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Berkshire Comprehensive Income is 11 Billion (Not 3.2 Billion)

May 07, 2012 | About:
Pradeep D

Pradeep D

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Berkshire Hathaway generates income from Operating Earnings as well from Float.

The book value metric that Buffett uses as proxy for intrinsic value takes both the earnings into account. Focusing only on the operating income part of the metric ignores the other half.

This comprehensive income is detailed in the "Consolidated Statement of Comprehensive Income" on page 4 of 31Mar2012 10Q.

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The Comprehensive Income is 11.2 Billion.

Income from Operations = 3.245 Billion

Other Comprehensive Income = 7.863 Billion

Total = 3.245 + 7.863 = 11.108 Billion.

This explains why the equity has increased from 168 to 180 Billion USD in the last quarter. (Page 2 of the 10Q)

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Anecdotally, we know that the equity portion of the float is about 75 Billion. This 75 Billion portfolio has done well with the rest of the market in the

first quarter of 2012.

Berkshire Book Value is close to the buy back threshold of 10% of Book value

The Price to Book Math is below

Market Cap = 201 Billion

Shareholder Equity (Book Value) = 180 Billion

Price/Book = 1.11 = 11% over book value.

Berkshire will buy back stock if @ 10 percent over book value. We are almost there!



About the author:

Pradeep D
I have a deep interest in macro-economics and investing though I work in information technology.

Rating: 4.3/5 (23 votes)

Comments

dpradeep73
Dpradeep73 premium member - 1 year ago


I am amazed as to how the mainstream media as to how the mainstream media completely missed this!
Munger200
Munger200 - 1 year ago
well spotted pradeep.
HDeffebach
HDeffebach - 1 year ago
The Comprehensive Income sheet lists:

"Net Change in Unrealized Appreciation of Investments" equal to $11.6B.

You list this as "Earnings from Float". Is this interest income (ie cash) from float or could this be appreciation of long term assets (ie, coke stock)? I do not know. I do, however, find it very surprising to find "Unrealized Appreciation of Investments" listed as Income.

Anybody know what "investments" appreciated and why they are considered as income?
Josh Zachariah
Josh Zachariah premium member - 1 year ago
"Net Change in Unrealized Appreciation of Investments" are changes in the value of the stock/debt portfolio and not income from float. Money from float may be used to purchase stock, but income from these investments would strictly be dividend income which is recorded elsewhere.

The reason why its such a high figure is that the stock market grew appreciably the past quarter. If the market ending q2 is down from the last quarter then this figure could very well be negative. I wouldn't expect the last quarter's performance of the stock market to be a recurring thing the next 3 quarters.
dpradeep73
Dpradeep73 premium member - 1 year ago
@ HDeffebach - This is indeed appreciation of long term assets such as coke stock. I dont know what the FASB's thought process was when they came up with the rule to exclude such income from the income statement but add it to comprehensive income and consequently equity on the balance sheet. I think it is because investment income if clubbed with operating income distorts the picture of the underlying operating business.

From my CFA exams I remember three distinct cases where this treatment occurs

1.) Unrealized gains\losses

2.) Income purely because currency gains or losses in your foreign sales\subsidiaries

3.) Pensions Assumptions

All three affect the equity, which Buffett uses as a proxy for intrinsic value.

This is particularly important for Berkshire because of two reasons

1.) They have a large float relative to Market Cap (150 plus billion float; 200 billion market cap)

2.) They also have a large unrealized gain component because Buffet rarely sells.
dpradeep73
Dpradeep73 premium member - 1 year ago
@Pepper999 - Dividends and interest income are indeed not included in this number. I was not making that point. Maybe the word "income" is causing confusion.

In the 2011 news letter when Buffett predicted INCOME FROM OPERATIONS of 12 Billion a year he clearly mentioned the loss of interest from the Goldman deal etc that would be offset by eventually higher interest rates and dividends from his companies.

The captial gains from investments, partly funded by float, were not covered in the 12 Billion estimate. However, it is relevant to book value and valuation.

Secondly, I agree with your other point. I dont expect the market to keep going up by 30% every six months.

The market dinged Buffett when Book Value in December 2011 when the market performed poorly and Book Value therefore grew by only 4%. I think kudos are due when the portfolio does well.

If we extrapolate income from operations from the first quarter (3.2 Billion) for the entire year, we get 13 Billion. Furthermore, if we assume the market stays at current level then the unrealized income will continue to be reported at 11B (7.6 B after provision for taxes).

BOOK VALUE PREDICTION @ DECEMBER 2012

Income from Operations -> 13 Billion

Unrealized Gains Income -> 7.6 Billion

Total Increase in Book value = 20.6 Billion.

Future Book Value = 168 + 20.6 = 188.6 Billion.

Berkshire is undervalued and we almost @ the 1.1 Book value threshold as of this quarter.

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