Author Topic: BRK Valuation  (Read 13578 times)

Thrifty3000

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Re: BRK Valuation
« Reply #70 on: June 25, 2020, 04:35:46 PM »
How I derive Berkshire痴 Look Through Earnings

Based on 2019 Earnings (In Billions USD except per share info)

Non-Insurance Business Earnings: $17.7

Less CapEx Adjustment (Maintenance CapEx less Depreciation): $3
Plus Acquisition-related Amortization: $1.3

TOTAL ADJUSTED NON-INSURANCE BUSINESS EARNINGS: $16
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Equities

Dividends: $4
Estimated Equity Retained Earnings: $9

TOTAL EQUITIES LOOK THROUGH EARNINGS: $13
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TOTAL SHARED HOLDINGS EARNINGS (Kraft-Heinz, Berkadia, Flying J): $1

EARNINGS FROM TREASURIES & CASH EQUIVS (Assume 1% yield. #lazy): $1.25

INSURANCE COMPANIES (After tax operating profit - I think Buffett ignores this): $.325

TOTAL LOOK THROUGH EARNINGS: $32 BILLION

Average Equivalent B Shares Outstanding (3/31/2020): 2,434,333,367

LOOK THROUGH EARNINGS PER B SHARE: $12.97

Post-Covid New World Order 20% Impairment (#reallyLazy): $10.37 per B share


handycap5

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Re: BRK Valuation
« Reply #71 on: June 26, 2020, 01:21:23 PM »
Chris Bloomstran on a recent interview put the normalized earnings power at $40 billion. Any idea of where he gets that figure?


Cigarbutt

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Re: BRK Valuation
« Reply #72 on: June 26, 2020, 02:26:43 PM »
You may also want to check out John Burr Williams' "Theory of Investment Value" (1938, Amazon).  There's a cogency to the way he writes, and I'm not sure we've substantively advanced our conceptual understanding of valuation by much since then. 

I'm not sure what the argument against initiating dividends paying out even just a fifth of earnings really is.  I'm not even really sure that "taxes" is the right answer.  We can all hold stock and treasuries on our person without paying any corporate tax.  A dividend would also enable them to methodically reason about share repurchases: how much in future dividend payouts are saved by repurchasing at this price or, similarly, by how much more can we accelerate dividends paid per share given this repurchase? 

Should they even have a sizable investment portfolio?
The book is available here:
https://archive.org/details/in.ernet.dli.2015.225177/page/n1/mode/2up
If anything, the book is interesting for historical reasons and investing work still basically comes down to somehow imagining future cashflows and using an appropriate discount factor. The emphasis on dividends has changed and Mr. Burr Williams hoped that investment analysis may eventually help to reduce the damage done by the cycle. i wouldn't bet on that.

Chris Bloomstran on a recent interview put the normalized earnings power at $40 billion. Any idea of where he gets that figure?
i haven't heard (or read) Mr. Bloomstran lately but it may be related to what he wrote in his last annual letter (p113, adjusted net income,economic earnings)
https://static.fmgsuite.com/media/documents/c388840b-3dda-41da-a062-077bf785255b.pdf

Thrifty3000

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Re: BRK Valuation
« Reply #73 on: June 26, 2020, 02:34:53 PM »
Yes. He lays everything out in great detail in his annual letters/novellas. He makes several more accounting adjustments than Vinod and I do for things like pension liabilities, etc.

He makes assumptions that a large percentage of the cash will be invested at higher rates of return over time (a safe bet), and incorporates the higher projected earning power into 渡ormalized earnings.

Due to his accounting adjustments and assumptions his pre-covid normalized earnings came in about $8 billion higher than my pre-covid estimate. If you assume $100 billion of cash will eventually be invested at an 8% to 10% return, and discount it a bit to account for the wait time to deploy, it accounts for much of the difference between his estimate and mine. I'm a wuss when it comes to optimistic forecasts, so I prefer to assume more cash will pile up at the same rate existing cash will be deployed (see next paragraph).

