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Todd Sullivan
Todd Sullivan

Berkshire Hathaway A Value Now? No

Todd Suvillian column: A follow-up on a post from March based on news today for Berkshire Hathaway (BRK-A). Whitney Tilson and Andy Kilpatrick (who worte the best book on Berkshire, "Of Permanent Value") were on CNBC today discussing the subject. Before we go on, watch what they said.

Now, earlier Tilson had this to say about housing and lenders.

Okay, so, if housing is going to drag for another 18 months, then Berkshire's results will also. So, one would then expect lower comp. earnings and hence a lower share price.

Financials institutions like American Express (NYSE:AXP), Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), USB (NYSE:USB), M&T Bank (NYSE:MTB) make up about 30%-40% of Berkshire equity portfolio (it varies based on valuations). The argument can be made that these are the class of the financials and that may be true, but all have seen share prices cut almost in half in the last year and a half no mater their quality. The other parts are tied to housing (shares have suffered) and the consumer like Home Depot (HD), Lowes (LOW), USG (USG), Coke (KO) and others. A prolonged housing downturn could see further deterioration.

Wholly-owned subs such as Shaw Industries, Clayton Homes, Jordan's Furniture (the are 4 furniture companies), Benjamin Moore, Home Services and Acme Brick and directly tied to housing and will suffer in the downturn Tilson predicts.

For all its holdings, Berkshire is essentially an insurance company. It has operated under "perfect" conditions for the last two years according to Buffett and eventually to run must end. Premiums are already falling and as houses are re-poed and fewer new cars are purchase, insurance premiums derived from those products will fall accordingly. I know people who are looking at homeowners and auto policies for way to decrease coverage and save money. Whether or not this is a good idea is irrelevant (I do not think it is), it is happening. Throw in a hurricane or two (we are due) and insurance could suffer quite a poor year.

For more on Berkshire's insurance read this former post:

Back in March when shares sat at $133,000 I argued they were not a "value". Today they sit at $111,000. Are they a value now? Perhaps but one also has to expect that the near term, if Tilson is correct is fraught with potholes for Berkshire and earnings ought to take a hit.

Based on that, share price ought to suffer also meaning you will probably be able to pick them up cheaper down the road. If I owned shares would I sell? If I needed the money in the next year, yes. If I had a multi-year time frame would I sell? No. If that was the case I would be watching down the road for a cheaper entry price, I think you'll get it.

About the author:

Todd Sullivan
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 2.8/5 (25 votes)


Tkervin - 9 years ago    Report SPAM
A note on insurance.........as driving miles are going down, accidents should follow suit- Geico should benefit.
Jsterling - 9 years ago    Report SPAM

You may have a point but IMO as easy credit evaporates and economy weakens the number of UN-insured should go up
Commodity - 9 years ago    Report SPAM
let the games begin

not even brk escaped the carnage of the twin bubbles

when will people ever learn

Ben Graham said never - he was right
Commodity - 9 years ago    Report SPAM

buy the xlf - do not gamble in stocks

it will be your ruin

buy dirt cheat real estate and get rich

poor Bill Miller

I mean his shareholders

Can ave Joe beat the markets ?

What a joke that is .

Mr Market broke Ben Graham 3 times.

He was a true genius.
John.sturges - 9 years ago    Report SPAM
Todd, great comments. BRK since 2000 has grown at 10.2% annually vs. the ~30%+ from 1986-1999. Size matters and better cos can be had in LUK, MKL and a number of other well run entities.
Buffetteer17 premium member - 9 years ago
Trying to predict near term share price gyrations of BRK is too hard for me. I just compare current price and my intrinsic value estimate. It seems a buy right now. So I did.
Sandy_capone - 9 years ago    Report SPAM
Okay, so, if housing is going to drag for another 18 months, then Berkshire's results will also. So, one would then expect lower comp. earnings and hence a lower share price.

