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Berkshire Hathaway – BRK.A/B – Analysis And Valuation | Italian …

Berkshire Hathaway. I ve always heard of it as a jewel and now i want to understand whether or not this classification is fair according to my standards.

Page 1 of the 2015 Annual Report:

Berkshire s gain in net worth during 2015 was $15.4 billion, which increased the per-share book value of

both our Class A and Class B stock by 6.4%. Over the last 51 years (that is, since present management took over),

per-share book value has grown from $19 to $155,501, a rate of 19.2% compounded annually.*

And a little bit later:

We ve had experience with both outcomes: I ve made some dumb purchases, and the amount I paid for the

economic goodwill of those companies was later written off, a move that reduced Berkshire s book value. We ve

also had some winners a few of them very big but have not written those up by a penny.

Over time, this asymmetrical accounting treatment (with which we agree) necessarily widens the gap

between intrinsic value and book value. Today, the large and growing unrecorded gains at our winners make it

clear that Berkshire s intrinsic value far exceeds its book value. That s why we would be delighted to repurchase

our shares should they sell as low as 120% of book value. At that level, purchases would instantly and meaningfully

increase per-share intrinsic value for Berkshire s continuing shareholders.

Ok, If this is not clear enough i m going to try to explain. Basically, Buffett is saying this: I ve made purchases, some of them have not been succesful. For every winner, i didn t record positive goodwill in the balance sheet (which is an asset, basically the difference between purchase price and book value of the purchased), but i recognized a loss whenever i had to write the goodwill off the balance sheet. Despite this, i managed to make my book value of 19% compounded for the last 51 year.

This was the first pages of the chairman letter. Now I would like to go into details about what Berkshire Hathaway does and how it does.

Many think that BH is just an holding with no proprietary core business, which owns shares of other companies and collects dividends every year. This is not true. BH owns:

  • BNSF Railway, which accounts for 17% of America s intecity freight in terms of revenues (ton-miles). Last year (2015) revenues are $40B, 1/5th of the BH total revenues with a pretax income of $6.8B.
  • Berkshire Hathaway, two months ago, purchased Precision Castparts Corp for $32B cash. In BH 10-k filing: PCC has become the world s premier supplier of aerospace components (most of them destined to be original equipment, though spares are important to the company as well) . Too early to judge results but PCC reported in 2014 revenues for $9.6B and a net income of $1.7B with a working base of 30,466 units. Not a bad acquisition. Looking forward to see and admire the results.
  • Berkshire Hathaway Insurance & GEICO: insurance divisions which contribute for $40B in the insurance division, and GEICO reports astonishing results every year.

These companies are owned entirely by BH, to not count the many holdings. Just for illustration purposes:

Shares Company % owned Cost (M) Market (M) 151,610,700 American Express Company 15.6 USD 1,287 USD 10,545 819% 46,577,138 AT&T 0.8 USD 1,283 USD 1,603 125% 7,463,157 Charter Communications, Inc 6.6 USD 1,202 USD 1,367 114% 400,000,000 The Coca-Cola Company 9.3 USD 1,299 USD 17,184 1323% 18,513,482 DaVita HealthCare Partners Inc 8.8 USD 843 USD 1,291 153% 22,164,450 Deere & Company 7 USD 1,773 USD 1,690 95% 11,390,582 The Goldman Sachs Group, Inc. 2.7 USD 654 USD 2,053 314% 81,033,450 International Business Machines Corp. 8.4 USD 13,791 USD 11,152 81% 24,669,778 Moody s Corporation 12.6 USD 248 USD 2,475 998% 55,384,926 Phillips 66 10.5 USD 4,357 USD 4,530 104% 52,477,678 The Procter & Gamble Company 1.9 USD 336 USD 4,683 1394% 22,169,930 Sanofi 1.7 USD 1,701 USD 1,896 111% 101,859,335 U.S. Bancorp 5.8 USD 3,239 USD 4,346 134% 63,507,544 Wal-Mart Stores, Inc. 2 USD 3,593 USD 3,893 108% 500,000,000 Wells Fargo & Company 9.8 USD 12,730 USD 27,180 214% Others USD 10,276 USD 16,450 160% USD 58,612 USD 112,338 192%

Below there s a little clause:

Berkshire has one major equity position that is not included in the table: We can buy 700 million shares of Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $11.8 billion. We are likely to purchase them just before expiration of our option and, if we wish, we can use our $5 billion of Bank of America 6% preferred to fund the purchase. In the meantime, it is important for you to realize that Bank of America is, in effect, our fourth largest equity investment and one we value highly. PEANUTS!

