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Berkshire Hathaway Inc. Message Board

  • russ_21401 russ_21401 Apr 22, 2005 9:32 AM Flag

    Bud as elephant illustration

    Last year, Berkshire had net earnings of $7,308M. BUD had net earnings of $2,240M.

    At 12/31/04, BRK had $40,020M in cash. BUD's current market cap is $37B. A nice accidental match to give us an illustration of what BRK's earnings would look like after a $40B-Bud-like acquisition.

    If BRK had owned BUD instead of cash last year, BRK would have had annual net earnings of over $9B last year (after subtracting our lousy returns on the cash). BRK's look-through earnings are now more than $1B/yr. So, BRK earnings would have been ~$10B. IOW, with a current market cap of ~$130B, Berkshire would have a P/E of 13.

    BUD P/E is currently 17.4. This illustrates how dramatrically Berkshire's earnings can grow (and its P/E shrink) as soon as BRK's cash is put to use. The "elepahnt" doesn't even have to be selling at a distressed multiple for the impact to be large. Even at P/Es between 15 and 20, like BUD, where tons of major companies currently trade, any acquisition is instantly extremely accretive to BRK earnings. Buffett just has to find something/s he likes and the company/companies has to be friendly toward the offer.

    As a percentage of assets, Buffett holding $40B in cash is an extremely abnormal condition for Berkshire. IMO, the market assumes a strong probability that the cash will not find a home; the far stronger probability is that it will. And when it does, you'll immediately see Berkshire's annual earnings in the $10B range.

    FWIW, Berkshire's pre=tax "investment gains" last year were $1,746M which is only slightly higher than the average over the past 7 years. This is balanced against BRK's unusually large hurricane loses last year of $1.25B pre-tax in the second worst Supercat year ever. Also, MEC had a rare charge against earnings of $579M from its zinc project.

    If anything, $10B-a-year in after-tax earnings (including look through earnings) is probably quite conservative for what Berkshire would look like after a $40B Elephant Acquisition, even if the price that Berkshire paid was close to a P/E of 20 for a company like BUD.

    It's likely that Buffett is waiting for 2-3 acquisition opportunities in the $10-20B range that are even better/cheaper than BUD. It's easy to forget how dramatic the earnings impact will be.

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    • I find some aspects of this illustration misleading in a way that is unduly favorable to BRK's valuation, at least if one is looking at current year and next year's projected earnings instead of the past.

      <Last year, Berkshire had net earnings of $7,308M. BUD had net earnings of $2,240M. >

      But this year estimated eps for BRK are put at about 3,825. And for FY06 just about 4% growth at 3960
      http://finance.yahoo.com/q/ae?s=BRK-A i have no reason to use any other estimates for illustration purposes so i'll use these. Then I'll assume $1B look-through earnings. So BRK earnings will be $3.8 + $1B +2.2B = $7B.

      BRK market cap is 126B. $126/$7B = 18 p/e for 05, v. the hypothetical 04 p/e of 13.

      i also doubt that BRK could ever go to zero cash, without jeopardizing the ratings of its insurance businesses and debt, so the illustration is unrealistic in a pumpy way IMO

      • 4 Replies to iwantwhatscomingtome
      • "i also doubt that BRK could ever go to zero cash, without jeopardizing the ratings of its insurance businesses and debt, so the illustration is unrealistic"

        iwant,

        You are completely wrong. (Oh, there's something new.)

        On 12/31/01, Berkshire had only $5.3B in cash while holding $67B in stocks-bonds-and-other (p. 22 of '01 Annual Report). At that time, Berkhsire's insurance operations were just as huge as they are now, yet Berkshire had no need to hold much cash. Insurance revenues were $21.1B in '04 and were already $19.3B by '00 (p. 27 of '04 Annual Report).

        So, the idea that Berkshire has to keep any significant amount of its cash because of its insurance operations is false. Buffett has said several times that he intends to INVEST THE CASH. All of it, if possible.

