?

If I recall correctly, Buffett is advocating looking at changes in book value per share to get a sense for how they're doing.  From the annual report, here are changes in book value, changes in S&P 500 including dividends, and the relative results.
                                                           Berk  S&P      relative
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5   (9.1)    15.6
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . (6.2) (11.9)   5.7
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.0  (22.1)   32.1
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.0  28.7     (7.7)
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5  10.9     (.4)
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4   4.9      1.5
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.4  15.8     2.6
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.0  5.5      5.5
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . (9.6) (37.0)   27.4
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.8  26.5     (6.7)
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.0  15.1     (2.1)
So Buffett, I mean Berkshire, has been averaging 8.74% per year gains in value going back to 2000 beating the crap out of the S&P 500 which has gone pretty much nowhere during the same time.

Of course if you had bought the stock back in March 2000 for around $40,000....

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