I guess your style is more Cramer and less of Graham/Buffett.
Mahmutpasha - 9 years ago    Report SPAM

How can anybody calculate the real intrinsic value of BRK. I cannot even imagine doing such a thing. How many people that go to the meeting have read the roports of BRK and the companies it owns. Just curious.
Crafool premium member - 9 years ago
I would say that what was described are true, and represent the fact that Berkshire Hathaway is operating at a depressed level of earnings (Nothing in the report is new or astonishing but merely a recap of the front page of the local newspaper or CNBC.) Thus, it is more probable that it is in the stock price already and that Berkshire represents fair to good value here.

I like the following quote that I got from Fairholme Capital's Bruce Berkowitz in the latest report, and it goes something like this: "an old Wall Streeter once said you make your best money in a bear market you just don't know it yet".

The fact that his equity investees are down in value presents an opportunity to acquire more shares at better prices or to add new positions (remember Buffett demands not only a great company but a great price as well. Buffett likes to say "You pay a mighty high price to invest in a rosy atmosphere." as well as " I would gladly pay someone a lot of money to get some of my holdings down 50%.")

Berkshire's size is definitely a constraining that's the problem with large numbers, and a fact that Buffett and Munger readily concede. His performance and Berkshire for that matter is not going to match that of his early days, however as he states it could be over 10% a year going forward, he definitely likes to think so. The large equity positions that BRK has were not acquired in a day nor in a week but require constant buying over MONTHS. His Kraft position required taking about a third of every days trading volume for around nine-months to amass. The Coca-Cola position took months of being in the market every day and taking half the daily volume. These positions are very difficult to accumulate and I would say that the present environment would be very beneficial to him to amass more shares in size that he like to say "Can move the performance needle."

His opportunity set is greatly expanded in an environment like today's. Look at the sheer deal flow. He is making a killing one supposes being an investment banker (i.e. Wrigley's, Dow Chemical, etc.) and gaining large positions in great businesses that he couldn't amass 12 months ago.

As far as insurance, trading carriers to a lower cost provider to save some money like your friends has generally been very beneficial to the GEICO's of the world. Remember, reinsurance a lot of time rests on the ratings of your company, Berkshire is AAA and with no CDOs and lots of cash should stay that way (AIG has no idea what it has or doesn't have or any ability to value it) Berkshire could see even more opportunity. They just started a bond insurer that as far as I can see is a roaring success earning the coveted AAA rating in months rather than years, and its competitors ratings are highly suspect (i.e. MBIA and AMBAC).

As far as hurricanes, you never no. Trust me I live in Florida. One reason Berkshires' insurance premiums are down is competition. Prior hurricanes killed the competition allowing Berkshire to write more business at levels they felt adequately compensated them for their risk. Now the others have repaired their balance sheets and are back. Berkshire as always adhering to its strict underwriting criteria doesn't wish for business to walk away, but they aren't going to play the price game. (It may be getting better, I believe Florida had to pay up big to get Berkshire to re-insure its "Citizens"-State operated insurance company. They couldn't get the bond market to absorb the huge issuance they needed. A hurricane is short term costly but long term very profitable to BRK.

That all said if you believe the large cash hoard of Berkshire weighed down its earnings in the good times (Many an observers criticized him for it)should be getting very optimistic of him putting a lot of it to work. Earnings could be getting ready to move up (Cash earns what? I believe he has been buying some fixed income offering double digit yields).

Remember the old saying "the seeds are sown for the next bull market in the recession/bear market today". I believe Buffett is a good candidate to be on the look out for investors like me in a volatile market like today.

Happy investing to all.

Alanb9 premium member - 9 years ago

great post
Armeetofo - 9 years ago    Report SPAM
cra: good points
Batbeer2 premium member - 9 years ago
There is no one with a stash of cash like BRK. So what we have here is a bear market and some intelligent investors with an incredible amount of cash.

BRK will probably be making less money than they did a few years back with their businesses but:

- These are well run businesses and they will bounce back.

- They allready have enough cash and it will be put to work.

Having said all that i don't like holdings. I also don't like financials. BRK is on two too hard piles for me.

Ebenjami - 9 years ago    Report SPAM
I think it's strange that thread full of Buffet bulls wouldn't be more seriously discussing what they think Berkshire is worth. Instead the thread is full of platitudes regarding what one clever 80-year-old might do with a few billion of float.

I'd buy BRKA at 94000 pretty happily. The good news is that it might get there!

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