        The example is entirely accurate.

        The real question is how much of Berkshire's low-yielding bond position could Buffett use for new investments IN ADDITION TO the $40B in cash (which will grow to at least $45B in cash this year). I have never heard a satisfactory response from anybody here who is actually in the insurance industry. In 1994, when Berkshire's insurance operations were small, Buffett held only $273M in cash, but $15.2B in stocks. But, of course, that was a SMART time to have 55 times as much in stocks as in cash.

        If anything, Berkshire could probably do a $50B acquisition in one phone call if Buffett decided to pull the trigger. It is simply false that BRK needs to hold anywhere near its current amount of cash. On 12/31/99, BRK had less than $4B in cash.

        When Buffett sees something he wants to buy, he has no trouble doing it __quickly. At the end of '98, Berkshire had $13.6B in cash. In the next 12 months, Buffett cut cash to $3.8B. Almost all of the $10B went straight into bonds. If nothing better presents in self, the day will come when Buffett does the same thing again __simply putting Berkshire's cash in bonds when he thinks they are fairly priced. The bond market is so huge that Buffett could put $45B to work in treasuties and never leave a ripple on the surface. In fact, that's what almost all American insurance companies do __own a tgon of bonds and a small amount of stocks (if any). Buffett/Berkshire simply have far greater flexibility in investment options __stocks, whole companies, commodities, FX plays__ because Berkshire writes so far below its capacity.

        Berkshire's structure constitutes a far better asset-allocation mouse trap for an insurance/investment conglomerate. The idea that, several years from now, Berkshire will still have a large cash position is THE STUPIDEST THING I HAVE EVER HEARD. The chances of this are almost nil. If nothing else, Berkshire will have an ENORMOUS bond position __like other insurers__ which will earn much better returns than the recent returns on our cash.

        Listening to you clowns discuss Buffett is like hearing a bunch of high school math students saying, "You know, I don't think that E = Mc(squared) is correct. Who says? That guy Einstein is so overrated."

      • <<But this year estimated eps for BRK are put at about 3,825. And for FY06 just about 4% growth at 3960
        http://finance.yahoo.com/q/ae?s=BRK-A i have no reason to use any other estimates for illustration purposes so i'll use these. Then I'll assume $1B look-through earnings. So BRK earnings will be $3.8 + $1B +2.2B = $7B.>>

        Um, you've kinda got a mess here, don't you? That $3.8 is $3.8K EPS. You're treating that as if it were $3.8B. That figure should be $3.8K X 1.54M total shares, or $5.85B. Then you come up with $5.85B + 1B + $2.2B = $9.05B, which at a market cap of $126B gives a PE of just under 14. Is that too pumpy for you?

      • BRK still has lots of bonds to liquidate after the $43 BB is deployed.

      • Where have you been?

        Yep, you and I will get along just fine. Whatever you do, don't go away. The board could definitely use more like you.

    • Russ, your illustration is right on target (just like Warren's elephant gun). The story is perhaps even more impressive when you consider the cash that BUD brews from it's operations, which is about $3 BILLION per year.

      BUD - Total Cash Flow From Operating Activities

      2004 = 2,940,300
      2003 = 2,970,900
      2002 = 2,765,200

      Best wishes,
      JT

      • 1 Reply to justintexas_99
      • BUD - Total Cash Flow From Operating Activities

        2004 = 2,940,300
        2003 = 2,970,900
        2002 = 2,765,200

        That is fine, but also subtract the capital expenditures to get a sense of free cash flow. Then, it is approximately the same as Net income (I know, it is not a science).

