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Berkshire Hathaway 2018 Valuation – Berkshire Hathaway A (NYSE: BRK.A)



Introduction

As a long-time owner of the corporation Berkshire Hathaway (BRK.A, BRK.B), I like to look at the valuation regularly and write about it at least once a year. My thesis is that Berkshire is a solid place to invest over long periods of time and that it is affordable right now. The 2018 letter to the shareholders gives us the framework to look at the various groves that make up the real value of the company. Thinking of groves reminds us not to be pedantic with every tree in the forest.

This article looks at the value of 2018 which is different from the valuation we have seen in recent days. In many ways, the valuation in 201

8 is depressed due to the low share prices at the end of December. In general, the shares in the portfolio are higher to current prices, with the exception of Kraft Heinz (KHC).

We annually refer to the 2018 annual report, including the letter to shareholders from the beginning of the report.

Accounting changes have caused dramatic fluctuations in GAAP revenue. This is because unrealized investment gains and losses are now included in the GAAP income statement. When valuing the company, I try to follow Buffet's advice on page 3 in the letter to shareholders who say that one should focus on operating profit.

The letter to shareholders talking about five groves:

  1. Collection of non-insurance businesses.
  2. Equities.
  3. Quartet of companies in which Berkshire shares control.
  4. Treasury bills and other cash equivalents.
  5. Real estate / non-life insurance business.

A key statement of intrinsic value is made on page 6 of the letter to shareholders:

I think Berkshire's intrinsic value can be approximated by summarizing the values ​​of our four real estate assets and then deducting an appropriate amount for taxes ultimately payable on sale of securities traded.

I refer to Berkshire Hathaway Energy as BHE to avoid confusion with the parent company.

Operations

Buffett said the following in the spring of 1996 meeting:

So I urge you, if you are trying to decide on the wisdom of repurchase or the issue of shares, that you do not think about the book value. You do not think about specific P / Es. You are not thinking about any small model.

But you think about what you really wanted, A, choose businesses you can understand and then think what you would really pay to be in those businesses. And that is what counts over time, whether the repurchases are made at a discount from this figure.

We have a comparison available for BNSF and market transactions for BHE. We must estimate the present value of future cash flows for the remaining operations on the operating side. Over the years, Buffett has noted that there are some good companies in this group that have high returns on capital. I am using a 14x pre-tax earnings profit on these non-insurance subsidiaries to estimate the amount of money that can be deducted now for Judgment Day.

The note (26) "Business Segment Data" section on page K-106 of the Annual Report breaks down operations:

 Berkshire Hathaway Business Segment Data

Image source: 2018 annual report. Red rectangle added by the author.

The operating companies in the red rectangle above had profit before tax as follows: 2016: $ 18,795 million; 2017: $ 19.75 million; 2018: $ 21,643 million. As I said before, we have a comparison for BNSF and market transactions for BHE. As such, the pre-tax results in the other companies in this group are key to the valuation and they are as follows: 2016: $ 10,224 million; 2017: $ 10,927 million; 2018: $ 12,308 million.

We see capex on page K-107 in the annual report:

  Berkshire Hathaway capex

Image source: 2018 annual report.

BNSF's annual Capex exceeds annual depreciation by nearly $ 1 billion and we know almost all of this capex is "maintenance", so it drastically reduces owner revenue. By deviating from the ugly capex situation at BNSF, Buffett on page 5 of the letter to shareholders reveals that $ 1.4 billion is in acquisition-related amortization costs that do not have a real financial cost. BHE capex exceeds depreciation even more dramatically than BNSFs, but much of the capexes are on the growth side.

BNSF – $ 81.4 billion

The Union Pacific (UNP) had a market coverage of $ 101.8 billion as of December 31, 2018. I think BNSF is worth at least 80% of this or $ 81.4 billion.

Our number is undoubtedly too conservative, as the Union Pacific market door on February 22, 2019 is $ 123 billion based on the share price of $ 170.06. Some say the BNSF value should be closer to 100% of the Union Pacific than 80%.

