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Berkshire Hathaway Inc. Message Board

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  • Novalis_97 Novalis_97 Jul 28, 1998 8:20 AM Flag

    Why BRK is

    But we are now midway through 1998 now and we
    want to know the current relationship between
    Berkshire's market price and its intrinsic value. As for
    Berkshire's stock portfolio, we know from Berkshire's 1997
    shareholder letter that the total value of the portfolio
    stood at $36,247.7 mil. as of 12/31/97. But currently,
    the collective value of Berkshire's KO, G, AXP, WPO,
    FRE, DIS, WFC, and TRV stands at $38,645.9 mil. AND we
    know that the value of Berkshire's "other" stocks
    (each below $750 mil. in value) stands at $4,467.2 mil.
    * (1 + 25.6%/2), or $5,039.00 mil. (25.6% is the
    average growth rate of Berkshire's stock portfolio and
    you divide it by 2 to get a growth rate MIDWAY
    through 1998). Add $5,039.00 mil. to $38,645.9 mil. to
    get Berkshire's current stock portfolio value of
    $43,684.9 mil. This is 20.5% greater than the 12/31/97
    value of $36,247.7 mil. So the 12/31/97 $38,043
    "investments per share" figure has risen 20.5% in 1998 as well
    to $45,841.815. This is the first component of
    Berkshire's intrinsic value midway through 1998.

    second component is the intrinsic value of Berkshire's
    subsidiaries midway through 1998. Berkshire's subsidiaries'
    historical EPS growth rate has been 24.2%. Halve this to get
    12.1% for mid-1998. Then, multiply $717.82 by 1.121 to
    get a midyear EPS figure of $804.68. Then, divide by
    (r - g) or 0.04 to get the subsidiaries' mid-1998
    intrinsic value of $20,117. Add this to the mid-1998
    intrinsic value of Berkshire's stock portfolio to get an
    overall mid-1998 intrinsic value figure for Berkshire of
    $45,841.815 + $20,117 = $65,958.815 per Berkshire share (or
    just $66,000). No wonder Berkshire's been tanking!
    It's only worth $66,000 per share but it's been flying
    high at $70-80K a share.

    Interestingly, it's a
    good thing for Berkshire to be tanking now because
    Buffett can buy General Re even more cheaply. Each
    General Re share is convertible to 0.0035 BRK "A" share.
    0.0035 of a BRK.A now is $248.15. But General Re is
    worth at least $300. So keep hoping for Berkshire to
    tank even more so that Buffett can pick up each $300
    General Re share in the fourth quarter for less than $200
    a share. Berkshire's current "tanking" is NOT
    necessarily a bad thing. I bet Buffett is just praying it
    tanks even more.

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    • Your valuation is appreciated, but has some

      1. We've already disagreed on the proper number by
      which to discount future earnings. Suffice it to say
      that since you peg the interest rate at 9% (as a risk
      premium, a la Hagstrom), then your final number is higher,
      .04, or 25x earnings, which is not so

      2. WB has said himself that EPS growth in the area
      of 25% forever is impossible (unless you expect to
      be living in the United States of Berkshire within a
      few decades). No company can maintain a 22% advantage
      over GDP growth forever, which your valuation

      3. In your valuation of Berkshire's operating
      businesses, you use pretax earnings instead of net

      4. Your calcualtion of Berkshire's present
      investment portfolio is uncertain, but probably reasonable.
      It's just that WB may be trimming investments here,
      buying more bonds there, etc.

      5. You calculation
      of half-year growth is not accurate. If something
      grows 10% in a year, that does not mean it grows 5% the
      first half of the year and 5% the second. Compound
      interest doesn't work that way. In your case, however, its
      not so bad. One dollar that's growing at 24% annually
      will grow about 11% in the first half year. But the
      longer yor time period, the more inaccurate it becomes
      to simply divide by 2.