        Given 2004 eps of $2.77, that is a reasonable amount of cash flow being generated for $48 per share. You decide whether it is worth it or not. In last 10 years, it has gone up by 150% (approx again). It will be optimistic to assume that will continue (I think) but it might. So, in 10 years, the eps will be $6.93 per share or a price of 15x6.93 = $103 per share. That is what I think. Plus, say $15 in dividends. So, total value (approx) in 10 years = $118 and that amounts to an annual returns of 9 percent per year. That is what I think is likely to happen. The stock is reasonably priced. Buffett probably likes it because it has a very low downside risk. It is almost like investing in a risk free asset. (Last 10 years, the stock return has been 16% or so).

    • At 12/31/04, BRK had $40,020M in cash. BUD's current market cap is $37B. A nice accidental match to give us an illustration of what BRK's earnings would look like after a $40B-Bud-like acquisition.

      If BRK had owned BUD instead of cash last year, BRK would have had annual net earnings of over $9B last year (after subtracting our lousy returns on the cash). BRK's look-through earnings are now more than $1B/yr. So, BRK earnings would have been ~$10B. IOW, with a current market cap of ~$130B, Berkshire would have a P/E of 13.
      ------------------------------------
      russ - the problem i have with this analysis is that buffett can't buy 100% OF BUD for $37B to conolidate those earnings - so your pe ratio is unlikely.

      he typically has to pay much more for 100% of a company.

      I am not convinced he can get there with 5% positions in marketable securities. As the BUD purchase proves, its now very difficult for BRK to deploy cash in the stock market without tripwires going off that announce buffett's purchases.

      wabuffo

    • "The only time that I'd want a stock that I owned to drop in price would be if I had just initiated a position and was hoping to accumulate more at lower prices. Once I'm close to fully invested in a company I'd sorta like to see the stock go UP in price."

      Those of us who are working and investing funds sort of like the idea of being able to continue buying additional shares in our favorite companies at bargain prices. I would be thrilled to be able to do this as long as possible. Being "fully invested" is an ongoing exercise when you have constant inflows of cash to deploy.

      Make no mistake, I would like to see Berkshire reach IV at some point, but while it is under IV, I'm going to continue taking advantage of the situation by buying.

      And for the record, I'm not an academic, or I would believe that the current price always reflects IV since every good academic knows that markets are efficient.

    • <<My guess is that these guys must have government or academic related jobs.

      The only time that I'd want a stock that I owned to drop in price would be if I had just initiated a position and was hoping to accumulate more at lower prices. Once I'm close to fully invested in a company I'd sorta like to see the stock go UP in price.

      At that point I'm not really sure why I'd want it to go DOWN in price. >>

      One reason? To save face.

    • "warp our perceptions via saturation TV adds & so elect a president"

      No particular complaint about this president intended here. Johnson was even worse and he worked for the other wing of the Demoblicans.

    • Well, that wasn't my answer, but maybe it's one of those inkblot things. Any special interest with enough money to warp our perceptions via saturation TV adds & so elect a president should be viewed with some caution. Whoever the special interest is, and regardless of how loudly they say they have my best interests at heart.

    • When I worked for Child Protective Services in Cal, we were trying to give away more money
      than the people would bother to get.

      mohonri

    • Thanks mohonri.

      One comment. You said "I think it's more accurate to say "special interests" run America." -- and I agree.

      However, there are a lot of special interests, and it's useful to be very clear on which are the richest and most powerful.

      I once worked for an organization that blew enough money on a silly pipe dream, over about four years, to cover Bush's and Kerry's campaigns put together.

      Reader poll: do you think that I worked for (a) Gays and lesbians?
      (b) Poor rural whites?
      (c) A large corporation?
      (d) The Sierra Club?
      (e) Welfare mothers?


      (Answer key to come in a future post.)

    • astral said:

      "Wouldn't it be cool if there were a political party that represented folks who (a) live outside the beltway and (b) earn less than $500,000 a year?"

      Everybody says Nadar is a quack when he says the corporations run America. Nadar has guts.
      I think it's more accurate to say "special interests" run America.

      mohonri

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BRK-A
219,000.00-1,365.00(-0.62%)Mar 3 4:00 PMEST

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