BHE – $ 42.2 billion after deduction of NOK 4.2 billion for minority interests

BHE 2018 3Q 10-Q says within nine months The period ends September 30, 2018, the company paid Walter Scott, Jr. $ 107 million for 177,381 shares. That comes to $ 603.22 per share. 2018 3Q 10-Q continues to say that 76,996,944 shares in the shares were outstanding as of October 31, 2018. This implies a common market capital of $ 46.4 billion.

Page 8 of 2018 Berkshire annual report states that they own 90.9% of the BHE strain. That means Berkshire owns around $ 42.2 billion, and there are non-controlling interests of around $ 4.2 billion.

As mentioned earlier, BHE has a lot of capital development, but much of it is investing for growth. Energy subsidiaries are more valuable at Berkshire, a full tax payer, than at other companies that have different tax structures. BHE's investments were discussed by Buffett in the spring 2012 meeting:

We have a clear competitive advantage. It is not unique, but it is a clear competitive advantage that Berkshire pays much of the federal income tax.

So when there are programs on the energy field, which for example involve tax credits, we can use them because we have a lot of taxes that we have to pay and therefore we get a dollar-for-dollar benefit.

I don't have the numbers, but I guess maybe 80 percent of US tools can't reap the full tax benefits, or perhaps any tax benefits, from doing the things we just talked about because they didn't pay any federal income tax.

They have used bonus depreciation, which was adopted last year and where you get 100 percent depreciation in the first year. They dry out their taxable income.

And if they have deleted their taxable income through such things as bonus depreciation, they cannot – they can't – have any appetite for wind projects where they get a tax credit or – in the solar arrangement.

So, being part of Berkshire Hathaway, a big taxpayer, MidAmerican has extra capabilities to go out and do many projects without worrying about whether they are exhausted by their tax capacity. That's an advantage we have.

Non-insurance subsidiaries # 3 to # 7 – $ 89.6 billion

Page 8 of the letter to shareholders shows that these five companies had a fine 2018 along with income of 6.4 billion before tax, up from 5 , $ 5 billion in 2017.

I put together a spreadsheet for these five companies based on information provided on pages K-46 to K-48 of the annual report:

Income

Pre-tax income [19659046] PCC [19659045] $ 10.2 Bn

up 16%

Lubrizol

$ 6.8 Bn

up 17% [1]

Marmon

$ 8.2 Bn

down 5.6%

] IMC

up 16.1%

up significant

Clayton Homes

$ 6.0 Bn

$ 0.9 Bn – up 19%

[1] Exclusive one-off items

Non-insurance subsidiaries # 8 to # 12 – $ 33.6 billion

On page 8 of the letter to shareholders, the next group (Forest River, Johns Manville, MiTek, Shaw and TTI) earned 2.4 million USD before tax in 2018 as w as up from $ 2.1 billion in 2017.

Non-Insurance Subsidiaries No. 13 and Remaining – $ 50.4 billion

Revenue of NOK 3.6 billion before tax in 2018 , page 8 of the letter to the shareholders notes that this group is up from $ 3.3 billion in 2017.

Investments

I like to take investment numbers directly from the balance sheet. A notable change from 2017 is that the main balance sheet on page K-64 and K-65 in the annual report no longer has a financial and financial product section:

Insurance and other

Cash and cash equivalents [19659045] $ 27,749 Mn

] Short-term investments in US government bonds

$ 81,506 Mn

Investments in fixed-maturity securities

$ 19,898 Mn

Investments in shares

$ 172,757 Mn

Equity method investments

$ 17,325 Mn

Railroad, Utilities

and Energy

Cash and Cash Equivalents

$ 2,612 Mn

Incomplete /

Unadjusted

Under Total

$ 321,847 Mn

] Line " The equity method of investment "which includes Kraft was analyzed differently in my latest review article. In 2017, note (20) "Fair value" section showed a large difference between the carrying amount of Power and fair value. In 2018, the gap has narrowed to $ 13,818 million and $ 14,007 million, respectively. As such, I think it is now sensible to make investments in the equity method directly from the balance sheet.