      One thing you did
      imply, with which I agree, is that Berkshire's year-end
      IV will depend on the eventual cost of the Gen Re


      • 4 Replies to NadavMa
      • �One thing you did imply, with which I agree, is
        that Berkshire's year-end IV will depend on the
        eventual cost of the
        Gen Re merger.�

        I don't
        agree with that. For me the price is known: 280,000 x
        (IV of an A share). The market price of the share is
        not relevant if you use IV to value your shares. I
        think it is the way WEB set the price. Any
        Buffett Fan

      • I made a mistake in my last message. Novalis did not assume that EPS would grow at 25% forever, but at 5% forever.

      • 1) Using 9%, the denominator is larger (r - g =
        0.09 - 0.05 = 0.04), which makes the PV smaller and
        more conservative, which is prudent. Not too long ago,
        Buffett expressed the view that interest rates couldn't
        stay low forever (but as long as they did high stock
        prices could be justified), so I'd rather err on the
        safe side. Imagine if I didn't use a risk premium:
        instead of about $20,000 per share, I would have
        calculated the IV of BRK's subsidiaries as something
        signficantly higher than $20,000.

        2) I don't use the
        subsidiaries' 24% EPS growth rate in the formula. I use 5% --
        which is very conservative. In the formula, g = 0.05.
        Buffett merely noted in his table that the subsidiaries'
        pre-tax EPS growth rate has been 24% a year for the past
        30 years. I know Buffett says he can't keep a 24%
        growth rate forever, but if you know anything about
        Buffett, you know that he has been saying that every year
        since he started and he says it more out of a fear of
        flighty investors than out of self-doubt about his
        investing ability. Also note Buffett doesn't have any plans
        to retire, his favorite holding period for a stock
        is "forever," and capitalism and positive-NPV
        projects have not plateaued yet historically.

        3) I
        agree using pre-tax earnings is strange but it's
        Buffett's table and he says it's "central" to estimating
        BRK's intrinsic value. Who am I to argue with

        4) Buffett's top 8 stocks (which make up about 90%
        of his entire portfolio) and the number of shares of
        each are well-known, and I used his portfolio's
        historical growth rate as the rate for the remaining 10%,
        which I think is reasonable. Of course, Buffett can
        change things around here and there, but for the most
        part Buffett hardly ever changes his portfolio. He
        says he makes more money "snoring" than when

        5)I agree about compounding but as you said it's not
        going to make a significant difference within a year.

    • Mr. Novalis:

      > So keep hoping for
      Berkshire to tank even more so that Buffett > can pick
      up each $300 General Re share in the fourth quarter
      > for less than $200 a share.

      This is an
      error. Buffet isn't paying $200 a share, or $300 a
      share. He's paying 0.0035 BRKa shares, the intrinsic
      value of which doesn't change as the stock price

      I am not competent to evaluate your BRK valuation

    • I calculate the IV in a similar way. But I think
      that if you want to actualise it you have to take in
      count the GNR acquisition. There will be more share and
      more investment. You have to add 24 billion in
      investment and 280 000 A shares. That shoukd give you around
      8 000$ per A share that appears result of WEB

      This way to calculate is similar to the one describe
      by Charlie in Wesco annual report. He says too that
      a dollar of earning in BRK is more valuable than a
      dollar in Wesco. I don't really know what to do with
      this phrase but I think it means that there is some
      "sure" growth in this stock that we should add a value
      for. But I don't. I use this amount as my margin of
      security so I buy BRK at my IV instead of 20% lower as I
      do with other stocks.
      Buffett Fan

      • 1 Reply to frenchie_m
      • I agree about GRN. 0.0035 of General Re's 76.5
        mil. shares oustanding is 267,750 new BRK shares.
        General Re's $24 bil. float divided by 267,750 = $89,636
        per BRK share. This is a $20,000 premium over BRK
        current price. $20,000 * 267,750 = $5.355 bil. gain in
        intrinsic value for BRK immediately upon finalization of
        the merger. Add this to the BRK's mid-1998 portfolio
        value calculated yesterday, $43,684.9 mil., to get a
        portfolio value of about $49 bil. This represents a 35%
        portfolio gain midway through 1998. 12/31/97 "investments
        per share" of $38,043 "investments per share" * 1.35
        = $51,469. Add this to the subsidiaries' mid-1998
        IV of $20,117 for an overall mid-year 1998 IV of
        $71,586 a share.