Ok, BH owns a relevant stake of the all quoted companies. What does that mean? Means Dividends. Means capital gains. Means a low variability in earnings with a predictable increasing path (not realizing capital gains is a huge advantage if you can afford that). Coca cola investiment is giving back 1300% and he didn t pay a penny of capital gain taxes on it. Probably dividend/year is higher than the price of a whole share Buffet paid in the early 50s. Do you see the potential of such things?
Let s go straight to the facts now. We are not analyzing a manufacturing company, so my valuation will rely on some different ratios and what for me is important to see in such a company. This is a holding, so in order to produce dividends/accumulate capital it has to get inflows every year. Revenues and gross profit are a reliable measure of what i can expect from this.

Berkshire Hathaway – BRK.A/B – Analysis And Valuation | Italian ...

Can you see what i see? Revenues going up at 10% CAGR since 2011. Well, it is impressive, really. Revenue growth is followed by a COGS growing at 8% CAGR. Components to me are ininfluent, with higher D&A expense that could be given by higher investments in the railway sector or in PP&E (property, plant & equipment). Honestly I don t care that much to investigate further. What i see is anyway a growing Gross Income. Of course we have to consider that 2011/2012/2013 has been great for stocks, and for US economy. Most BH holdings come from there and so we explain a part of the positive results. Interest expense, which i look at in these companies, is not high, with 3.5B this year and 3B as a mean of the last 5 years. I expect this data to be worse in the future due to the rising interest rates. Two things to note on the BS side. Cash, higher than ever with $74B, almost doubled from 2011. Be careful companies out there, someone ight buy 2/5% of you all of a sudden! Debt, with $75.48B also this is really high, in constant growth in the last 5 years starting from $58B. You know guys, i do like this. Would be helpful to know what kind of debt is this. Is it fixed or floating? Which is its duration? Is this high because in the last year Buffet called the banks and opened a $200 M loan every day because of extremely low rates? If this is what happened be sure that that will be a boost to income. Would be a great move. You pay interest in the first years because you just park that money, but when Interest rates go up you invest for higher rates.

Ok, at this point usually i would talk about cashflows. In this case i don t. Why? Because there s no need to pay dividends. You just need to have a cashflow capable of financing operations and investing/financing activities and you re good. FCF is 15B. Where are all these money going? Bank or shares. That s beautiful.

Multiples chapter:

  • Price: 209$
  • P/E 14x: not much. Maximum of the last year has been 19x
  • P/BV: 1.33x. Minimum has been 1.19x and commitment of company to buy shares at that price had effects. If i had liquidity in January i would have bought a lot of these shares at that price.
  • Interest Coverage: 9x. More would probably mean a non efficient allocation of debt. Or not enough debt.

Why is BH trading so low in terms of multiples right now? Well, it s a mixture of things. But i would explain 70% of it with the classical irrational investor. Core business is insurance, and insurance companies margins are negatively correlated with interest rates.
What i think is a good price for BH? Well, this is a good price. BH traded on an average of 1.58x Book Value. Right now we are at 1.33x so we are getting a discount on this stock compared to the price that would have been historical for constant BV 1.58*160 = 252.8$. Right now the discount is 17% more or less.

Berkshire Hathaway – BRK.A/B – Analysis And Valuation | Italian ...

Follow me on this: If price can t go lower than 1.20 in p/bv, and bv/s can only increase, means that at 1.2 we are going to get the best quotation ever. And 1.33 is not far from 1.2 .. What do you think of this company?

Cheers

Luca

Could Brussels Airport win back Ethiopian Cargo? ‹ World Freight …

Brussels Airport[1] has revealed that it is hoping to lure back Ethiopian Cargo s freighter services after the airline was was forced to move to Dutch hub Maastricht-Aachen in November because of traffic rights.

In its monthly traffic update, the Belgian airport revealed that thanks to the amendment of a bilateral agreement with Ethiopia, the federal government has created the possibility of Ethiopian Cargo moving services back to Brussels.

The airport is consulting with the company about a return, it said in a statement. Last year, Ethiopian Cargo s volumes helped the airport to record an increase in cargo demand. Brussels was one of the fastest growing European Airports as it recorded a demand increase of 7.8%[2] on 2014 levels to 489,000 tonnes.

However, towards the end of the year, the airline was forced to switch services to Maastricht-Aachen after it was not able to obtain the necessary traffic rights to enable it to continue its activities at Brussels Airport. This resulted in full-freighter volumes dropping by 25% in the last two months of the year compared with 2014

The switch had an almost immediate effect on Brussels cargo volumes and in January the Belgian hub saw cargo demand decline by 2.4% year on year in January to 36,964 tons. This was followed by a 1.8% decline in demand to 37,771 tons in February, although it was helped by the extra day during the month.

Thanks primarily to the leap day, belly cargo rose by 4.3% and the volume of integrator cargo rose by 2.9% in comparison with February last year, it said.


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References

  1. ^ Opens external link in new window (www.brusselsairport.be)
  2. ^ Opens external link in new window (www.aircargonews.net)