In 2017 and earlier we had to go to the table at the end of the note (4) "Investments in equity securities" in the annual report and add securities included in "other assets". In 2018, the fair value of $ 172,757 million from the K-79 Note (4) table corresponds directly to the balance sheet.

I like to add "Short-term investments in US government bonds" line to the "Cash and cash equivalents" line and eliminate the segment difference between "Insurance and others" and "Railway, utilities and energy."

Segment

Value

Cash and cash equivalents

$ 111,867 Mn

Investments in liabilities with maturity

$ 19,898 Mn

Investments in shares

$ 172,757 Mn

Equity investments [19659045] $ 17,325 Mn [19659046] Incomplete / Unadjusted Sub Tot Al

$ 321,847 Mn

Three of the five groves are represented in the table above, and this is what the letter to the shareholders says about them on pages 5 and 6:

Berkshire's runner-up groove by value is the collection of stocks, which typically entails a 5% to 10% stake in a very large company. As mentioned earlier, our equity investments were worth almost $ 173 billion at the turn of the year, an amount well above the cost.

A third category of Berkshire's commercial property is a quartet of companies where we share control with other parties. Our share of post-tax operating profits in these companies – 26.7% of Kraft Heinz, 50% of Berkadia and Electric Transmission Texas, and 38.6% of Pilot Flying J – was approximately $ 1.3 billion in 2018.

In our fourth grove, Berkshire held $ 112 billion at year-end in US government bonds and other cash equivalents, and another $ 20 billion in various interest income.

Rounding to the nearest billion, our spreadsheet lines to $ 173 billion, $ 112 billion, and $ 20 billion, match the numbers in the letter.

Page 12 of the letter to shareholders breaks down investments in stocks, such as large positions such as Apple (AAPL), Bank of America (BAC), Wells Fargo (WFC), Coca-Cola (KO) and American Express (AXP) is displayed individually. I have added a column showing the closing prices February 22, 2019:

Company

Shares

Dec 2018

Market price

February 22, 2019

Market price

Apple [19659045] 255,300,329 [19659045] $ 40,271 Mn

$ 44,159 Mn

Bank of America

918,919,000

$ 22,642 Mn

$ 26,722 Mn

Wells Fargo

449,349,102

20706 Mn

$ 22,027 Mn

Coca-Cola

400,000,000

$ 18,940 Mn

$ 18,112 Mn

American Express

151,610,700

$ 14,452 Mn [19659045] $ 16,289 Mn

Other Stocks

n

n / a

n / a

Total

n / a

$ 172,757 Mn

n / a

] * The above spreadsheet excludes shares in pension funds of Berkshire subsidiaries.

Again, this article presents a review of 2018, but we can see that the top five stocks overall have a value of February 22, 2019 which is over $ 10 car lion higher than the value in December 2018.

Power Heinz & Andre Equity Method Investments

One had to be under a rock to be unaware of the fact that Kraft is struggling enormously now. Their share price fell almost 30% on February 22, when the company revealed non-cash write-downs of $ 15.4 billion. We can improve our mood with regard to Power by acknowledging that it is a relatively small part of Berkshire. As we said before, our valuation in December 2018 uses the balance sheet for this grove, and some discussion is appropriate.

Kraft Heinz had a share price on December 31, 2018 of $ 43.04 and a February 22, 2019 share price of $ 34.95. The 325,442,152 Kraft shares owned by Berkshire were worth $ 14 billion at the end of December and $ 11.4 billion at the end of February 22. So our value for Kraft in December 2018 is nearly $ 3 billion higher than today's value. That said, our valuation in December 2018 for the total amount of Apple, Bank of America, Wells Fargo, Coca-Cola and American Express is over $ 10 billion lower than today's value.

For the remainder of this equity method, gross annual report speaks about it on page K-80 which states that the carrying amount of remaining interests is around $ 3.5 billion. These interests include Berkadia Commercial Mortgage, Pilot Travel Centers and Electric Transmission Texas.

