Avoid making negative or unhelpful posts, and instead focus on providing constructive feedback and ideas that can help to move the discussion forward.
- Manlobbi
Halls of Shrewd'm / US Policy
No. of Recommendations: 4
In August of 2020, Berkshire wrote down the goodwill on the acquisition of Precision Castparts by $9.8 billion. Additional write down of intangible assets brought the total to $11 billion. Buffett admitted in his 2020 letter that he was "simply too optimistic about PCC's normalized profit potential," admitting he made a significant error in judgment regarding the company's future earnings, which led to an incorrect valuation.
However, subsequent to a horrific 2020, and weak growth in 2021 and 2022, PCC has been, to say the least, going gangbusters. However, according to US GAAP, once the goodwill impairment is recorded it cannot be reversed. Similarly, internal generated goodwill, say the franchise value of See's Candies cannot be recorded as a gain in goodwill.
So I guess my question is for "Grove 1" the operating earnings of Berkshire owned businesses, shouldn't the multiple that's applied whether one uses Price/Earnings or something else be increasing over time? And likewise, shouldn't the intrinsic value of Berkshire be increasing over time such that perhaps 2x Book Value is now a more appropriate measure than 1.5x BV?
No. of Recommendations: 8
I think you're right about PCP, they aren't as dead as they once looked.
But it isn't really a huge part of the overall corporation.
Sure, you could make a case for adjusting book for PCP back up to what it was, then using a traditional multiple. The problem is, both good and bad things have happened. There are real problems at BHE, which is far far larger. It's entirely possible that the true intrinsic value of BHE is a third less than what it appeared a few years ago.
One sign of that complication:
If I estimate value based on earnings of things other than investments, or a conservative multiple of book for things other than investments, the book based metric is a fair bit higher even when using a book multiple that used to make the two match. Phrased another way, return on [non investment] book assets seems to have fallen.
Jim
No. of Recommendations: 10
However, according to US GAAP, once the goodwill impairment is recorded it cannot be reversed. Similarly, internal generated goodwill, say the franchise value of See's Candies cannot be recorded as a gain in goodwill.
So I guess my question is for "Grove 1" the operating earnings of Berkshire owned businesses, shouldn't the multiple that's applied whether one uses Price/Earnings or something else be increasing over time? And likewise, shouldn't the intrinsic value of Berkshire be increasing over time such that perhaps 2x Book Value is now a more appropriate measure than 1.5x BV?
This is the kind of problem you run into with book value, along with all the other problems, like the fact that share repurchases reduce a higher proportion of the equity than the number of shares. But in grove 1, the fully owned businesses, we usually use that grove's earnings to get an idea of its value, either by assigning some arbitrary multiple (15?) to the post-tax earnings, or (my preference) by adding up all the earnings except those from the equity portfolio and fixed income, and then seeing what the implied multiple of those businesses is.
The earnings of grove 1 are fully reported in the earnings statement of the overall company, so I can't see why any adjustment would be necessary, if you are using grove 1's earnings in your valuation and assigning a multiple to them. And if you are subtracting off the market value of the public equities (grove 2) and the fixed income assets (grove 4), and dividing by the earnings from groves 1, 3 and 5, you don't need to apply any multiple at all, you just see what multiple the market is assigning these businesses and you decide whether you want to pay that multiple or not.
dtb
No. of Recommendations: 3
Hi Mungo. Regarding the size of PCP, I think it might be larger than many think. For example, Howmet has a $100bn market cap and when the two companies (PCP & Arconic) were public in 2016, Precision was much larger. Of course Howmet can be overvalued by the market, etc. But we donīt really know how profitable PCP currently is, and how much will earnings grow in the near future due to the explosion in demand given AI, gas turbines, Boeing, etc. Maybe we get more information in the AR.
