Berkshire Hathaway Inc. Message Board

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  • Novalis_97 Novalis_97 Aug 14, 1998 8:37 AM Flag

    Better measure of earnings for BRK

    I think Buffett calculates BRK's intrinsic value
    in two ways, one a short-cut way and the other the
    more comprehensive way.

    The short-cut way is to
    define the intrinsic value of BRK's investments in KO,
    G, etc. as merely their market price and to then
    come up with an "investments per share" figure for
    BRK. In the last 3 Letters to Shareholders, Buffett
    has been providing a table showing BRK's "investments
    per share" and Buffett asserts that this figure is
    the first component of BRK's intrinsic value (the
    other component being the intrinsic value of BRK's
    wholly-owned subsidiaries, determined by discounting their
    aggregate earnings and earnings growth rate).

    more comprehensive way that Buffett determines BRK's
    intrinsic value is to look at not only the earnings of
    BRK's wholly-owned subsidiaries (and discounting them)
    but also to discount the "look-through earnings" of
    BRK's holdings in KO, G, etc. Since Berkshire actually
    owns 8% of Coke's outstanding stock, Buffett believes
    Berkshire (and its shareholders) have a claim to 8% of
    Coke's earnings -- just as if BRK owned 100% of Coke,
    BRK (and its shareholders) would have a claim to 100%
    of Coke's earnings. The SEC merely has a rule that
    says if you own less than 20% of a company's stock,
    you can only claim the dividends on that 20% as your
    own income and not 20% of all the earnings outright.
    But in the case of Berkshire, even if it owns less
    than 20% of Coke, 8% of Coke (worth about $16 bil.) is
    still a huge amount of Coke stock, so Buffett has a
    case when he says Berkshire can properly claim 8% of
    Coke's earnings as its own earnings. Just imagine if BRK
    merged with Coke someday (i.e., owned 100% of Coke). BRK
    (and its shareholders) would have a rightful claim to
    100% of Coke's earnings. The same is true if BRK only
    owns 8% of Coke -- BRK's shareholders have a rightful
    claim to (and actually own) 8% of Coke's earnings. It's
    a transitive relationship: if BRK shareholders own
    BRK (true) and BRK owns 8% of Coke (also true), then
    it must be the case that BRK shareholders own 8% of

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