Greg Speicher

By my estimate, Berkshire Hathaway’s normal earning power after tax is approximately $18 billion. This puts the stock at an adjusted P/E ratio of 11x based on today’s share price. To get there, I assume the following: Redemption of GE, GS and Swiss Re preferred Normalized but still low interest rates Normalized dividend for Wells Fargo and U.S. Bancorp 2012 dividend increase per consensus estimates IBM full-year dividend Full-year earnings for Lubrizol A more normal housing environment Following Buffett, I also include undistributed earnings from Berkshire’s large equity holdings. No adjustment has been made for Berkshire’s large cash holdings which I expect will approximate $40 billion after Q1, 2012, assuming no major purchases. This equates to almost $25,000 per A share. Here is my data. By Greg Speicher 'Get ValueWalk's Daily Edition By Email and Never Miss Our Top Stories'
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Years ago, Warren Buffett said at the annual shareholders meeting that what he and Charlie Munger try to do is figure out what a company’s Value Line sheet will look like in ten years. Of course, this can only be done in stable businesses with a good long-term record of performance. It is in that spirit that I made a 5-year projection for U.S. Bancorp (USB) a la Value Line. U.S. Bancorp is a well run bank with an outstanding long-term record of performance. It is focused on core banking functions – consumer and business banking, wealth management, wholesale banking, trust services and payments – and has minimal exposure to investment banking and other challenges larger banks are facing with capital markets. My base or mid case assumes annual asset growth over the next five years of 7%. This is reasonable given U.S. Bancorp’s historical performance and given the continued consolidation in U.S. banking. The base case assumes a 2016 ROA of 1.7%, well below the banks pre 2008 returns and reasonable assuming a modest recovery in housing. U.S. Bancorp had an ROA of 1.53% in 2011. Assuming the bank’s P/E in 2016 is 13 (its long-term median P/E), it
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Warren Buffett has long underscored that GAAP can sometimes obfuscate the economic performance of a business. To wit, Buffett introduced the notion of look-through earnings, which comprise both reported earnings AND any undistributed earnings of a company’s investees. (See Berkshire Hathaway’s Owner’s Manual for more details.) Buffett has underscored that including these earnings in a calculation of a business’s normal earnings power is highly useful in understanding where the business stands and in valuing the business. The tree still falls, even if nobody hears it. In his 2011 letter to shareholders, Buffett made it a point to note that Berkshire’s share of the earnings of  The Coca-Cola Company (KO), American Express Company (AXP), Wells Fargo & Company (WFC) and  International Business Machines Corp. (IBM) – the “Big Four” – was $3.3 billion. Under GAAP, only $862 million of dividends were reported. The press mostly ignores or is ignorant of this reality in reporting Berkshire’s earnings. Therefore, many have a poor understanding of Berkshire’s true earnings power. I made my own estimate of Berkshire Hathaway Inc.’s (BRK.A) (BRK.B) 2012 look-through earnings from its equity investments. My estimate is $6.5 billion of which just under $2 billion will be paid to – and reported by – Berkshire
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By Greg Speicher #30: Respect the efficiency of markets. Value investing is seemingly more popular than ever. Books on value investing continue to multiply. Several universities offer programs based on the principles of value investing, and a number of MBA programs send their students on pilgrimages to Omaha to meet with Warren Buffett. These schools produce many trained specialists who find work in various value-oriented hedge funds and money management firms. The web is full of various sites and blogs – like this one – that follow a value investing philosophy. It is impossible to assess the collective fruit of all these efforts. It is, unfortunately, very possible to be well versed in value-investing methodologies and still fail to produce above-average results. One thing that can lead to sub-optimal results is under appreciating how efficient the market is most of the time. Wall Street is full of a lot of smart people who dedicate tremendous energy to following the market. The Internet has only made it easier to stay on top of the latest news and information. It is wise to recognize this reality and remain very humble about being able to gain an edge on the basis of better research alone.
