On the previous post on Berkshire
Hathaway, I pointed my view on BRK valuation under the two-column method and
the return it implied. Under that calculation, the expected return is somewhere
around 10% a year. Taking into account that I expected year end 2015 intrinsic
value under this formula to be about 181,5$ per B share. Now we have definite
results:
Earnings (excluding underwriting
gains): 11.186$ per A share
Investments: 159.794$ per A
share
Which result in 271.654 per A share
or 181,1 per B share
It seems I wasn't that far.
But this year Warren Buffett
proceeded to update on his view of intrinsic value:
1- Underwriting gains are now
fairly stable and should be considered for intrinsic value purposes. He event
told us that while this year underwriting result was 1.118$ per A share the
average result for the last 10 years was 1.434$ per share (telling us the
normalized underwriting gains)
2- As happened before he excluded
some intangible write off from the earnings, but he also told us that since
BNSF implied spending in excess of depreciation at all times, we should
consider BNSF earnings to be lower than they actually are (6.775 million
pre-tax earnings or 4123.6 per A share with depreciation of 1,932 and
capex of 5,651)
About this:
1- The purpose of excluding
underwriting gains for me was
a) how stable are those in case of
catastrophe? Since for 13 years they have been positive I was inclined to
believe that they were to be expected on average (negative underwriting income
in a year should give them the possibility of raising prices which would
compensate on the following years). Warren Buffett just confirmed that and
since he has a better understanding of their exposures I believe I should
confirm my prior belief
b) Investment deferred taxes and
float were not being discounted and BNSF earnings in excess of depreciation
(point 2) were not being discounted also. So excluding underwriting gains was
an overly simplified way to do that. However, that was (knowingly) incorrect
because it is inaccurate.
2- He mentions spending in excess
of depreciation but doesn't mention:
a) BRK is able to defer taxes to
compensate (at least in a big part) for that, as long as he keeps spending in
excess of depreciation (which he tells us is forever)
b) A big part of that spending is
growth capex be it to: create new routes, to increase existing routes capacity
or to maximize efficiency and thus get better pricing than competition and
steal business (about this last point he does mention the difference in prices
versus the competition: under 3c per ton mile versus 4.2-5.3c; a huge
difference)
To make the calculation more
accurate I should instead of ignoring underwriting gains:
1-Take them into account
2- Discount the excess value of
float. However:
a) float is growing, which
simultaneously further reduces the chance of it having to be paid back and if
it grows a lot we should, instead of discounting it, increase its value due to
its growing ability
b) Float implies excess cash (point
3) and implies fixed income investments (instead of more equity investments).
3- Discount the excess cash needed:
float implies at least a 20 billion cash cushion (which Warren has stated he
views as at least 25 billion since going under 20 would make him take emergency
measures to sell). It actually doesn't. He proceeded to explain that part of it
was because of the financing method at Clayton Homes. In addition at least part
of it is needed for other businesses regular working. But these 20 billion
whatever they are needed for they should be discounted. However.
a) They should not be discounted in
full because: the cash still belongs to Berkshire and gives a cushion to the
investor that most other equity investments don't by allowing survival to 1 in
100 year events;
4- Discount excess debt: not
applicable
5- Discount investment deferred
taxes: a good part of it might never be repaid because he views it as
businesses purchased (just like BNSF). However taking them as nonexistent is
somewhat aggressive
6- Discount BNSF earnings (which as
explained before is quite complicated, or impossible).
1- Plus 14.340 per A share (23.560
million or 9.56$ per B share)
2 and 3- Probably 2 a) nets with 2
b) and 3 on zero, but it could go to either side
4- not applicable, the business
could take some more debt (in fact we could assign a positive value to the
capacity to increase leverage but they do not intend to increase it much so it
is more conservative not to)
5 and 6- Are very hard to discount.
The appropriate discount might be much lower than the value in 1, but I always
found it more conservative to simply ignore, but I am probably being too
conservative
However by changing the provided
values Warren in fact updated his estimate of current intrinsic value, stating it to be
higher than the standard two column method would say. Most likely he is the one who
is right. Anyway, the price is still much lower than the two-column price, why
should I worry if the intrinsic value is higher 9,5$/B share? And anyways, even
if I took that into account that would probably change the 10% price to
the 9,5% price or something similar.
ps: the share repurchase value has
increased to 124.4$ per B share (very near the price it was trading at the time
of my first post a month ago)
Disclaimer: I own BRK-b shares.
This is not investment recommendation. Always do your own research. Always read the introduction post.
Viva, Rolling! Espero que esteja tudo bem por aí...
ReplyDeleteAcabei agora mesmo de ler o "You can be a stock marker genius".
O último parágrafo diz o seguinte "The idea behind this book was to let you know about a snowball sitting on top of the hill, to provide you with a map and enough rope and climbing gear so that you can reach that snowball. You job - should you choose to accept it - is to nudge it down the hill and make it grow".
Impossível não me lembrar deste blog.
Só uma curiosidade, o nome tem origem neste livro?
Cumprimentos
Bem tenho andado ausente deste blog. Vou ver se um dia destes coloco aqui mais umas coisas que tenho andado a fazer (o problema é que são microcaps e gosto de ter a posição quase construída antes de postar, mas acho que uma delas já posso pôr aqui).
DeleteA ideia é essa, poderei ter lido também aí, mas julgo que será mesmo do livro: Snowball, Warren Buffett and the business of life. A vida dele é a personificação da metáfora. No fundo é o conceito de compounding que se aplica a tudo na vida (e não apenas ao dinheiro).
Ok! Interessante. Nunca tinha ouvido falar nesse livro. É uma possível entrada na minha lista de futuras leituras.
ReplyDeleteO último que comprei foi o "Quality of Earnings". Supostamente já devia ter chegado, mas deve estar quase quase a bater à porta. Conheces? Se sim, recomendas?
Quanto às microcaps, posso afirmar que irei ler com muito interesse e muita atenção.
Cumprimentos
Viva, Rolling!
ReplyDeletePor curiosidade, ainda estás investido na BRK?
Os tão falados "120b" em cash nesta altura devem ser postos a circular. O génio e o faro de Buffett e Munger devem encontrar alguma coisa com um grande desconto.
Hoje coloquei uma ordem. Não foi executada. Talvez amanhã seja o dia.
Cumprimentos