No. of Recommendations: 11
Weighing all of this together: I'm not sure that I'd assign any net profit to BHE for the year(s) it takes to be worked out. Heck, bankruptcy seems not unlikely to me. For a conservative forecast for Berkshire, maybe we assign a net of null to BHE for the near future?Thanks for your thoughts, though that last one is not the cheeriest view!
I certainly appreciate that there are more losses to come. But, given that the value of any enterprise with earnings is based primarily on earnings well after the 5-10 year mark, for me the question is not how bad will it be this year and in the next couple/few years, but rather, if we knew what the future would be like
on average what would this year look like? What would this year look like if it were (in the context of the substantial future) neither unusually good nor unusually bad? I believe there will be losses and mitigation expenses, more than in the past, but not enough to make every year profitless on average.
In other words, I think that BHE (which is of course more than just PG&E) will be earning money over the decades to come. And, by extension, using a really unusually bad year as the estimate doesn't seem right. The question is, how much is a reasonably prudent assumption?
These are the net after tax earnings and net profit margins at BHE in the last few years,
13.11%
14.12%
14.70%
14.23%
14.79%
8.96% (oops)
Maybe it would be sufficient to pencil in an expectation that the firm can probably still make a certain percentage in future? Maybe 12% doesn't seem too crazy as an answer to that question: "neither unusually good nor unusually bad relative to all future years"? The average for the last 3 years (average of 12 rolling-four-quarters figures) is 12.34%, which is basically made up of two normal years and one recent bad one.
Or, another way to look at it: until the recent issues, 2021 and 2022 represented the modern normal. The three US energy operations (after their proportional share of interest expense) accounted for almost exactly half of the net operating profit of BHE. Let's say the other units stay profitable at the old normal levels, and a very conservative view of the US energy operations is that they will be only half as profitable as they were before at the prior "normal". So, we'd see the new normalized net margin at 3/4 of the rate of those two years, which would put it at 10.9%. Somehow my gut feels that it's too conservative to assume that US utilities will forever have only half the profitability of the past. On the other hand:
* Net margins have been very good in the last five years before the fires at 14.2%, partly because of a changing mix of businesses. Average 2012-2015 was only 11.5%, so maybe 10.9% doesn't seem crazily low by comparison?
* A lot of the net profit at BHE comes from a negative tax rate from green tax credits that might not last forever.
For a sense of scale:
The 2023 full year net profit at BHE as reported came in at $2331 after accruals and so forth. That's the worst rolling-four-quarter period from the wildfires.
At the "old normal" average margin of the prior 5 years the profit would have been $3691, 58% higher.
The 10.9% net margin assumption above, based on "half the earning power value of the US energy utilities is permanently gone", would put the cyclically adjusted earnings at $2835, somewhat below the midpoint between the two.
Jim
