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- Manlobbi
Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A)
No. of Recommendations: 21
FWIW, as always.
Per share values are per B.
Book: $301
Current price: $479
Current P/B: 1.6
5-groves value: $414 (15x Op. earnings, 30% of float ($51B) deducted from cash, 10y avg insurance underwriting earnings at 10x)
5-groves optimistic: $468 (17.5x Op. earnings, 0% of float ($0B) deducted from cash, 10y avg insurance underwriting earnings at 17.5x)
Shareholder Equity + Float + 1/2 Deferred Taxes: $390
Highest buyback: $418
Estimated earnings power per share: $29.54 Current PE 16.2 (Op. earnings + estimate of ongoing cap gains)
Cash: $153 per B share
If value is 1.55x book, we are about 66% 'equities', 34% cash/fixed
I'll be donating shares to our DAF. Other than that I'm a hold.
No. of Recommendations: 4
I had not heard of a DAF (donor advised fund) before your post. I will look into it. At some point I need to give it all away. Thank you.
No. of Recommendations: 4
FWIW.
I use Schwab for my DAF.
I get a higher IV using what I believe is the same methodology.
Grove 1:
$196 (23.23 oper earnings (no insurance) + 0.95 retro insurance losses) times a PE of 17.5 which I base on a formula that uses the current 10 year treasury rate)
Grove 2:
$107 Net after tax value of equity holdings with small gain of 2.1% YTD added.
Grove 3:
$ 19 KHC, Oxy, Berkadia equity + Oxy preferred and Oxy warrants
Grove 4:
$165
Cash, Treasuries, including railroads plus small YTD add for retained earnings.
Grove 5:
$21 Many may not include this. Smoothed annual underwriting profits over 20+ years Times same 17.5 PE.
Total: $508
I anticipate operating earnings from non insurance will improve in 2025. Maybe insurance underwriting profits as well.
No. of Recommendations: 2
I think you may be too conservative with your cash buffer. Even if you assume that 30% of cash or $51 BB will never be invested in equities. It is still invested in something. Cash which is really short term fixed income. That certainly is not worth $0. Most insurance companies hold only fixed income. So what is the problem. Maybe not optiomized lie other BRK funds, but certainly worth something.
No. of Recommendations: 0
No. of Recommendations: 1
I reviewed DAF’s in the past and passed on it. Why? F.E.E.S
Being a heavily concentrated Berkshire owner for over two decades, turning over my charitable to the croupier is something like asking the fox to guard the henhouse.
Brings to mind the joke from Fred Shwed’s Where-are-the-customers-yachts; “my firm made money, I did, two for three ain’t so bad”
If the goal is to do maximum good for charity, DAF isn’t the best way.
Others comment?
No. of Recommendations: 1
If the goal is to do maximum good for charity, DAF isn’t the best way.
Others comment?
Charitable Gift Annuity became possible a couple of years ago. Once in a lifetime transfer from an IRA to a CGA, maximum $54,000 (inflation adjusted).
It's a QCD, so it counts as RMD and isn't taxed.
You get lifetime annuity income and the charity gets something when you die.
No. of Recommendations: 12
Book: $301
Current price: $479
Current P/B: 1.6
5-groves value: $414 (15x Op. earnings, 30% of float ($51B) deducted from cash, 10y avg insurance underwriting earnings at 10x)
5-groves optimistic: $468 (17.5x Op. earnings, 0% of float ($0B) deducted from cash, 10y avg insurance underwriting earnings at 17.5x)
Shareholder Equity + Float + 1/2 Deferred Taxes: $390
Highest buyback: $418
Estimated earnings power per share: $29.54 Current PE 16.2 (Op. earnings + estimate of ongoing cap gains)
Cash: $153 per B share
If value is 1.55x book, we are about 66% 'equities', 34% cash/fixed
Nice and to the point! There is much to be said for a simple approach.
A couple of possible improvements you may want to consider, using no more data collection:
* Rather than using 10 year average insurance operating earnings, I suggest using 10 year (or whatever) average of the underwriting profit as a *percentage* of the size of the insurance business rather than an absolute number. Since the insurance division is growing pretty steadily, a 10 year average of the absolute numbers is likely to be an underestimate. For example, percent of float or percent of premiums earned. For my estimate of current period cyclically adjusted pre-tax underwriting profit, I use both, being the average of (2.7% of current period premiums earned) and (1.3% of current period float), which are quite close to the long run averages. Watch out for years with big retrocession contracts such as 2007 or 2017: they cause a huge accounting spike in premiums earned which should be backed out if you just want the size of the ongoing insurance business.
