Author Topic: 2017 YE intrinsic value versus Market Value  (Read 4956 times)

longinvestor

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2017 YE intrinsic value versus Market Value
« on: December 05, 2017, 06:16:29 PM »
With the run up, some of these thoughts are surely swirling.

Chime in.


SlowAppreciation

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Re: 2017 YE intrinsic value versus Market Value
« Reply #1 on: December 05, 2017, 08:38:43 PM »
$197/share (current price)
  • $66/share stocks
  • $36/share cash (after taking out $20b for dry powder)
  • $12/share KHC (marked to market)
  • $11/share fixed income
  • $1/share Pfds/Warrants
= $127/share book - $10/share deferred tax (new rate)
= $117/share book

$197 - $117 = value of operating businesses
$81 = value of operating businesses

2016 Earnings operating businesses earned $8.50, so implied multiple on the operating businesses is 9.5x. This seems low, and I think it deserves a higher multiple, which in and of itself would give us a ~15% discount to current prices.

Then factor in if you think BRK will benefit further from lower taxes not just at their operating businesses, but also with their stock holdings. AAPL, WFC, BAC, AXP in particular will benefit. And then do you think the portfolio has more room to run? Berkshire's stock portfolio trades at 19x earnings, whereas the S&P is at 25. Maybe this says more about the market's valuation than Berkshire's, but I certainly wouldn't say Berkshire's stock portfolio is overvalued.

So let's call it $220/share - $240/share.

Dynamic

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Re: 2017 YE intrinsic value versus Market Value
« Reply #2 on: December 06, 2017, 12:25:23 AM »
I answered 'materially undervalued 10-30%'

But that depends on the implied forward return when priced at IV. To me that implied forward return is maybe 7-10% without a great deal of near term downside protection.

So even though I think that IV is more than 11% over current market price of $195-$200 per B share, I'm reluctant to buy or to sell at the current price, a price that reasonably well accounts for the expected tax cuts.

scorpioncapital

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Re: 2017 YE intrinsic value versus Market Value
« Reply #3 on: December 06, 2017, 01:27:43 AM »



So let's call it $220/share - $240/share.
[/quote]

And nothing says in a bull market you can't trade at 2x IV or $440 to $480 per share. Although that's not something you are counting on. But an overshoot is also possible.

Dynamic

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Re: 2017 YE intrinsic value versus Market Value
« Reply #4 on: December 06, 2017, 02:32:23 AM »
I'd say a large overshoot of IV is possible in many companies, but unlikely to reach 2xIV nowadays in the case of Berkshire given Buffett and Munger's stated intention that they would seek to discourage extreme undervaluation or overvaluation so that incoming/outgoing shareholders do not benefit disproportionately from the misfortune of their counterpart in the trade. I think

Nonetheless there's a wide enough trading range to really load up when it's cheap and to lighten up when it's more fully valued. In my case, I last bought just under $125 (Feb 2016, which was <1.25x last reported BV at the time, and later turned out to be <1.2x BV at year end) but I sold a good chunk at a somewhat undervalued $140 (May 2016) to load up on Apple, which was extremely cheap at $95 at the time.

I'd have needed a much higher price to sell Berkshire and hold the cash, and so far that hasn't happened (except for a temporary need to 'demonstrate I had X cash available to be withdrawn' for a one-off purpose a few years ago, which required me to sell a lot of my shares and show it had been in my account and available for withdrawal for a specified period, then I was able to buy back later).

If I had used borrowed money such as a mortgage extension to buy extra Berkshire (which I've not done yet but might consider in future at prices <1.3xBV) then I might be tempted to sell to cash at 1.55-1.60xBV to pay off the loan or lock in gains, depending on circumstances due to the different risk profile.

frankyt81

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Re: 2017 YE intrinsic value versus Market Value
« Reply #5 on: December 06, 2017, 11:47:40 PM »
Warren Buffet said in the last AGM that he thinks he can compound IV for the next 10 years in the 10% range, if interest rates rise a bit.

https://youtu.be/Pwdph0qVb4Q?t=1h11m52s

Under this assumption you can get a 10% compounder for 10-20% discount. Not too bad in today's environment.

rolling

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Re: 2017 YE intrinsic value versus Market Value
« Reply #6 on: December 07, 2017, 01:33:54 AM »
Berkshire 2 column intrinsic value has been coumpounding at around 9,5% a year. Without tax change that is the return to be expected on that estimate. With the tax change that number might increase to about 10,5-11%. If you use such an high discount rate berkshire is trading around fair value. However berkshire is safer than many bonds: widely diversified, loads of cash available, conservative capital alocation. In addition, since it does not pay dividends the coupons are automatically reinvested without tax payment.

So it is an high grade, tax efficient, coumpounding long term bond. As such the discount rate should be the same you would use for an equally safe bond. That might be around 4%. A discount rate of 6% would be conservative in current environment for such a bond. As such intrinsic value is way higher than current value.
« Last Edit: December 07, 2017, 01:43:56 AM by rolling »
My usual portfolio: Highly concentrated (up to 3 or 4 positions) in smallcaps and microcaps.

longinvestor

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Re: 2017 YE intrinsic value versus Market Value
« Reply #7 on: December 07, 2017, 02:40:08 AM »
Berkshire 2 column intrinsic value has been coumpounding at around 9,5% a year. Without tax change that is the return to be expected on that estimate. With the tax change that number might increase to about 10,5-11%. If you use such an high discount rate berkshire is trading around fair value. However berkshire is safer than many bonds: widely diversified, loads of cash available, conservative capital alocation. In addition, since it does not pay dividends the coupons are automatically reinvested without tax payment.

So it is an high grade, tax efficient, coumpounding long term bond. As such the discount rate should be the same you would use for an equally safe bond. That might be around 4%. A discount rate of 6% would be conservative in current environment for such a bond. As such intrinsic value is way higher than current value.
4 to 6% discount rate, I agree with. IV is way over as you point out. Why, imo, there is a buyback threshold at all. We live in times where they're not able to pull off the buyback. A time will come when they might well be able to.
« Last Edit: December 07, 2017, 02:53:20 AM by longinvestor »

frankyt81

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Re: 2017 YE intrinsic value versus Market Value
« Reply #8 on: December 07, 2017, 05:59:37 AM »
I meant with 10-20% discount the margin of safety to IV, not a discount rate.

StubbleJumper

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Re: 2017 YE intrinsic value versus Market Value
« Reply #9 on: December 07, 2017, 06:28:15 AM »
Warren Buffet said in the last AGM that he thinks he can compound IV for the next 10 years in the 10% range, if interest rates rise a bit.

https://youtu.be/Pwdph0qVb4Q?t=1h11m52s

Under this assumption you can get a 10% compounder for 10-20% discount. Not too bad in today's environment.


He talked about still managing berkie in 10 years?  There's a high likelihood that he'll need to communicate his management and investment decisions with the aid of a Ouija Board...