Whitney Tilson On Berkshire Hathaway Annual Letter And Omaha Events

Whitney Tilson On Berkshire Hathaway Annual Letter And Omaha Events

by VW StaffMarch 14, 2014, 11:50 am

Whitney Tilson extends an invitation to Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) events in Omaha as the Warren Buffett-led company releases its annual letter.
Warren Buffett releases annual letter

2) Speaking of Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), Buffett released his annual letter last Saturday morning (the full annual report is posted here) and, as usual, it’s a great read, with lots of information for Berkshire Hathaway shareholders (it’s the only stock that’s been in my fund continuously since inception more than 15 years ago) plus good general advice for investors. My take:

a) Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) is a juggernaut firing on all cylinders. It’s easy to overlook, but what’s going on here is truly extraordinary. Has there ever been a business that combines Berkshire’s size, stability, quality, growth and shareholder friendliness? I can’t think of one.

b) Using the same methodology I’ve used for years (my BRK slides, which I haven’t updated in a while, are posted at www.tilsonfunds.com/BRK.pdf), I calculate Berkshire’s intrinsic value as of the end of 2013 at $226,000/A share, 22% above yesterday’s closing price of $185,750 (said another way, Berkshire is an 82-cent dollar).

The calculation is easy: I put a 10 multiple on Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s pre-tax earnings, which were $9,116/share in 2013 (from page 7 of his annual letter), plus I add $600/share to reflect half (to be conservative) of the $1 billion average annual underwriting profit of Berkshire’s insurance operations over the past 11 years, during which “our underwriting profit has aggregated $22 billion pre-tax, including $3 billion realized in 2013” (page 4) (or you could put a 5 multiple on the entire average pre-tax insurance earnings – take your pick).

So that’s 10 x $9,700 = $97,000, to which one adds investments per share, which Buffett says in his letter are $129,253 (page 7), to arrive at $226,000.

c) I estimate that Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s intrinsic value is growing at a rate of at least 10 percent per year (higher if the company continues to make large scale acquisitions, which I think is likely).

d) Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) is also cheap based on a multiple of book value. At year-end 2013, Berkshire’s book value was $134,973, so the stock today is at 1.38x book. Here’s what Buffett had to say (from the first page of his letter):

Berkshire Hathaway’s intrinsic value

As I’ve long told you, Berkshire Hathaway’s intrinsic value far exceeds its book value. Moreover, the difference has widened considerably in recent years. That’s why our 2012 decision to authorize the repurchase of shares at 120% of book value made sense. Purchases at that level benefit continuing shareholders because per-share intrinsic value exceeds that percentage of book value by a meaningful amount. We did not purchase shares during 2013, however, because the stock price did not descend to the 120% level. If it does, we will be aggressive.

So even at a 20% premium to book ($162,000), Buffett is willing to buy back shares “because per-share intrinsic value exceeds that percentage of book value by a meaningful amount.” My interpretation of this is that Buffett thinks Berkshire’s intrinsic value is at least 1.6x book and probably 1.8x book. This is consistent with my estimate above of $226,000, which is 1.67x book.

e) Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) is not only one of the lowest-risk companies I can think of, due to its Ft. Knox balance sheet, well-diversified steams of free cash flow, and Buffett’s conservative management, but its stock is also one of the lowest risk I can think of because of the very firm “Buffett put” at $162,000 (and rising, in line with Berkshire’s book value), the price at which Buffett will be “aggressive” in buying back stock, a mere 12.8% below today’s price.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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