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https://open.substack.com/pub/watchlistinvesting/p...

I enjoyed this thoughtful and free Berkshire Deep Dive and learned a few things and had his conservative sum of parts breakdown and I.V. He will be speaking at the Gabelli and VALUEx sub-meetings in Omaha this Friday. I always find his comments very thoughtful and he has been approachable as well.

His book is terrific as well for those interested in the historical financial analysis of Berkshire and even goes back to the pre-Buffett era. It was a 5 year project!

Adam puts in the work

Cannot access. What is his IV?

“Cannot access. What is his IV?”

You won’t like it. Base sum of the parts valuation $385/b. He then adjusts the value of BNSF and BHE to $90bn each to give an adjusted valuation of $404/b.

That’s using 15x earnings, 12x insurance underwriting earnings, includes all the cash, haircut for Apple.

I do it using the Buffett described 5-groves method and get a similar answer.

He thinks buying at that level might get a 10% return going forward. Sounds good to me.

So why did WEB pay $407?

“So why did WEB pay $407?”

Maybe he also thinks that will give a roughly 10% return, which is far better than 5% on excess cash.

Isn’t $160-170 billion in cash plus Berkshire’s borrowing capacity likely more than enough for any conceivable elephant?

That’s true. At the same time, he has the authority to purchase shares only at prices below intrinsic value, conservatively calculated.


“The Board of Directors of Berkshire Hathaway Inc. has today authorized an amendment to Berkshire’s share repurchase program…..Under the amendment adopted by the Board of Directors, share repurchases can be made at any time that both Warren Buffett, Berkshire’s Chairman and CEO, and Charlie Munger, a Berkshire Vice Chairman, believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined.”


https://www.berkshirehathaway.com/news/jul1718.pdf


He has also said that his IV is a range rather than a specific number. The authorization from the BOD likely refers to the lower end of his estimate. According to current policy, he is authorized to purchase only when the stock trades below the lower end of his estimate.

https://www.morningstar.com/stocks/is-berkshire-ha...

He has also said that his IV is a range rather than a specific number. The authorization from the BOD likely refers to the lower end of his estimate. According to current policy, he is authorized to purchase only when the stock trades below the lower end of his estimate.

2023 5-groves, no reduction in cash, no haircut for Apple, ignoring underwriting earnings (the method Buffett described in the 2018 AR):
15.0x earnings: $398
17.5x earnings: $424
20.0x earnings: $450

Mr. Buffett: $407
Adam Mead: $404
Morningstar: $427
Mr. Market: $359-$420 (2024 closing prices)

I could see $407 being in the range of "below intrinsic value, conservatively calculated".

It's not a back-up-the-truck signal.

share repurchases can be made at any time that both Warren Buffett, Berkshire’s Chairman and CEO, and Charlie Munger, a Berkshire Vice Chairman, believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined.”


Technically, this authorization would have to be revised, unless the seances are working.

But really, how much of a constraint is this? It is Buffett that has a range in his mind, and he is asked to repurchase only when shares trade below this range.

And what is the intrinsic value of a stock that trades at $399 and is expected to increase at, say, 8% a year, when 10-year Treasuries are at 4.6% and the S&P 500 as a whole is expected to return 2% over the next 12 years, starting from 5000. Serious question.

Buffett has said that the intrinsic value of a company is the "discounted value of the cash that can be taken out of a business during its remaining life." If you use 4.6% as the discount rate, and 8% as the growth rate for Berkshire's earnings, and assume that the P/E multiple is the same in 10 years, you get a present value of $549. Using a 5% growth rate, you get $415. That seems like a reasonably conservative determination of the lower bound of what we expect from Berkshire.

dtb

Buffett has said that the intrinsic value of a company is the "discounted value of the cash that can be taken out of a business during its remaining life." If you use 4.6% as the discount rate, and 8% as the growth rate for Berkshire's earnings, and assume that the P/E multiple is the same in 10 years, you get a present value of $549. Using a 5% growth rate, you get $415. That seems like a reasonably conservative determination of the lower bound of what we expect from Berkshire.

DTB

I like your PV of $549! :) Could you advise what you used as the starting point for the growth rate of earnings. There has been such a variation over the last 5 years, I am wondering about the starting input value.

Thanks

Aussi

Mr. Buffett: $407

That is what he PAID not what IV is

I like your PV of $549! :) Could you advise what you used as the starting point for the growth rate of earnings. There has been such a variation over the last 5 years, I am wondering about the starting input value.


I simplify the calculation by just using today's share price ($399) and, assuming P/E multiples remain the same as today, calculating growth rates from today's share price (8% baseline assumption) and discounting this by the 10y treasury rate (4.6%). This implicity makes a major assumption that the current P/E multiple is not out of line with the historical level.

Using current earnings and extrapolating them is not a straightforward thing to do, since Berkshire's earnings (including unrealized investment gains) are extremely volatile, as are its insurance underwriting results. Rather than using a multiple of earnings for calculating fair value, something like the 5-grove system would probably be better, except good luck finding all the numbers going back 20 years.

A simpler variant of this approach is the one Tilson uses*, where he calculates fair value based on the total of all investments plus a fixed multiple (Tilson uses 11) of the pre-tax operating earnings from the wholly owned businesses, similar to Jim's 2 1/2 column approach. The end of 2023 IV per A-share, calculated this way, was $639,679, with A-shares trading at $542,625, a 15% discount. The average discount, going back to 2002, has been 20%, so on that basis, you might say that at year end 2023, shares were trading at 6% above their 22 year average, with respect to intrinsic value. That was Dec 31st, 2023, when B-shares were at $356.66; at a share price of $399, and with intrinsic value up maybe 2.5% after 4 months, we would have shares currently 15% over their average.

If I recalculate, assuming we are currently 15% above the usual multiple and that we will revert to the 2002-2023 average multiple over the next 10 years, I get intrinsic values of $398, $480 and $576, for expected growth rates of 6%, 8% and 10%.

Maybe Buffett's 'conservative range' of IVs doesn't go as low as 10-year annual returns of only 6%, but the low end of my range is close to today's price. Maybe I am being TOO conservative, and should repurchase as he has been doing.

dtb

*https://stansberryresearch.com/articles/my-updated...

Technically, this authorization would have to be revised, unless the seances are working.

I would pay a lot to watch a medium channeling Charlie when he's in grumpy mode. It would be a hoot.

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