No. of Recommendations: 5
Thanks for the thoughtful reply
Question: How comfortable are you with the price multiples you apply? As you know, just a change of P/E from, say, 15 to 16 make a 7% change in the valuation.
The fact is, I don't worry about it at all. As I mentioned, I have two very specific uses for my estimates, and the multiple I use really doesn't matter much for those specific uses. A higher or lower multiple still gives about the same trend rate of increase, and still gives the same utility for comparing the current ratio of price to estimated value versus the historical ratio of price to estimated value. The only difference a multiple of 15 or 16 (or 17 or 18) makes for my purposes is a very very slight shift in the valuation towards the operating companies and away from the investments per share. But the difference is so small that it's not really an issue, unless I decided to use a huge multiple.
In fact earlier today I was thinking that my traditional 15 was so conservative as to be unrealistic, but then I was looking at the fact that net real total income in these divisions has been flat or negative for several years so I thought maybe it's not the time to take out some conservatism. Looking only at very recent results, they are looking more like cash cows perhaps not even deserving a multiple of 15, though I don't really expect that to be true forever.
Comment: Wildfire losses at PacifiCorp are unlikely to be limited to the 2023 losses. I think we have to come up with some way of factoring in the possibility of a huge loss sometime in the near future.
This is true. But the sad act is I have absolutely no way to know how to estimate that, or what the average will be in future. In theory the estimate in current book value is the best guess of the total liability, so for now I'll go with their marks and deal with the revisions as they come in.
A much bigger issue is whether that is the trend, rather than an event. Reading between the lines of Mr Buffett's comments at the annual meeting leads to some depressing thoughts. If utilities are seen as economic punching bags easy to take advantage of, then the whole business model is somewhat broken and ALL recent value estimates are wrong. Again, I have no real way to estimate that penalty, but (other than the two specific adjustments I made) I guess my valuation methodology will follow the earnings as they come in for better or worse, since I'm no longer using the "peak to date" figures. I merely have to be careful not to treat every anomalous loss as anomalous if at some point it appears to be a normal and periodic cost of doing business like big hurricane losses.
Jim
