Berkshire Hathaway Value Update, Year-End 2014

“As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that number is for Berkshire shares (nor, in fact, for any other stock). In our 2010 annual report, however, we laid out the three elements – one of them qualitative – that we believe are the keys to a sensible estimate of Berkshire’s intrinsic value. That discussion is reproduced in full on pages 123-124.

Here is an update of the two quantitative factors: In 2014 our per-share investments increased 8.4% to $140,123, and our earnings from businesses other than insurance and investments increased 19% to $10,847 per share.”

—Berkshire Hathaway, Annual Report 2014, p. 7

Intrinsic Business Value Update

Last weekend I read the 2014 annual report from Berkshire Hathaway. As usual I enjoyed it, and even more so this year due to the extra writings from both Warren and Charlie.

Buffett himself summed up Berkshire’s 2014 in a good way in the beginning of the shareholder letter, when he said that “It was a good year for Berkshire on all major fronts, except one.” The exception was attributable to BNSF that according to Buffett “…disappointed many of its customers. These shippers depend on us, and service failures can badly hurt their businesses.”

The table below shows some key financial data for the prior ten-year period, including an estimate of intrinsic business value (by using the so-called “two-bucket approach”).

By using this two-bucket approach and applying a pre-tax earnings per share multiple of 10 times, results in a intrinsic business value per A share of $248,593 (or $166 per B share) at the end of 2014, and increase of 12.8% year-over-year. Book value per share increased 8.3%, from $134,973 to $146,186. The biggest change was in the price per share, increasing 27.0% year-over-year, from $177,900 to $226,000.

BRKA2014_1

The 10-year average intrinsic business value (IBV) to book value (BV) was 1.65. Price to book value and price to intrinsic business value averaged 1.38 and 0.84 respectively.

BRKA2014

At the moment (March 6, 2015) the A share is trading at $218,986 (or $146 per B share), giving a margin of safety of 12%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is informational and is in my own personal opinion. Always do your own due diligence and contact a financial professional before executing any trades or investments.

2 thoughts on “Berkshire Hathaway Value Update, Year-End 2014

    1. In this post pre-tax earnings from non-insurance operations is used and a 10 times earnings multiple is applied to these earnings to come up with an estimate of the value of the non-insurance operations. A 10 times pre-tax multiple approximates an after-tax earnings multiple of 15 times assuming a tax rate of 35%.

      To answer your question about ROE, usually the main reason for using pre-tax earnings, or even EBIT, is to get a cleaner measure of the operating returns of a business and also to make it easier to compare different companies. For example, by using EBIT divided by invested capital (net fixed assets plus net working capital) we do not take into account how a business is financed (capital structure, i.e., equity and debt) or current taxes, which both could differ between companies and thus skew any comparisons of different companies. Also, when looking at ROE it’s important to understand whether there is any financial leverage or not (that is, does the business have any debt?) since this impact ROE. In the end it’s ROE that counts, but you want to know the different components of it (net profit margin, asset turnover, financial leverage). For businesses with debt you always have two components of the total return, the first one being the operating return (the returns generated by the business itself regardless of the capital structure), and then the second one being the effect from introducing debt in the capital structure. Hope that helps!

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