If I recall correctly he also assumes a higher growth rate than I do. I believe his pre-covid estimate gravitated towards 8%. I知 trying to talk myself into using a 7% rate, but I知 not there yet. The cash will be a huge drag. They have to invest $30 billion and growing annually in expensive large cap equities, expensive private companies, or their own fairly priced shares. Remember, BNSF 登nly cost $26 billion. I just can稚 be optimistic about BRK being able to make a BNSF sized acquisition at a decent price every single year going forward, which is pretty much what it will take to sop up the free cash pouring in (cry me a river). (Buffett says his circle of competence encompasses about 5% of businesses. If you assume he痴 comfortable evaluating/purchasing 5% of the businesses in the world, which are at least as big as BNSF, that doesn稚 leave many.)

I do look forward to Bloomstran痴 analysis of covid痴 impact on the various segments, if for no other reason than trying to forecast how things like negative interest rates will impact every insurance and banking operation; how less travel will impact airline and auto related businesses, etc, etc, etc - a gargantuan undertaking, and WAY above my pay grade (probably above Bloomstran痴 pay grade, and maaaybe above Buffett痴, seeing as he went to DEFCON 1 in March). That痴 why I just lop 20% off my pre-covid estimate (#lazy #tooHardPile).

« Last Edit: June 26, 2020, 03:03:56 PM by Thrifty3000 »

widenthemoat

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Re: BRK Valuation
« Reply #74 on: June 26, 2020, 04:32:16 PM »
I'm not saying it isnt cheap (and I'm long) but if you count the equities you are implicitly including a bunch of the value of the insurance. There were over $160 B in liabilities related to the insurance operation last quarter. I get the concept of float, but I think treating that as equity (vs a long term cheap loan) is an aggressive way to think about it.

If you wanted to sell the insurance cos without their financial assets but with their policy liabilities, you'd be sending a bunch of money out the door to get someone to take them.

bizaro86, not taking a shot at your thoughts on the float liability, but rather want to see if you can poke holes in how I think about it. I'll use a hypothetical company that is 100% capitalized by float as my example. Let's assume we issue a $1.0m policy at the beginning of every year that gets paid out at the end of the year. We take that $1.0m and invest it into Treasury bills at a 10% rate (day-dreaming over here, I know). Well at the end of the year we would have $0.1m in the bank, $1.0m in a Treasury bill, receive cash inflows of $1.0m for the new policy issued, and pay out $1.0m of insurance claims/expense for the beginning of the year policy (assuming cost of float is zero). In this situation, the equity holder would be able to receive a dividend of $0.1m, unencumbered by the float liability. We can have this same situation occur forever into perpetuity, collecting $0.1m every year. My question becomes, why knock something off of the equity value if we never have to truly pay back the float and it doesn't cost anything in interest? That's $0.1m in my pocket every single year, just as if I funded the company 100% with my own money.
« Last Edit: June 26, 2020, 04:40:37 PM by widenthemoat »

Mephistopheles

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Re: BRK Valuation
« Reply #75 on: June 26, 2020, 05:16:18 PM »
I'm not saying it isnt cheap (and I'm long) but if you count the equities you are implicitly including a bunch of the value of the insurance. There were over $160 B in liabilities related to the insurance operation last quarter. I get the concept of float, but I think treating that as equity (vs a long term cheap loan) is an aggressive way to think about it.

