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Berkshire Hathaway's 2012 Look-Through Earnings from Stock Investments Look to Be $4.5 Billion

March 22, 2012 | About:
Greg Speicher

Greg Speicher

Buffett has long underscored that GAAP can sometimes obfuscate the economic performance of a business. To wit, Buffett introduced the notion of look-through earnings, which comprise both reported earnings AND any undistributed earnings of a company's investees. (See Berkshire Hathaway's Owner's Manual for more details.) Buffett has underscored that including these earnings in a calculation of a business's normal earnings power is highly useful in understanding where the business stands and in valuing the business. The tree still falls, even if nobody hears it.

In his 2011 letter to shareholders, Buffett made it a point to note that Berkshire (BRK.A)(BRK.B)'s share of the earnings of Coca-Cola, American Express, Wells Fargo and IBM - the "Big Four" - was $3.3 billion. Under GAAP, only $862 million of dividends were reported. The press mostly ignores or is ignorant of this reality in reporting Berkshire's earnings. Therefore, many have a poor understanding of Berkshire's true earnings power.

I made my own estimate of Berkshire's 2012 look-through earnings from its equity investments. My estimate is $6.5 billion of which just under $2 billion will be paid to - and reported by - Berkshire as dividends. That leaves $4.5 billion that Berkshire will likely earn in 2012 that will not be reported. That is substantial. Buffett wrote in his 2010 letter that he estimated Berkshire's normal after-tax earnings power to be $12 billion.

Berkshire's total 2012 after-tax earnings - including look-through earnings - could be as high as $16.5 billion, or more.

One other detail should be mentioned. Years ago, when Buffett would provide a calculation of look-through earnings in his shareholder letters, he would deduct an amount equal to the additional taxes that Berkshire would have paid if all owner earnings were paid as dividends. In my judgment, that is overly conservative. Buffett is generally a very long-term holder of common stocks. The present value of the deferred taxes on the capital gains that will be derived from these retained earnings will be far less than the taxes due if these earnings were distributed as dividends in the years they were earned. Nevertheless, some adjustment should be made to any estimate of intrinsic value based on look-through earnings to account for Berkshire's deferred tax liability.

Finally, my estimate is largely based on consensus 2012 earnings estimates for Berkshire common stock investments.


About the author:

Greg Speicher

Rating: 3.7/5 (18 votes)


AlbertaSunwapta - 3 years ago
I gave you 4 stars. I deducted a point from you for writing this and making the market more efficient. Soon they'll be bringing back EMH with a vengeance.

However, can you now find other similar examples of hidden earnings? (Hopefully some little unknown micro-cap investment holding companies disguised as some distasteful operating companies to ensure longterm undervaluation. Buggywhips, newspapers...)
Rjstcr premium member - 3 years ago
I agree with AlbertaSunwapta completely. Except I gave you 5 stars and hope you respond to his second paragraph.
Sjzhao2003 - 3 years ago
To Greg: Thank you for your postings. I've always enjoyed your writing and every time I read your posts, I come away a bit wiser. Thank you!

To AlbertaSunwapta and Rjstcr: You may find these two interesting:

- DJCO (large investments in WFC + profitable operating business + unquestionable management with Charlie Munger in charge)

- GENC (a net-net with large investment in mutual funds etc., but with a side of maybe questionable management)

Greg Speicher
Greg Speicher premium member - 3 years ago
Thanks for the comments. Sijhao, I agree that DJCO is one to look at.

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