Float Responsibility – $ 0

It is difficult to set precise figures on the value of the insurance companies. It is also difficult to calibrate the financial responsibility for flow. I treat them like a wash. Different reviews from others can mean a big turn in valuation areas.

Buffett talks about how GEICO differs from some of its other insurance companies in the spring 2012 meeting:

JAY GELB: Warren, when discussing Berkshire's intrinsic value, why do you consider the insurance industry only cash plus investment per share?

And what is a reasonable majority to apply for the premium income of the non-insurance business?

WARREN BUFFETT: I wanted to – I don't value the insurance business quite the way you say it. For example, I would appreciate GEICO differently than I would appreciate Gen Re, and I would appreciate some of our smaller companies differently.

But basically I want to say that GEICO is worth – has an intrinsic value – it is larger – significantly greater – than the sum of its net value and its relocation. Now I don't want to say about any of our other insurance businesses.

But there are two reasons. One is, I think it is quite rational to assume a significant subscription result at GEICO over the next decade or two decades, and I think it's likely to grow significantly.

And both are values ​​- things of tremendous value. So it adds to the current flow value, but I can't say about any other business.

GEICO is valued differently from its other insurance companies, and the financial flight responsibilities are valued differently from one investor to another.

Deferred tax liability – $ 11 billion

Here is the net deferred tax liability from note (18) "Income tax" on page K-96 of the annual report:

  Berkshire income tax

Image source: 2018 annual report.

On the investment side, we are concerned about the line above which shows $ 17,765 million in deferred tax liability. The deferred tax asset section does not break out investments so that the net is not clear from the table. However, the network is discussed on page 5 of the letter to shareholders where it is revealed that the equity portfolio has a federal income tax of approximately $ 14.7 billion.

Berkshire has good tax planning and this is an interest-free loan that I think has a financial responsibility of about 75% of the accounting obligation. As such, I spend $ 11 billion here, which is 75% of the $ 14.7 billion accounting commitment.

In terms of operating taxes such as the property, plant and equipment line above, we estimate the present value of future earnings as opposed to using the operational sheet balance sheet numbers. Buffett also says the following on page 6 of the letter to the shareholders:

You can also ask whether there should be no remuneration for the large tax costs that Berkshire would incur if we were to sell some of our wholly owned businesses. Forget about that: It would be foolish for us to sell some of our amazing companies, even if no tax was payable on sale. Really good businesses are very hard to find. Selling everything you are fortunate enough to own, makes no sense at all.

Derivative liability – $ 0

The note (20) "Fair value" section on page K-100 in the annual report shows derivative contract liabilities of $ 2 452 million. I assume the financial responsibility for these shareholdings may well be closer to zero than the Black-Scholes liability, so no deductions are made here.

Insurance Company and Share Holding Companies Debt – $ 0

Berkshire uses debt sparingly. The note (17) "Loans for debt and other borrowing" on page K-94 in the annual report shows USD 34,975 million in loans outside the group "Railways, tools and energy". I do not know how much of this bond to investment and how much bond to operations.

Pie Chart

We take our 11 billion financial investments net deferred tax liability out of the cash slice.

Note 25 Section "Prerequisites and Obligations" on page K-105 of the annual report states that the financial cost of acquiring all outstanding minority interests will be about $ 5.6 billion. About $ 4.2 billion of this is from BHE, and I'm taking the remaining $ 1.4 billion from the account slice.

Here's what Buffett said about sites in the spring 2011 meeting:

We never – we – about Charlie and I had to keep a number in an envelope in front of us about what we thought the intrinsic value of Berkshire was, well , none of us would like to keep a figure, we would keep a reach because it would be ridiculous to come up with a single specific number, which not only includes the businesses we own, but what to do with the capital of the future.

But even our intervals will vary modestly, and they may deviate tomorrow in the form of how I would feel today, but not dramatically at all.

I agree with this feeling, but at the same time it would be a little silly to make a pie chart based on the low selection and another based on the high range. Some of the pieces have a wide range, but others do not. What I have done is put together a pie chart located at the low end of my valuation area. As such, I am not religious about the total number at the bottom of the cookie form.

