No. of Recommendations: 57
The aggregation of the businesses is too much for my short-term memory to cope with, from just reading the quarterly report. With this recent quarter there were enough alarm bells to force me to start looking closer at the numbers. To do that, I had no choice but to start an Excel analysis to compensate for my inability to simply synthesize a clear picture from reading alone. I split the different businesses out separately and reconciled back to the consolidated numbers. Even though there is a long list of businesses they are organised logically and roll up clearly into the consolidated P&L. Anyway, this is what I found. The focus is on what percentage do the various segments and businesses contribute to the Q2 2023 earnings.
This is a breakdown of Q2 2023 Non Insurance Earnings before tax (EBT) totalling $7,849 Million (3 months earnings only & excluding investment gains). Followed by the percentage weighting, to help provide a sense of relative importance. Perhaps relevant when some of the operating businesses are struggling against - strong 2022 numbers (post supply chain issues, post pandemic high demand and pricing power. Remember at the AGM Buffett spoke about these factors. 2022 was an unusually good year in many ways making 2023 comparable trading difficult). But also, to help consider the significance and distinction between businesses that are in decline, versus those that are experiencing temporary cyclical swings in volumes.
BNSF, $1,615M, 21%
Manufacturing - Industrial Products, 1,520M, 19%
Manufacturing - Building Products, 1,227M, 16%
Services, 824M, 10%
BHE, 624M, 8%
Non-Controlled businesses (Oxy, Kraft etc)511M, 7%
Retailing, 438M, 6%
Other (Buffett's trading account?), 419M, 5%
Manufacturing - Consumer Products, 356M, 5%
Pilot Travel Centers (80% interest), 186M, 2%
McLane Company, 129M, 2%
Total Non Insurance Earnings before tax and inv gains, $7,849M 100%
Please chime in with observations. I am no expert on the trading performance, or competitive positions of these businesses. My observations:
BNSF - Volumes down reflecting general weaker macro picture verses 2022. However, versus Union Pacific volumes are down a lot more. Significant increase in labour costs. It's a big part of Berkshire's profits and IV. Capital intensive. Impossible to replicate.
Manufacturing - Industrial Products, $1,520 Million PBT Q2 2023. We don't have the EBT for the businesses making up this segment but we do have the turnover. The percentages following the entity name is the contribution to the total turnover for the group. These are important businesses to Berkshire and they are good businesses with a PBT margin of 17.1%, which is up from 16.5% in Q2 2022. Revenues grew 15.1% (some of which was due to acquisitions/Alleghany. Major recovery in Precision Castparts (aerospace recovery).
Marmon 35%
Precision Castparts 26%
Lubrizol 18%
IMC International Metalworking Companies 11%
Other (W&W|AFCO Steel, CTB, LiquidPower, Scott Fetzer) 10%
Manufacturing - Building Products, $1,227 Million PBT Q2 2023.
Clayton Homes contributed 43% of the turnover to this segment. With the companies below contributing the remaining 57%. EBT fell 6.1% driven by an 11.5% drop in Clayton Homes EBT. This segment had a EBT margin of 18.3% which was up from 17% in 2022. They are good businesses and the decline in earnings is clearly linked to the wider housing market and higher interest rates.
Claton Homes
Acme
Benjamin Moore
Johns Manville
MiTek Inc
Shaw Industries
Services, $824 Million PBT Q2 2023.
This segment includes the companies listed below. The largest of these businesses are NetJets and FlightSafety (aviation services). Turnover increased 9.4% and PBT increased 9% versus Q2 2022 lead by aviation services at 8.2% turnover growth. As a group they earned 15.9% EBT margin perhaps indicating good businesses and currently in a cyclical move up on the aviation front.
NetJets
FlightSafety
Affordable Housing Partners, Inc
Business Wire
Charter Brokerage
CORT
Dairy Queen
TTI, Inc
WPLG, Inc
XTRA
IPSIntegrated Project Services
BHE, $624 Million PBT Q2 2023. The percentage of Non Insurance Earnings before tax at 8% understates the importance of BHE due to the large tax credits they receive. We know BHE is incredibly significant to Berkshire and is growing. A very valuable business with superb management.
