Portfolio manager’s Letter September 2007
I presented here are three tables comparing the value of Berkshire Hathaway with some of Warren Buffett’s recent purchases. Also included for the sake of comparisons are some of the stocks of Berkshire Hathaway’s long term holdings. All three tables show Berkshire Hathaway operating income, the ratio of current operating earnings divided by price as of July 1, 2007, the forward price earnings ratio on July 1, 2007, and the company’s growth rate for the last 5 years.
For Table One the stocks have been sorted by the forward PE ratio, with the cheapest stock at the top of the list. On this basis Conoco Phillips is the cheapest with a PE of 8.4. Burlington Northern is about the middle of the list with a PE of a little over 15, and generally the stocks as a group appear reasonably priced if not cheap with about half to the list showing a PE of less than 15.
For Table Two the stocks are sorted on the basis of Berkshire Hathaway operating income divided by the per share price. Berkshire Hathaway operating income is sometimes a better indication of value, than PE, because it is not as affected by one-time items and other games. By this measure the recent purchases appear even cheaper, with 16 out of the 27 stocks at or below Warren Buffett’s preferred ratio of 10 times operating earnings or less. Looking at this list of Berkshire Hathaway Operating income it is not hard to understand why Warren Buffett has been able to spend $15 billion in new purchases since 2005.
Table Three sorts the stocks according to annual earnings growth for the last five years. Note that the rate shown for Berkshire Hathaway is actually for revenue growth not earnings. I used the revenue figure because in 2001 Berkshire Hathaway’s earnings were very low because of losses at the World Trade Center, so any comparison starting with that year gives an unrealistic growth rate for earnings. Nevertheless, Berkshire Hathaway places number three on this list in terms of earnings growth.
The only companies showing more rapid earnings growth are USG with 78.3%, and Conoco Phillips at 57.0% two cyclical companies ridding the tail end of their growth cycle. Neither of which likely to maintain this growth into the near future. This leaves us with the impression that Berkshire Hathaway will be able to sustain its growth at a higher rate the than the companies Warren Buffett has been buying. As of the date that this table was prepared Berkshire Hathaway was selling at 8.5 times operating earnings, and cheap as this appears it includes nothing for the operating earnings of Berkshire Hathaway’s investees.
The after tax earnings of Berkshire Hathaway’s investees haves been increasing rapidly in the last couple of years because of Warren Buffett’s equity purchases and last year increased 33% to $1,222 per share.