There were 1,640,929 equivalent A shares outstanding at 31 December 2018. We know that the B shares are 1 / 1500th of these.

Segment

Value

Per A Part

Per B Part

BNSF Non-Insurance Subsidiary # 1

$ 81.4 Bn

$ 49606

$ 33 [19659048] BHE Non-Insurance Subsidiary # 2

$ 42.2 Bn

$ 25,717

$ 17

Non-Insurance Subsidiaries # 3 to # 7

$ 89.6 Bn

$ 54,603

$ 36

Subsidiaries without insurance # 8

$ 33.6 Bn

$ 20,476

$ 14

Subsidiaries without insurance # 13 and remaining

$ 50.4 Bn

$ 30,714

$ 20

Cash and cash equivalents

$ 99.5 Bn

$ 60,616

$ 40

Investments in fixed-maturity securities

$ 19.9 Bn

$ 12,126

$ 8 [19659048] Apple

$ 40.3 Bn

$ 24,542 [1 9659045] $ 16

Bank of America

$ 22.6 Bn

$ 13,798

$ 9

Wells Fargo

$ 20.7 Bn

$ 12,618

$ 8

Coca-Cola

$ 18.9 Bn

$ 11,542

$ 8

American Express

$ 14.5 Bn

$ 8,807 [19659045] $ 6

Other stocks

$ 55.7 Bn

$ 33,972

$ 23

Kraft Heinz and other equity method investments

$ 17.3 Bn

$ 10,558

$ 7 [19659048] Total

$ 606.6 Bn

$ 369,697

$ 246

Again, I think this cake is on the conservative side of the valuation area. Seeing as the top five stocks are now over $ 10 billion higher, one could say that Mr. Market was a bit too pessimistic with stock prices at the end of December. The value we have for BNSF is probably low. Partial offsetting of these elements is the Kraft Heinz value in December high.

This tower map is easier to follow if you think of it as a clock with the legend the objects on the right starting at 12 o'clock and clockwise:

]

Image source: Created by author.

Closing Thoughts

One of the reasons I like to look at things in a pie chart is because of headlines like Kraft Heinz, whose stock price lost about 30% of the value on February 22. Kraft Heinz's stake is a very small percentage of Berkshire's total value.

Page 13 of the letter to the shareholders talking about that investments in US businesses can do extremely well over long periods:

Let's put numbers that way: If my $ 114.75 had been invested in an S & P 500 index fund without fee, and all dividends had been reinvested, my stake would grow to be worth (before tax) $ 606,811 on January 31, 2019 (the latest data available before printing this letter). There is a gain of 5 288 for 1. Meanwhile, a $ 1 million investment by a tax-exempt institution of that time – say pension fund or college contribution – will have grown to around $ 5.3 billion.

Let me add another extra calculation that I think will shock you: If the hypothetical institution had only paid 1% of the assets annually to various "helpers", such as investment managers and consultants, the gain would have been reduced to half to 2 , $ 65 billion. That is what happens over 77 years when the annual return of 11.8% actually achieved by S & P 500 is converted to 10.8%.

To "protect" yourself, you may have deprived of shares and opted for 3 1/4 grams of gold with your $ 114.75.

And what would it have assumed that the protection had delivered? You will now have an asset worth around $ 4,200, less than 1% of what would have been realized from a simple uncontrolled investment in US business.

The point that taxes have had a damaging effect on investors is a common theme with Buffett. It is not just taxes, he is aware of other costs as shown on page A-1 of the annual report, where we see only 30 corporate office employees from a total employee count of 389 373.

As S & P 500, Berkshire is an investment in American business and I think both will continue to do well over long periods of time. Berkshire is an investment that allows me to sleep well at night, as I think it will surpass S&P 500 in bear markets.

Disclaimer : Any material in this article should not be relied upon as a formal investment recommendation. Never buy a stock without doing your own thorough research.

Enlightenment: I am / we are long BRK.A, BRK.B, AAPL, UNP, VOO. I wrote this article itself expressing my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.


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