Whitney Tilson’s presentation on Berkshire Hathaway.

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Whitney Tilson
Whitney Tilson in full gear

The Basics

  • Stock price (5/4/17): $249,540
    • $166.34 for B shares
  • Shares outstanding: 1.64 million
  • Market cap: $409 billion
  • Total assets (Q4 '16): $621 billion
  • Total equity (Q4 '16): $286 billion
  • Book value per share (Q4 '16): $172,108
  • Repurchase maximum price (1.2x book): $206,530
  • Downside to the Buffett repurchase put: 17%
  • P/B: 1.45x
  • Float (Q4 '16): $92 billion
  • Revenue: $224 billion
  • Berkshire Hathaway today is the 11th largest company in the world (and 4th largest in the U.S.) by revenues

History

  • Berkshire Hathaway today does not resemble the company that Buffett bought into during the 1960s
  • It was a leading New England-based textile company, with investment appeal as a classic Ben Graham-style "net-net"
  • Buffett took control of Berkshire on May 10, 1965
  • At that time, the company had a market value of about $18 million and shareholder's equity of about $22 million

The Berkshire Hathaway Empire Today

Whitney Tilson - Berkshire Hathaway

Whitney Tilson - Berkshire HathawayThe Step by Step Investment Process for Earning Superior Returns – Part II

Earnings of Non-Insurance Businesses Have Soared

Whitney Tilson - Berkshire Hathaway

Buffett, Combs and Weschler Are Putting Berkshire's Cash to Work at a Healthy Clip

Whitney Tilson - Berkshire Hathaway

  • Buffett is doing a good job investing – the latest examples being Precision Castparts, Kraft and Duracell– but the cash is coming in so fast (a high-class problem)!
    • Berkshire will generate free cash flow equal to the $32.7 billion paid for PCP in ~2 years
  • Markets have a way of presenting big opportunities on short notice
    • Junk bonds in 2002, chaos in 2008
    • Buffett has reduced the average maturity of Berkshire’s bond portfolio so he can act quickly

Valuing Berkshire

"Over the years we've…attempt[ed] to increase our marketable investments in wonderful businesses, while simultaneously trying to buy similar businesses in their entirety." – 1995 Annual Letter

"In our last two annual reports, we furnished you a table that Charlie and I believe is central to estimating Berkshire's intrinsic value. In the updated version of that table, which follows, we trace our two key components of value. The first column lists our per-share ownership of investments (including cash and equivalents) and the second column shows our per-share earnings from Berkshire's operating businesses before taxes and purchase-accounting adjustments, but after all interest and corporate expenses. The second column excludes all dividends, interest and capital gains that we realized from the investments presented in the first column." – 1997 Annual Letter

Whitney Tilson - Berkshire Hathaway

"In effect, the columns show what Berkshire would look like were it split into two parts, with one entity holding our investments and the other operating all of our businesses and bearing all corporate costs." – 1997 Annual Letter

Buffett's Comments on Berkshire's Valuation Lead to an Implied Historical Multiplier of ~12x

Whitney Tilson - Berkshire Hathaway

  • 1996 Annual Letter: "Today's price/value relationship is both much different from what it was a year ago and, as Charlie and I see it, more appropriate."
  • 1997 Annual Letter: "Berkshire's intrinsic value grew at nearly the same pace as book value" (book +34.1%)
  • 1998 Annual Letter: "Though Berkshire's intrinsic value grew very substantially in 1998, the gain fell well short of the 48.3% recorded for book value." (Assume a 15-20% increase in intrinsic value.)
  • 1999 Annual Letter: "A repurchase of, say, 2% of a company's shares at a 25% discount from per-share intrinsic value...We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated...Recently, when the A shares fell below $45,000, we considered making repurchases."

Estimating Berkshire's Value: 2001 – 2016

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Whitney Tilson - Berkshire Hathaway

  1. Unlike Buffett, we included a conservative estimate of normalized earnings from Berkshire's insurance businesses: half of the $2 billion of average annual profit over the 12 years prior to 2014, equal to $600/share prior. Starting in the 2015 AR, Buffett began to include all insurance earnings, so this is reflected in 2014 and 2015 earnings. Both we and Buffett exclude investment income.
  2. Historically we believe Buffett used a 12 multiple, but given compressed multiples during the downturn, we used an 8 in 2008-2010 and 10 since then.

Berkshire Is Trading 16% Below Its Intrinsic Value

Whitney Tilson - Berkshire Hathaway

* Investments per share plus 12x pre-tax earnings per share through 2007, then an 8x multiple from 2008-2010, and a 10x multiple thereafter.

See the full presentation below.