No. of Recommendations: 22
Average P/B since the credit crunch just a hair under 1.38
Let's say 1.4 is pretty normal in the modern era.
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For years now, it has felt like P/B should be an outdated, unreliable metric for BRK value. The more BRK moves away from being primarily a financial company (e.g., insurance), and the more its results are driven by the operating businesses, the more it should be valued using other metrics. But you have provided convincing evidence that the market doesn't seem to be valuing it that way even though Buffett has been pushing a sum of its parts valuation using the 5 groves approach. Too complicated for the market? Conglomerate discount?
I wonder if the divergence between value assessed using P/B and value based on actual understanding of its distinct businesses is finally started to change under the weight of its divergence.
Or perhaps the recent run-up is simply the market doing what it does: fluctuating. Because maybe there is no such divergence, yet.
Whenever I mention P/B, I should add my caveat: I actually value the firm in a quite different way, based much more on earning power. But, almost entirely by coincidence, P/B has so far continued to give almost the same results. It makes a nice short hand that everybody can relate to.
I can take my non-book value estimate and divide it by book value for the same time period to get an implied "fair" P/B ratio. Perhaps surprisingly, in fact in the last year and few years the implied "fair" P/B has dropped a bit, not risen. Within statistical noise, I hope, but the long-believed notion that fair P/B should be rising just isn't visible to me yet.
The sad truth is that the net after-tax operating earnings (excluding a couple of volatile things like underwriting) have really disappointed in the last few years. Four quarter rolling after-tax inflation-adjusted earnings per share to Q3 were up only 0.7%/year rate from four years earlier. And that wasn't a blip: after seasonal adjustments, the figures have been almost perfectly flat the whole time. Measured the same way, that same after-tax inflation-adjusted per-share figure rose 8.85%/year in the prior four years, admittedly a stretch straddling the tax cuts. If the best test of pricing power is having earnings keep up with inflation without trouble, or seeing margins hold firm, Berkshire's units are not displaying pricing power.
Jim