        So without GRN, BRK's midyear
        1998 IV is about $66,000 a share (calculated

        But assuming the GRN merger already took place, then
        BRK's IV is just about $71,600 now -- about $5,000

    • and you use the "investments per share" figure,
      as it seems everybody else who figures the value
      does. So I have a simple exercise for you and anyone
      else you wants to join in:

      BRK decides to issue
      bonds to raise some money. Let's say $1 Billion. WEB
      then uses the proceeds to buy $1 Billion worth of
      Coca-Cola. Investments per share rise by $801. What happens
      to intrinsic value?

      I know that WEB appears
      to imply that the "investments per share" is a key
      figure for the intrinsic value calculation, and I'm sure
      that's a figure to take into account. But there may be a
      reason he wants everybody to figure it out for

      Here's a second easy question:

      Does anybody
      believe that he doesn't take into account every single
      item on a prospective company's balance sheet? Who
      here believes there is the slightest chance? And if
      he's looking at both sides, why should we be shy about

    • Novalis
      The conclusion of your analysis could
      be debated. How does BRK benefit at this point if
      the price of the shares falls? I can't see how the
      GRN deal is at all affected by what happens to the
      stock now; the price was set in June and barring some
      kind of upset, will not change. However, future stock
      deals are hampered by a decline in the value of the

      Are you distinguishing accounting nuance, in
      particular, purchase accounting for GRN which presumably
      values the deal at the date the transaction closes?
      Here, I can see that BRK assumes less goodwill on its
      books if the value of the deal declines, which leads to
      less accounting impact from goodwill amortization.
      Your post presented internal (aftertax?) operating
      income which have probably been adjusted for any
      goodwill amortization; if so, even your valuation of BRK
      isn't much affected by goodwill.

      I look forward
      to your reply. Thanks.

      • 1 Reply to douffas
      • The price was not set back in June. Only the
        ratios were set back in June: 1 GRN share = 0.0035 BRK.A
        or 0.105 BRK.B. Check out the Berkshire news release
        at As a matter of fact, there are news reports that
        some arbitrageurs are currently buying GRN because its
        price is underpricing BRK stock and they anticipate
        making an arbitrage gain in the fourth quarter (when the
        deal is expected to be finalized). But they're betting
        that BRK stock will stay at its lofty levels during
        the fourth quarter -- however, there's no guarantee
        this will occur.

        Scenario 1: GRN
        underpricing BRK (what's happening now)

        GRN today:
        BRK today: $68,700; 0.0035*$68,700 =

        $234.4375 < $240.45, so GRN is underpriced compared to

        Scenario 2: BRK underpricing GRN (what could happen in the
        4th quarter if BRK continues to tank and why this is
        good for Buffett)

        GRN: $234.4375 (assume same
        as today)
        BRK: $50,000 (assume this);
        0.0035*$50,000 = $175

        $175 < $235.4375, so BRK would
        be underpriced compared to GRN if BRK tanks some
        more -- and Buffett would be able to buy each $234 GRN
        share for only $175, a huge discount. But $234 isn't
        even GRN's intrinsic share price. GRN has $24 bil. in
        float and 76.5 mil. shares outstanding, which puts
        GRN's intrinsic value per share around $313 per share
        ($24 bil. / 76.5 mil.). In that case, Buffett would be
        getting an almost 50% discount, which is the kind of deal
        Buffett likes.

214,490.00-250.00(-0.12%)Apr 24 4:00 PMEDT