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.
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 $200 M loan every day because of extremely low rates? If this is what happened be sure that that will be a boost to income. Would be a great move. You pay interest in the first years because you just park that money, but when Interest rates go up you invest for higher rates.
Ok, at this point usually i would talk about cashflows. In this case i don t. Why? Because there s no need to pay dividends. You just need to have a cashflow capable of financing operations and investing/financing activities and you re good. FCF is 15B. Where are all these money going? Bank or shares. That s beautiful.
- Price: 209$
- 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.
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?
JOSH Cullen is just the man for City s play-off push, according to Reece Burke. The West Ham midfielder has been secured for the rest of the season after catching the eye in his first month at Valley Parade.
Phil Parkinson believes Cullen s maturity , despite his lack of experience, will be a key factor and was delighted to get his loan tied down. He said: When we bring lads in, we try to look after them as a club and we ve got a good dressing room. The lads are always very welcoming to new players and Josh has fitted in well.
He s very mature for his age. Like I say, he s got an old head on young shoulders and that s one of his real attributes.
He s made a good contribution in his first few games since he s been here and we need that competition in the squad for places.
Burke is not surprise to see his pal make such an immediate impact in League One.
He s small and looks like a school kid but on the pitch he s like a man, said the defender. I ve played loads of games in the under-21s with Josh and he s a leader, a really good player. Like fellow Hammers graduate Burke, Cullen arrived at City with a smattering of senior experience following two starts in the Europa League. Parkinson added: If you look at Reece, he played some games in the Premier League last season. Obviously Josh has had the taste in European football so it wasn t completely new to them.
Ideally, I think those are the players you want who have had a taste of it.
That s really important because sometimes the first few games at first-team level can be a bit of a shock in terms of the intensity in which they are played.
But those two have done well for us and it s good for West Ham as well.
I m not a big fan of the (Premier) under-21 league. I watch a lot of the games and they are played at a very slow pace and there s very little goalmouth action.
I don t think they are a great grounding for players going into league football. You can only play so much of that and you ve got to get out into the real world if you are going to develop.
Burke has already established himself as a big player in City s season but admits he needs to contribute with more goals. He scored against Burton in midweek, following up after Jon McLaughlin parried Billy Clarke s shot to claim his first at Valley Parade. Burke admitted: I was due a goal because I haven t scored for a while. But I was lucky enough to get in at the back post so it was good.
I ve always struggled with goal-scoring, to be honest. That s one of my targets at the beginning of the season because top class defenders get goals as well.
It s good to chip in and that s why I was buzzing to get my second one of the season. It was a big game and we needed a result.
The win put City on the brink of the top six ahead of this afternoon s home clash with struggling Doncaster. Burke, whose loan extends to cover the play-offs, said: It would be a great achievement for me if I do get to play in them.
Those are the games you want to play in when everyone is watching and you ve got the chance to impress.
The experienced players will be all right but obviously the young lads, including me, will have to deal with the pressure.
But that s part of the experience and you need to keep a cool head. Meanwhile, Jamie Proctor is a doubt for today because of a tight hamstring.
*JAMES Hanson missed out on the SkyBet League One player of the month title for February.
The City striker was on the four-name shortlist after scoring three times, including twice at Peterborough on his 300th career appearance.
But the judges went with Millwall goalkeeper Jordan Archer, who conceded only three goals in five games.
Marnie Harvey, a 17-year-old girl is suffering from a horrific mystery condition which causes thick, stinging blood to seep from her eyes and ears. According to Daily Mail, Miss Harvey s condition has baffled doctors for three years and has left her virtually housebound. Now, desperate for a diagnosis, she is sharing her story in the hope of getting her life back. Miss Harvey s ordeal began in 2013 when she woke up with blood spatters on her pillow.
Her terrified mother Catherine, 43, took her to the GP but despite several tests, no cause could be found. For the next two years she was sent for more investigations and told to change her diet, eliminating food groups from sugar to dairy, in a bid to find out what was causing her symptoms. But her condition continued to get worse and in July last year she was horrified to wake with gloopy blood seeping from her eyes. She now bleeds from her eyes, nose, ears and fingernails up to five times a day but doctors from every area of medicine are baffled as to why.
In the last few weeks, she has also started to bleed from her tongue and scalp. Thought to be the only person in the UK and possibly the world with this unique set of symptoms doctors have dubbed the frightened teenager The Mystery Girl. Recalling the moment she woke up with her eyes bleeding, Miss Harvey said: Red, gloopy tears were dripping out of my right eye.
I had blood all over my face and a shooting pain behind my eyes.
I felt my way downstairs and there, my parents, brother and sister all screamed when they saw me. My brother called an ambulance.
According to her: I never used to get ill and have always been a healthy girl. I loved sports at school and was on track to get good GCSE s.
Then in February 2013 I was at home when I started coughing up blood.
Her doctor sent her for a chest scan, which came back clear, but the worrying symptom continued for two years.
She frequently attended North Staffordshire Hospital and had further blood scans, which again, came back showing nothing amiss. Then, she developed a pain in her side but tests couldn t reveal why. She also began suffering migraines and sickness so bad she missed weeks of school.
Marnie Harvey and her mother
After her attendance dropped below 50 per cent her parents were threatened with legal action. However, Miss Harvey managed to take her GCSE exams but didn t get the results she was hoping for. Believing the symptoms might be related to her diet, doctors advised her to try eliminating food groups. Over the course of two years she cut out dairy, chocolate, gluten, wheat and sugar but nothing worked.
She said: I never really ate that much cheese or chocolate anyway, but I gave up everything that could be causing my ill-health. We could never find a correlation between what I ate and how I felt.
By June 2015 the headaches and sickness had worsened. However, what was to happen next was truly horrifying.
My eyes started bleeding. Then my nose and ears. It was a dark red, gloopy blood. It didn t gush out, it seeped.
Miss Harvey had gone to bed with a headache. When she woke up her vision was blurry and as she stumbled towards the mirror, she was in for a shock. She had blood over her face and a sharp pain behind her eyes. When she went downstairs her terrified family called an ambulance immediately and she was taken to hospital.
Yet, once again, doctors couldn t find anything wrong and she was sent home, only for the bleeding to return. Mrs Harvey took her daughter back to hospital where they were referred to the ear, nose and throat (ENT) and eye department. Mrs Harvey said: Marnie was tested for a tumour behind her eyes. They looked in her ears and up her nose and put a camera down her throat.
Everything came back clear. As far as results were concerned, she was the picture of health.
The bleeding continued as often as five times a day and Miss Harvey said she felt like her life was on hold. When it flows, she can t eat or open her eyes as the blood stings.
Mrs Harvey is now appealing for anyone who might know what could be wrong with her daughter to help them out.