Retailing, $438 Million is made up of the companies listed below. BHA contributed 67% of revenue to this segment in the first half of 2023. As a group the EBT margin is 8.8%, which is down on Q2 2022, which was 9.1%. Home furnishing struggled in 2023 probably against strong comps in 2022. BHA was strong probably due to soft comps re supply constraints in the prior year. Aside from BHA, there is a lot of Berkshire nostalgia seeing these familiar names. I don't know how the jewellery businesses are doing these days but Sees and the home furnishing retailers are still putting the competition through a meat grinder I am sure.
Berkshire Hathaway Automotive (BHA)
Jordan's Furniture
Nebraska Furniture Mart
RC Willey Home Furnishings
Star Furniture
Ben Bridge Jewellery
Borsheims
Helzberg Diamonds
See's Candies
Pampered Chef
Oriental Trading
Detlev Louis
Manufacturing - Consumer Products, $356 Million. This segment probably (listed below) contains some of the Berkshire businesses that deserve a lower valuation multiple. Sweeping generalisation from a no nothing keyboard warrior! What we do know is that this group experienced a turnover decline of 18.7% and an EBT decline of $21.1%. Forest River recreational vehicles clearly suffering against exceptional 2022 post pandemic sales comps. Revenue at Forest River declined 34.2% YOY and EBT declined 39.2%. I imagine Forest River is a great business. Apparel was soft and footware okay. Duracell lost share to cheaper brands.
It is an interesting group of companies. I wonder has Berkshire under invested in brand building or are they just really tough businesses.
Brooks Sports
H H Brown Shoe Group
Fechheimer
Fruit of the Loom
Garan
Larson-Juhl
Jazwares
Duracell
Richline Group
Forest River
I will stop there and conclude with this. I wanted to look at the weighting of the various groups and I am very pleased to find that the weakest segment (Manufacturing Consumer Products) is one of the smallest contributors to Non Insurance Earnings Before Tax and investment gains/losses.
The next stage is to look at the valuation of the five groves. The above covers two of them (1 and 3 below).
Grove 1 Non Insurance Businesses with ownership between 80% and 100% (BNSF, BHE, MSR)
Grove 2 Equity securities
Grove 3 Control group businesses
Grove 4 Cash, US Treasuries, Fixed Income (bonds)
Grove 5 Insurance
I am not too worried about my overall valuation. I suspect it will conclude that Berkshire is fairly valued plus or minus 10%, all things considered. But I am more interested in how that valuation will grow over the next 10 and 20 years.
Valuation methodology will probably be:
Grove 1 - select a multiple for each segment down to as granular profit level available against what I know about the business.
Grove 2 - market value and maybe look a little closer at each of the big holdings and average earnings over last 3 or 5 years and assign my own multiple
Grove 3 - select a multiple of earnings
Grove 4 - as per the book value on the Balance Sheet
Grove 5 - I never really know how to value the insurance business. Will probably just use float as equity method. Although insurance is a difficult business, I do believe Berkshire has built a very special culture now. As evidenced by the incredible underwriting record since 2002 - underwriting profits every year bar 2017.
I usually learn something about Berkshire when I post here. I really enjoy the discussions, especially if I learn something, so don't hold back telling me where I am wrong or filling in the blanks and providing more detail. Grateful to Manlobbi for facilitating.
Best wishes all
EVBigMacMeal
No. of Recommendations: 2
I really enjoy the discussions, especially if I learn something, so don't hold back telling me where I am wrong or filling in the blanks and providing more detail.
Thank you for sharing your in depth analysis. I too greatly appreciate the open discussions and sharing so we all can benefit.
I would be interested on anyone's input on how to view the accruals PacifiCorp has taken for the wildfire exposure. The following excerpt from the quarterly is the first time I recall seeing the accruals identified.
''PacifiCorp has accrued cumulative estimated pre-tax probable losses associated with the 2020 wildfires of $1,018 million through June 30, 2023, or $608 million net of probable insurance recoveries.'
Does anyone have an idea what these would be net after tax considering the negative tax rates for the utilities?
Looking at the BHE specific quarterly it seems like the accruals have just started in the last three quarters. It likely accounts for the odd under performance of BHE recently. I'm curious how others are viewing this for their IV estimates of the BHE portion going forward.
Jeff
