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Berkshire Hathaway Inc. Message Board

  • HopeToBe_WBCopyCat HopeToBe_WBCopyCat Sep 12, 1998 5:13 PM Flag

    How to Value BRK? Here is one simple ap

    From time to time, many participants on this
    board have discussed BRK's valuation - - I have found
    them helpful and I thank you. I explain my approach
    below. It appears to me that, BRK is now reasonably
    valued. And, if you allow for the possibility that
    General Re's float is going to be valuable, BRK is
    probably undervalued. Here is my logic:

    BRK has
    two business:
    (i) Investments (Coke, Gilette,
    etc.)
    (ii) Operating businesses (GEICO, Shoes,
    Aviation, etc.)

    Let us value them on per share
    basis:

    (i) BRK's Investments per share: $38,043 (same as
    Dec. 31 last year)

    See: BRK 1997 annual report
    p. 4. Let us assume that BRK's investments have not
    increased in value this year (Coke, etc.) So, this amount
    remains the same ($38,043 per share).

    (ii) Then,
    the main point we need to decide is the multiple we
    should assign to the remaining businesses which
    generated $718 (p.4 of the annual report) pre-tax earnings
    per share.

    I will assign a multiple of 30 as
    explained below (it is not as generous as it appears). So,
    $718 pre-tax eps = 718 x 30 = $21,540 per
    share.

    Thus, value per share= (i) $38,043 +
    (ii) $21,540

    = $59,583 (say, $60,000)

    Notes on 30
    multiple for earnings: Historically,operating earnings of
    BRK companies have increased at the rate of 24% per
    year (Annual report, p. 4). But, this is lower than
    truth because some of earnings has been used to invest
    in other companis such as Coke, Gilette, etc. Those
    are not counted as growth in earnings (as reported
    above in 24%). Thus, the true growth in earnings is
    much more - - my guess is about twice or about 40% per
    year. A multiple of 30 is okay for that kind of
    growth.

    I would appreciate your comments on this simple
    approach.

    Further explanation if you find the above
    comments helpful:
    Annual report (p. 4) shows that
    ivestments have increased at the rate of 25.6%. Note that
    this growth includes an increase in the price of the
    underlying investments as well as new investments. For
    example, investments of $377 per share in 1977 (or $3,910
    in 1987) would not include American Express as AXP
    had not been purchased as yet. But, the $38,043 in
    1997 includes AXP. Thus, some of this increase of
    25.6% is from new purchases made possible by earnings
    of the operating companies (say GEICO).

    The
    investments of $38,043 per share is essentially the total
    investements of $46.6 Billion divided by the number of shares
    outstanding. This requires the assumption that the liabilities
    are not assigned to this investment. This is a
    reasonable assumption.

    Someday, BRK will have to
    pay taxes if Coke or AXP, etc. are sold. This has not
    been taken into account. It may be possible for BRK to
    spin-off the investments of the shareholders without
    paying taxes. But, that would require a planning well
    ahead of such spinoff.

    The multiple of 30 is
    arbitrary and who knows what it should be. It is just fine
    so long Buffett is alive - - after that, I am less
    certain about it as the operating companies might start
    investing in projects with smaller returns.


    Please, give me your comments. I shall appreciate it
    greatly.

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • "A quantification of the insurance industry's or
      General Re's potential exposure to year 2000 losses are
      not possible, as policy wordings vary and legal
      interpretations of possible insurance coverage for losses are
      likely to differ from jurisdiction to
      juristiction".

      Homework, homework...

      Thanks for your
      response, but it does little to define the possible
      liability. Rather, it only confirms my feeling that there
      could be negative surprises down the road from Y2K as
      even GRN doesn't know what to expect. I wonder if
      BRK's insurance cos are as clueless as GRN re: Y2K?

    • Although 20% LTV on a house sounds like my kind
      of idea, I only saw one good item out of the six you
      listed (not selling BRK) for the house purchase. I
      really do hope you have better reasons for the house
      purchase than you listed and I know more than a few of us
      who follow this board would agree. I'm disturbingly
      reminded by your reasons of couples who had babies as an
      attempt to patch up a sagging relationship. Best of good
      luck.

    • I think they trust me as far as my ability to
      hold onto and grow funds (remember I'm a penny
      pincher), it's the "work ethic" issue that is holding both
      sets of parents back. Both are self
      made...

      Both have danced around the issue of trusts but there
      is a ruluctance to share the wealth which is a
      strange commentary especially when you had a lot of
      carrots dangled in front of you like I have over the
      years.

      Greg

    • I did this once w/another stock. It's kind of
      like borrowing on margin. You must be sure to keep the
      amount borrowed down or you get a call fron the bank
      instead od the broker.

      Hope this helps

    • ........I've not done this but once did a "cash
      out" home re-finance at a lower interest rate. My
      house note stayed the same and I used the "cash out"
      money to buy some BRK which was appreciating at a
      pretty good clip.....I can't tell you if this was a real
      smart thing to do, because I hate the "paralysis of
      analysis"..........I just knew that I wanted some more shares......

    • 300 K down payment with a 1st. mortgage of 75K at
      37/38 years old? NICE PROBLEM.

      FWIW, in my
      neighborhood, 375K buys you a late 1950,s tract home with no
      ocean view that is a fixer upper if not a tear
      down.

      Ocean view starts at 550K to 7 digits.

      Quit your
      complaining man, life is good for you.

    • I like this idea of borrowing against your
      BRK...will banks actually go for it? Obviously it is solid,
      but I am continually amazed at the lack of
      sophistication of the minds of financial decision
      makers...anyone have experience with this?

    • I really havent thought it out much, but have you
      considered selling your house, buying more Brky's and using
      your shares as collateral for a home loan? On the
      assumption that Brk goes up at 15% year on year, you have
      quite a 'margin of safety'. (but then again I bet the
      guy who bought on margin at 84k thought he had it all
      figured out too!)

    • ---->Net worth of $25 mil plus $5
      mil?
      Holly shit! Your biggest problem isn't buying a
      house... your biggest problem is your parents estate
      taxes! (...a problem most people would be happy to have)
      But then again, if you were an "ex-pot head who's
      been running scared for 20 years", your parents are
      gonna have a hard time trusting you with their money...
      which forces them to keep everything until they die. A
      tough decision for any parent to make!

      Your
      parents should start thinking about estate planing early.
      We made the mistake of learning the hard way...
      after my father died. My parents live 'poor', like
      you.... junk car, modest house, and 5 TV's.... (one in
      the bedroom, one in the living room and 3 in the
      garage!... behind 2 old refigerators, and a kitchen sink...
      Really! Remember "Sanford & Son"? Pretty damn close to
      it!) It was only later that we found they were sitting
      on a 'pot of gold'... but what use is it to them
      now?

      Your parents (and hers) need to draft up
      something that starts off "Yesterday, I
      died..."

      Good luck with your house!

    • If you put this $300,000 into bonds, you would be making about $1,400. And if you put it in BRK and it grew by 10% a year, you would make $30,000 in the first year.

      It's your money though.

    • View More Messages
 
BRK-A
222,250.00-605.00(-0.27%)Feb 26 4:00 PMEST

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