Portfolio manager’s Letter February 2003
Three years ago in March 2000 Warren Warren Buffett gave his most direct hint about the value of his company, when he said that he would buy the Class A stock for $45,000. Since he only buys with a margin of safety we know that his estimate of Berkshire Hathaway intrinsic value at the time was substantially in excess of the $45,000 figure.
I am reasonably sure the Berkshire Hathaway intrinsic value (and Hence Warren Buffett’s potential purchase price) have increased substantially in the three years since then. The question is, by how much?
The Companies Net Asset Value has not changed much because a lot of air has been let out of the equity portfolio. This drop in the value of the stocks since 2000 and the changing nature of Berkshire Hathaway, means that Net Asset Value is no longer a good guide to determining the Berkshire Hathaway intrinsic value.
So how can we guess what Warren Buffett’s buy-back figure would be today?
The Table below lists 15.6 billion that Berkshire Hathaway has spent in the last three years on loans, acquisitions and expansions. This total, if employed at Warren Buffett’s target rate of thirteen percent pre-tax would yield 2.0 billion annually and could easily justify a ten to fifteen billion dollar bump the Berkshire Hathaway intrinsic value.
From the table below we can see that in last the three years while Berkshire Hathaway’s Net Asset Value has only grown by 6.9%, its Revenue has grown by 82%.
|Ben Bridge Jewelry (Est.)||$264|
|US investment (Est.)||$50|
|Benjamin Moore & Co||$1,100|
|12.7% of Shaw inds.||$324|
|Fruit of the Loom||$730|
|Pampered Chef (Guess)||$900|
|Northern Natural Gas||$950|
|Kern River Acquisition||$900|
|Kern River Expansion||$1,200|
|Loans and Financings|
|Williams co. Pref.||$275|
|TXU Corp. Pref.||$250|
|Three year Total||$15,560|
The net income of the operating companies has grown by 342%, Its float by 60%, Earnings before investment gains are up 450%.
None of this is to say that Berkshire Hathaway will actually buy stock if the price of the Class A declines to $60,000, or $55,000, or at any lower price.
“Berkshire Hathaway’s Revenue (If you include its share of MidAmerican) rose by an average of 27.5% annually for the last three years.”
|Berkshire Hathaway Growth for the Last Three Years|
|In Billions of Dollars|
|Year||1999||2000||2001||2002 (Est)||Average Per Year|
|Revenue (Includes MidAmerica)||$24.00||$37.10||$41.70||$43.80||27.5%|
|Net Asset Value||$57.70||$61.72||$57.95||$61.70||2.3%|
|Net Inc. from Operating Companies (After-tax)||$0.51||$1.00||$1.47||$2.26||114.4%|
|Earnings Before Investment||$0.67||$0.94||-$0.05||$3.70||150.5%|
Even though there are no elephants in sight at the present time the scent is beginning emerge from the bush, and Warren Buffett being something of a pack-rat when it comes to cash, may very well decide to keep his ammunition intact. When the Elephants do start to emerge, Warren Buffett may have a better use for the shareholders money.
But whether there is a buy-back or not, It seems pretty obvious that Berkshire Hathaway in the low sixties is trading at a substantial discount to Berkshire Hathaway intrinsic value. The progress of the last three years has gone largely unnoticed by the market and most of the financial press, but that does not make it any less real.
It is interesting to note that, in 2000 Alice Schroeder at Morgan Stanley was valuing Berkshire Hathaway at $90,000 and Warren Buffett was buying at $45,000. Now, Alice has raised her valuation to $120,000. Does this mean that Warren will be buying at $60,000?
The Table below shows the change in Berkshire Hathaway’s theoretical buy-out price based on internal growth of 10%, 12%, or 15%. We know that Warren and Charlie have both said that because of its size, they do not think that Berkshire Hathaway can grow at a 15% rate, so 15% is probably a bit of a stretch. The 10% or 12% figures do not seem totally unrealistic.
|Theoretical Rate of Internal Growth||Stock Price|
Back in 2000 there was discussion to the effect that Warren Buffett’s buy-in point would establish a price floor, or an essentially risk free entry point for purchasing the stock. This was, of course, was mostly wishful thinking, but I do believe Warren Buffett’s $45,000 offer in 2000 was an important marker for Berkshire Hathaway intrinsic value of the stock.
Further I believe that there is a point somewhere in this neighborhood where the risk associated with buying Berkshire Hathaway’s stock is very reasonable compared to the potential gain that an investor can expect from a long term position.