If you wanted to sell the insurance cos without their financial assets but with their policy liabilities, you'd be sending a bunch of money out the door to get someone to take them.

bizaro86, not taking a shot at your thoughts on the float liability, but rather want to see if you can poke holes in how I think about it. I'll use a hypothetical company that is 100% capitalized by float as my example. Let's assume we issue a $1.0m policy at the beginning of every year that gets paid out at the end of the year. We take that $1.0m and invest it into Treasury bills at a 10% rate (day-dreaming over here, I know). Well at the end of the year we would have $0.1m in the bank, $1.0m in a Treasury bill, receive cash inflows of $1.0m for the new policy issued, and pay out $1.0m of insurance claims/expense for the beginning of the year policy (assuming cost of float is zero). In this situation, the equity holder would be able to receive a dividend of $0.1m, unencumbered by the float liability. We can have this same situation occur forever into perpetuity, collecting $0.1m every year. My question becomes, why knock something off of the equity value if we never have to truly pay back the float and it doesn't cost anything in interest? That's $0.1m in my pocket every single year, just as if I funded the company 100% with my own money.


Well, good way to think of it is-

would you rather have $1 m in equity or $1 m in float, all else being equal?
The real liability amount of float is less than, perhaps substantially so, then what is on the balance sheet but it is of course greater than zero.

widenthemoat

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Re: BRK Valuation
« Reply #76 on: June 26, 2020, 05:31:11 PM »
I'm not saying it isnt cheap (and I'm long) but if you count the equities you are implicitly including a bunch of the value of the insurance. There were over $160 B in liabilities related to the insurance operation last quarter. I get the concept of float, but I think treating that as equity (vs a long term cheap loan) is an aggressive way to think about it.

If you wanted to sell the insurance cos without their financial assets but with their policy liabilities, you'd be sending a bunch of money out the door to get someone to take them.

bizaro86, not taking a shot at your thoughts on the float liability, but rather want to see if you can poke holes in how I think about it. I'll use a hypothetical company that is 100% capitalized by float as my example. Let's assume we issue a $1.0m policy at the beginning of every year that gets paid out at the end of the year. We take that $1.0m and invest it into Treasury bills at a 10% rate (day-dreaming over here, I know). Well at the end of the year we would have $0.1m in the bank, $1.0m in a Treasury bill, receive cash inflows of $1.0m for the new policy issued, and pay out $1.0m of insurance claims/expense for the beginning of the year policy (assuming cost of float is zero). In this situation, the equity holder would be able to receive a dividend of $0.1m, unencumbered by the float liability. We can have this same situation occur forever into perpetuity, collecting $0.1m every year. My question becomes, why knock something off of the equity value if we never have to truly pay back the float and it doesn't cost anything in interest? That's $0.1m in my pocket every single year, just as if I funded the company 100% with my own money.


Well, good way to think of it is-

would you rather have $1 m in equity or $1 m in float, all else being equal?
The real liability amount of float is less than, perhaps substantially so, then what is on the balance sheet but it is of course greater than zero.

Personally, I think I would prefer $1.0m in float. I don't have to lay out a dime of my own money to earn $0.1m per year. If I'm laying out my own money to purchase the business from someone else, I would certainly prefer float if I wanted to grow the business - I would be able to distribute all earnings and grow them by using float instead of my own equity. I would also prefer float if it was profitable (i.e. essentially borrowing at a negative rate).
« Last Edit: June 26, 2020, 05:38:54 PM by widenthemoat »

ValueMaven

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Re: BRK Valuation
« Reply #77 on: June 26, 2020, 06:29:18 PM »
The Rational Walk on twitter posted this and I totally agree with this approach...its neat way to value BRK:

3/31/20: Cash & Investments = $349.5B + $33B gain in Q2 = $382B vs. Market Cap of $427B

Implied Value of $45B for non-insurance wholly owned subs (BNSF, GEICO, Clayton, PCP, Utility etc etc) .... man this thing is CHEAP

He also pegs P/BV at 1.08x

Thoughts?  It's an interesting way to triangulate valuation
« Last Edit: June 26, 2020, 06:37:43 PM by ValueMaven »

