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Berkshire Hathaway Inc. Message Board

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  • Novalis_97 Novalis_97 Jul 26, 1998 11:15 AM Flag

    brk, axp at pe of 26

    From Page 2 of AXP's "Notice of Annual Meeting of
    Shareholders To Be Held April 27, 1998":

    "In connection
    with obtaining the approval of the Board of Governors
    of the Federal Reserve System to acquire up to 17%
    of the outstanding voting share of the Company,
    Berkshire and the Company have entered into an agreemenmt
    (effective for such time as Berkshire owns 10% or more of
    the Company's outstanding voting securities), and
    Berkshire has made commitments to the Board of Governors,
    designed to ensure that Berkshire's investment in the
    Company will at all time be passive. Pursuant to an
    additional agreement, so long as Berkshire owns 5% or more
    of the Company's voting securities and Harvey Golub
    is the Company's Chief Executive Officer, Berkshire
    and its subsidiaries will vote all Company common
    shares owned by them in accordance with the
    recommendations of the Board of Directors of the Company. Subject
    to certain exceptions, Berkshire and its
    subsidiaries will not sell Company common shares to any person
    who owns more than 5% of the Company's voting
    secruties or who seeks to change the control of the Company
    without the consent of the Company."

    Page 2 of
    this notice also states that Buffett owned 49,456,900
    AXP shares, or 10.6% of AXP, as of 12/31/97 (same as
    at 12/31/96). I think the above statement on Page 2
    of the proxy statement is definitive proof that
    Buffett has already or plans to signficantly boost his
    AXP stake from 10.6% to 17%. I believe that if you
    want to purchase more than 15% of a publicly traded
    company, you must obtain permission from the Federal
    Reserve Board to do so -- and, apparently, Buffett has
    received this permission and has had to reveal his plans
    to buy more AXP to the entire world in the process.
    When Buffett is known to be buying something, it means
    that company is underpriced, so go buy some AXP on
    Monday. At 107 1/16, AXP is only up 19.958% this year (it
    closed 1997 at 89 1/4. My intrinsic value calculation
    also shows AXP is signficantly

    Intrinsic value = (net income + depreciation - capital
    expenditures) / (12/31/97 30-year bond rate + correction factor
    if historically low - numerator's growth

    So intrinsic value (at year-end 1996) = ($1,991 mil.
    + $187 mil. - $343 mil.) / (0.0592 + 0.01
    correction - 0.05 growth rate)

    = $95,572.92 mil.
    (year-end 1996)

    Intrinsic value at year-end 1997 =
    $95,572.92 mil. * 1.05

    = $100,351.6 mil. (year-end

    #shares outstanding on 12/31/97: 466.417

    "Instrinsic" share price on 12/31/97: $100,351.6 mil. /
    466.417 mil. shares outstanding = $215

    Wow, AXP's
    market share price on 12/31/97 was $89.25 but its
    intrinsic share price was $215! No wonder Buffett is
    planning to increase his AXP stake from 10.6% to a
    whopping 17%!!!!! And since we are more than halfway
    through 1998, AXP's intrinsic value has only increased
    but AXP is still selling at only about half its 1997
    year-end intrinsic value ($107.0625 vs. $215).

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    • It's little wonder you believe AmEx is so undervalued, since you have assumed that it will grow by 5 percent FOREVER.


      • 1 Reply to NadavMa
      • �There�s no magic to evaluating any financial
        instrument...If every financial asset were valued properly, they
        would all sell at a price that reflected all of the
        cash that would be received from them FOREVER until
        Judgment Day, discounted back to the present at the same
        interest rate. There wouldn�t be a risk premium, because
        you�d know what coupons were printed on this �bond�
        between now and eternity. That method of valuation is
        exactly what should be used whether you�re in 1974 or
        you�re in 1998.�

        -- Warren Buffett two months ago
        at the Univ. of Washington Business

        Like Coke and Gillette, American Express is the kind
        of company whose earnings are as regular and
        predictable as a perpetuity bond. Therefore, you can use the
        perpetuity formula to calculate the intrinsic value of AmEx,
        which is exactly what I did in my previous

        The perpetuity formula (with a coupon that grows at
        the rate of g) is:

        PV (perpetuity) = C / (r -

        If you look at AmEx's "owner earnings" ("C" in the
        above formula) for the past 10 years, you will notice
        that C has been growing at MORE than 5% a year for the
        past 10 years. Thus, when I used 5% as g in my
        previous post, I was using a CONSERVATIVE growth estimate
        for AmEx -- so, if anything, AmEx's intrinsic share
        price is probably HIGHER than $215, but I use an
        intentionally low g just to stay on the safe side.

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