Berkshire Hathaway
2009 Earnings

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By rclosch
May 26, 2009

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Commoncents33 says:

"Recently Buffett said that at current prices (roughly $3000/B) Berkshire is not demonstrably below intrinsic value. Sure, Buffett has a history of guiding expectations lower, then surprising on the upside. Yet, Buffett has also had a history of trying to give reasonable direction to his shareholders when the price: IV is too far off his estimate. Indeed, in 2000, he famously offered to buy back B's at 1500."

Buffett has also stated several times at the Annual Meeting and elsewhere that intrinsic value of Berkshire is growing "much faster" that its book value. On December 31, 1999 Book value was $57.8 Billion. At the end of 2007 Berkshire's book value was $120 Billion. The annual growth rate of book value for the seven years was a little over 11%.
It is up to you to decide what you feel Buffett meant by the words "much faster than book value" but that is what he said and 11% times 2000's $45,000. Leaves us somewhere "much "north of $93,400 for today's equivalent value to the 2000 offer to buy with Buffett's margin of safely included.

The above figures apply to the year end 2007. Since then Buffett invested $32 billion in 2008, $6.1 billion in the first quarter of this year and another $3 billion on the first day of the 2nd quarter. So if we are to take Buffett's recommendation and estimate the birds in the bush, the company's intrinsic value as of today has to be considerably higher than it was at the end of 2007. With something over $41 billion invested since the end of 2007 $4.0 billion in additional cash flow is not a hard guess, or about a 30% increase in the birds in the bush, from whatever intrinsic value you want place on 12/31/2007.
If you have trouble reconciling the above to Buffett's recent quote that Berkshire as not undervalued at around $90,000 per "A " share, then you are not alone.

A year and a quarter ago Mr. Market thought Berkshire worth $150,000, yet after its best year ever for commitment of funds (approximately 2.8 time the next best year), and what should be an equivalent increase in intrinsic value, we find the stock trading in the low $90,000s. Clearly this has nothing to do with intrinsic value, except for the rather curious observation that estimates of intrinsic value tend to be a lot lower today than they were a year ago.

Mungofitch says:

"If I were to make a case for not buying Berkshire, it would be this: The expected growth rate for Berkshire is declining, and there is an unusually large selection of extremely high quality companies
available at very compelling prices right now. For anyone with a demonstrated ability to evaluate businesses well, there are probably better choices."

This is a very good point; it is a point that certainly helps to explain the heavy selling that Berkshire has been subject to since the first of the year. (See table at)

This table indicates that value managers were sellers of Berkshire in the first quarter. Certainly this is a reflection of the trend mungofinch has identified. These managers were selling Berkshire in the first quarter to buy other stuff that was cheaper; on the other hand, this point may have applied better a couple of months ago than it does today. Much of the cheap stuff has doubled or tripled since the first of the year while Berkshire has underperformed the market by 13 or 14 percent. So logic would suggest that Berkshire is a much better value today relative to the rest of the market than it was in the first quarter

It is interesting that W. Tilson was selling in the first quarter particularly in view of the fact that I saw him on CNBC pumping the stock during this period. While this might not be as good a buy signal as a sell recommendation by KahunaCFA, I still think it worthy of consideration.

One final point, while the market to this point seems to have been propelled by short covering, going forward I think earnings recoveries will start to get more attention. Large pieces of Berkshire's Businesses are not affected by the economic downturn (Utilities, and Insurance, with Reinsurance moving to a hard market, and GEICO gaining market share). Combine this with expected cash flow from Buffet's busy 15 months and earnings for the rest of the year should compare very favorably to the rest of the market.

In the last two years Berkshire has taken noncash charges to earnings for accounting fictions that at least in Berkshire's case appear to present GAAP earnings as pointless. As of the March 30, these fictions amount to something in excess of $17 billion, but what GAAP taketh away so shall GAAP giveth back.

When the market recovers (someday it will recover) a lot of this $17 billion will magically start appearing on Berkshire's bottom line. Berkshire has underperformed since the first of the year, but I personally will not bet on a repeat of this performance in the third and fourth quarter.