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100 Ways to Beat the Market #24: Don’t skip the thorough analysis! Most of us do not easily part with our money. We like to think of ourselves as shrewd. We want good, reliable information before making a purchase. Yet, something interesting often happens when we decide we want something – we change from a dispassionate rational shopper to falling in love with the object we desire – particularly when there is a real or perceived scarcity factor involved. Our rationality can quickly give way to anxiety, greed and impetuousness. It is as if the brain short circuits and goes directly for the kill, as other more balanced considerations fade into the background. It was against the backdrop of this reality that Ben Graham formulated his wise and proven approach to investing, he himself having been almost wiped out by the 1929 crash. At its heart, Graham’s approach to investing is very simple and rests on a relatively small number of timeless principles. Buffett has traditionally singled out two: The Mr. Market parable which crystallizes the proper way to think about market prices and the Margin of Safety which both minimizes the possibility of permanent loss of capital and provides a
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By Greg Speicher 100 Ways to Beat the Market #19: Avoid businesses subject to disruption The value of a business is the present value of all future cash flows that it will produce. Determining these future cash flows is the serious work of a securities analyst. Ratios that look at past and present performance often reveal little about a business’s future prospects. Thinking is required, and that can’t be automated or delegated. Frequently, these future cash flows simply cannot be determined with precision. One risk that you must be on guard against is whether a business is subject to disruption. You need to consider what could kill the business? This is a foundational question, perhaps the most important. If the business is generating a good return on capital – and these are the types of businesses you should be looking at – you can be certain that there are those who would love to storm the castle and steal the gold. One of the biggest disruptors is the Internet. We all know that it’s a game changer for many businesses. Before making any investment, you need to think long and hard about whether your prospective investment is subject to Internet disruption and,
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#17: Select securities with a higher expected return than the market If you want to beat the market, you need to have a clear understanding of what drives market returns. Generally speaking, you can expect the returns of the the S&P 500 to be closely correlated with the growth of corporate earnings. Corporate earnings in turn are closely tied to GDP growth. After all, per Buffett, you can’t expect a component part – corporate earnings – to indefinitely grow at a faster rate than the aggregate to which they belong – the overall economy. You can provide your own estimates, but assuming that real GDP growth averages 3% and that inflation is at 3%, your would get a 6% return. Add in 1.5% for dividends and you are 7.5%. If you are expecting more than this, then you need to provide and defend your assumptions. Is the market’s return on equity closer to the high end or the low end of its historic average? Are multiples of earnings high of low? What are your expectations for interest rates going forward? These all play a roll in setting expectations. What is the point of this exercise if you are trying to
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By Greg Speicher #13: Use a good filter with your search strategy When Bill Ackman was recently interviewed on Bloomberg Television, he was asked if he was interested in Hewlett Packard given its recent large sell-off. Ackman commented, “One of the things I learned a lot earlier in my career is to do a calculation which I call return on invested brain damage, which is before I make an investment which requires brain damage, or a lot of work and energy, I figure out how much money I can make. The higher the brain damage, the higher the profit has to be to justify it.” Ackman does not want to spend time on an idea if the payoff isn’t large, particularly if it is a complex idea requiring extensive analysis. Ackman also said, “I have the fairly quaint notion that the value of anything is the present value of the cash you can take out of the business over its life.” So, if a business is not predictable, he will take a pass and look for something that is. Buffett has similar filters before he will get interested in an idea. First, he’s looking for “seven footers”. Making an analogy to putting together
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By Greg Speicher #10: Focus on maximizing portfolio earnings ten years out In his 1991 shareholder letter, Warren Buffett wrote that investors should focus on building a portfolio that maximizes look-through earnings ten years into the future. Look-through earnings are your share of the earnings of a company whose stock you own. For example, if you owned 100 shares of Acme Corp. and it earned $1 per share this year, your look through earnings this year would be $100. Focusing on future look-through earnings is rational because your success as a long-term focused investor will be driven primarily by the economic performance, i.e. future earnings, of the businesses in which you invest. As Buffett points out, this will force you to think about the long-term prospects of the business, rather than where the company’s stock will be in twelve months. It will also cause you to focus on a number of other important questions about the company’s earnings. What portion of the earnings comprise free cash versus earnings that need to be re-invested to either maintain or grow the company? What are the prospects for re-investing the company’s earnings and at what rate of return? Is the management skilled at capital allocation and
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By: Greg Speicher #7: Avoid Hot Industries with No Barriers to Entry A Lex column in yesterday’s Financial Times, “Solar: the sun also sets”, is yet another stark reminder that a growing industry does not necessarily make a good investment. The solar panel industry is expanding rapidly as measured by worldwide megawatts of solar panel shipments. By that measure, business is up approximately sixteen fold in the past five years. In stark contrast, solar energy stocks, as measured by the Mac Solar Energy Index, are badly trailing the S&P 500. The problem is overcapacity and cheap products coming out of China. One casualty, Evergreen Solar, just filed for bankruptcy protection. Investors are easily enamored with hot industries with seemingly unlimited growth opportunities. However, in many cases, the businesses in these industries do not have any durable competitive advantages. Competitors pile in and drive margins into the ground. Society may be the ultimate beneficiary if competition drives down prices far enough for solar power to compete with fossil fuels, particularly if it can be done without subsidies. Investors in this sector may not be so lucky. Steer clear of hot industries with no barriers to entry. Don’t invest in a business without a
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By: Greg Speicher #4 Go Back to Buffett In his classic book Mastery (which I highly recommend), George Leonard provides a road map to long-term success and mastery of your craft. It’s relevant to our subject because, if you want to consistently beat the market, you must pursue investment mastery. The first of Leonard’s five keys to mastery is instruction. Leonard states, “For mastering most skills, there’s nothing better than being in the hands of a master teacher.” There is none better than Buffett: not only is he the best investor of our era but also he has shared an enormous amount of his thinking. My advice is to carefully go back and read or re-read all Buffett’s output. Study it like a chemistry textbook. Study it like Eddie Lampert did. Take careful notes. Let it deeply inform your investment process. Start with the partnership letters and then work through all the Berkshire shareholder letters. Get a hold of the meeting notes from Outstanding Investor Digest going back to the 80’s. (They may be available through some good libraries. Order back copies if you have to.) They are pure gold. Move on to the speeches and videos. The 1991 speech at Notre Dame is a
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