Cigarbutt

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Re: BRK Valuation
« Reply #78 on: June 26, 2020, 06:50:08 PM »
I'm not saying it isnt cheap (and I'm long) but if you count the equities you are implicitly including a bunch of the value of the insurance. There were over $160 B in liabilities related to the insurance operation last quarter. I get the concept of float, but I think treating that as equity (vs a long term cheap loan) is an aggressive way to think about it.
If you wanted to sell the insurance cos without their financial assets but with their policy liabilities, you'd be sending a bunch of money out the door to get someone to take them.
bizaro86, not taking a shot at your thoughts on the float liability, but rather want to see if you can poke holes in how I think about it. I'll use a hypothetical company that is 100% capitalized by float as my example. Let's assume we issue a $1.0m policy at the beginning of every year that gets paid out at the end of the year. We take that $1.0m and invest it into Treasury bills at a 10% rate (day-dreaming over here, I know). Well at the end of the year we would have $0.1m in the bank, $1.0m in a Treasury bill, receive cash inflows of $1.0m for the new policy issued, and pay out $1.0m of insurance claims/expense for the beginning of the year policy (assuming cost of float is zero). In this situation, the equity holder would be able to receive a dividend of $0.1m, unencumbered by the float liability. We can have this same situation occur forever into perpetuity, collecting $0.1m every year. My question becomes, why knock something off of the equity value if we never have to truly pay back the float and it doesn't cost anything in interest? That's $0.1m in my pocket every single year, just as if I funded the company 100% with my own money.
Well, good way to think of it is-
would you rather have $1 m in equity or $1 m in float, all else being equal?
The real liability amount of float is less than, perhaps substantially so, then what is on the balance sheet but it is of course greater than zero.
Personally, I think I would prefer $1.0m in float. I don't have to lay out a dime of my own money to earn $0.1m per year. If I'm laying out my own money to purchase the business from someone else, I would certainly prefer float if I wanted to grow the business - I would be able to distribute all earnings and grow them by using float instead of my own equity. I would also prefer float if it was profitable (i.e. essentially borrowing at a negative rate).
Waiting for bizaro's more sensible and practical answer but here's a perspective.
Float can be free or can even have negative cost but it's conditional on a cushion of equity. One way to see it is if the characteristics of the insurance business allow you to discount the insurance reserve liabilities.
Take the following (simplified) and consider the ends of the spectrum:
Assets (float)=240, Liabilities (reserves)=160, equity=80
Scenario #1, poor business
You buy the business to put in runoff and pay about book value or a slight discount to BV (say 0.9 BV). So you pay 72 and record 8 as negative goodwill. A way to appraise the negative goodwill (as an equivalent) is to augment the value of the reserves (often done post-acquisition with a hit to acquired equity when such a business is acquired).
Scenario #2, great business, expect underwriting profit and growth (other end of the spectrum)
You buy the business, pay a premium to book value (say 2 BV). So you pay 160 and record 80 as goodwill. A way to appraise the goodwill (as an equivalent) is a contra-account to decrease the value of the reserves.

When you look at float as a source of financing (from policy holders), you can't choose it above other sources of financing but its value can be modified by the type of business you're running or acquiring.
Historically, insurance companies have behaved closer to scenario #1, which is a reason why reserves are not typically discounted and high premiums to BV are not the norm.

Thrifty3000

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Re: BRK Valuation
« Reply #79 on: June 26, 2020, 06:54:31 PM »
The Rational Walk on twitter posted this and I totally agree with this approach...its neat way to value BRK:

3/31/20: Cash & Investments = $349.5B + $33B gain in Q2 = $382B vs. Market Cap of $427B

Implied Value of $45B for non-insurance wholly owned subs (BNSF, GEICO, Clayton, PCP, Utility etc etc) .... man this thing is CHEAP

He also pegs P/BV at 1.08x

Thoughts?  It's an interesting way to triangulate valuation

My hesitation is that it values cash and equities at 27 times peak-cycle cash/equity earnings of approx $14 billion. A 3.7% peak-cycle earnings yield.