* In that last part, you seem to be evaluating cash-vs-other as a percentage of market cap to get a view of the capital structure. This isn't really very meaningful. (The demonstration is simple: if you evaluate several different assets as percentage of market cap, you get to way over 100% pretty quickly). To get a more insightful view of things, calculate things as a percentage of total assets. The firm does have liabilities. Fancier version for bonus points: unconsolidate the non-recourse debt when doing this. Pretend BNSF and BHE are public companies with their own arm's length debt, so remove their debt from both the asset and liability side of the calculation. When BNSF borrows a bunch of money, it isn't really boosting the leverage at head office in a meaningful way, any more than it would if Coke were to borrow some money.
Jim
No. of Recommendations: 3
Gator1984,
I get a higher IV using what I believe is the same methodology.
Yes, that's the usual outcome :-)
Using the same 17.5x:
Grove 1:
$196 (23.23 oper earnings (no insurance) + 0.95 retro insurance losses) times a PE of 17.5 which I base on a formula that uses the current 10 year treasury rate)
I didn't include "Other". Most of it was currency exchange gains. I don't get into the details of retro insurance and such. It's over my head.
$177
Grove 2:
$107 Net after tax value of equity holdings with small gain of 2.1% YTD added.
Same
Grove 3:
$ 19 KHC, Oxy, Berkadia equity + Oxy preferred and Oxy warrants
Again, you go into more detail than me. I just use the "Non-controlled businesses" number from the letter.
$12
Grove 4:
$165
Cash, Treasuries, including railroads plus small YTD add for retained earnings.
I just use the insurance cash and bonds from the AR.
$160
Grove 5:
$21 Many may not include this. Smoothed annual underwriting profits over 20+ years Times same 17.5 PE.
I didn't used to include this, because Buffett didn't when he first described 5-groves. You've all convinced me it should be there, but how? Jim has a later post in this thread and I need to think on that method more.
For now: 10 year average (not adjusted for anything): $15
Total: $508
Total: $471
On that basis we are not far apart.
No. of Recommendations: 0
I think you may be too conservative with your cash buffer. Even if you assume that 30% of cash or $51 BB will never be invested in equities. It is still invested in something. Cash which is really short term fixed income. That certainly is not worth $0. Most insurance companies hold only fixed income. So what is the problem. Maybe not optimized like other BRK funds, but certainly worth something.
Sure, 51 billion dollars - can I even type that with a straight face? - I can't fathom how much that really is. But, thinking in the abstract, Berkshire will always keep a lot of cash around (or short-term fixed income) while they have a large insurance operation. It earns interest, but likely not hardly anything over inflation.
I go back and forth on it. It drops my 5-groves by $23/share. Not a big deal.
No. of Recommendations: 1
I reviewed DAF’s in the past and passed on it. Why? F.E.E.SFidelity fee structure:
https://www.fidelitycharitable.org/content/dam/fc-...Starts at 0.6%.
Total market funds are a couple of basis points.
So, yes, your charities lose out on 0.6% or less. For us, the convenience far outweighs that. We can make monthly contributions to local and national charities. We can make contributions to the DAF when opportune for us, from an investment (like right now with Berkshire) and a tax standpoint.
No. of Recommendations: 3
Jim,
Thanks for the constructive comments, as always.
* Rather than using 10 year average insurance operating earnings, I suggest using 10 year (or whatever) average of the underwriting profit as a *percentage* of the size of the insurance business rather than an absolute number.
Makes sense, I'll try that out.
* In that last part, you seem to be evaluating cash-vs-other as a percentage of market cap to get a view of the capital structure. This isn't really very meaningful.
This is an idea I got from Buffett's interview with Becky back in 2020:
CNBC 2/24/20 WARREN BUFFETT: We own-- if you think about it, we’re 80-some-percent in equities. We may show $230 or $240 billion in equities, and that looks like we’re, against our market cap, we’re 40%. But we own 100% of these other businesses. Those are equities, too. I mean, we own a railroad. And we-- we own insurance companies. And those are-- those are equities. So, we’re about 80% in-- roughly in equities and about 20% in cash. And I’d rather-- I’d rather have that 20% in other good businesses. But, that is to some extent a curse of size. And it’s to some extent the fact that, it’s very hard. If interest rates stay at this level, we’ll wish we’d-- for the next 10 or 20 years, we’ll wish we’d been 125% in equities. I mean, it-- you know, equities are so much cheaper than bonds, long bonds, that-- you know, some-- something will change in a major way. I just don’t know what. And I want to be prepared for anything obviously.
I added a column to my spreadsheet back then and extrapolate: if Berkshire was 80/20 then, now they are...and it comes to about 66/34. It was just a very rough way of thinking about the size of the cash pile.
