No. of Recommendations: 12
Book: $301
Current price: $479
Current P/B: 1.6
5-groves value: $414 (15x Op. earnings, 30% of float ($51B) deducted from cash, 10y avg insurance underwriting earnings at 10x)
5-groves optimistic: $468 (17.5x Op. earnings, 0% of float ($0B) deducted from cash, 10y avg insurance underwriting earnings at 17.5x)
Shareholder Equity + Float + 1/2 Deferred Taxes: $390
Highest buyback: $418
Estimated earnings power per share: $29.54 Current PE 16.2 (Op. earnings + estimate of ongoing cap gains)
Cash: $153 per B share
If value is 1.55x book, we are about 66% 'equities', 34% cash/fixed
Nice and to the point! There is much to be said for a simple approach.
A couple of possible improvements you may want to consider, using no more data collection:
* Rather than using 10 year average insurance operating earnings, I suggest using 10 year (or whatever) average of the underwriting profit as a *percentage* of the size of the insurance business rather than an absolute number. Since the insurance division is growing pretty steadily, a 10 year average of the absolute numbers is likely to be an underestimate. For example, percent of float or percent of premiums earned. For my estimate of current period cyclically adjusted pre-tax underwriting profit, I use both, being the average of (2.7% of current period premiums earned) and (1.3% of current period float), which are quite close to the long run averages. Watch out for years with big retrocession contracts such as 2007 or 2017: they cause a huge accounting spike in premiums earned which should be backed out if you just want the size of the ongoing insurance business.
* In that last part, you seem to be evaluating cash-vs-other as a percentage of market cap to get a view of the capital structure. This isn't really very meaningful. (The demonstration is simple: if you evaluate several different assets as percentage of market cap, you get to way over 100% pretty quickly). To get a more insightful view of things, calculate things as a percentage of total assets. The firm does have liabilities. Fancier version for bonus points: unconsolidate the non-recourse debt when doing this. Pretend BNSF and BHE are public companies with their own arm's length debt, so remove their debt from both the asset and liability side of the calculation. When BNSF borrows a bunch of money, it isn't really boosting the leverage at head office in a meaningful way, any more than it would if Coke were to borrow some money.
Jim
