Business

Berkshire Hathaway: A Great company With With 52% Upside – Whitney Tilson

Berkshire Hathaway: A Safe, High-Quality, Growing Company With 52% Upside Over the Next Year (and Only 8% Downside Thanks to the Share Repurchase Offer). A presentation by Whitney Tilson – updated.

Get The Full Warren Buffett Series in PDF

Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

The Basics

  • Stock price (2/29/16): $202,555
    -$134.17 for B shares
  • Shares outstanding: 1.64 million
  • Market cap: $333 billion
  • Total assets (Q4 '15): $552 billion
  • Total equity (Q4 '15): $259 billion
  • Book value per share (Q4 '15): $155,501
  • Repurchase maximum price (1.2x book): $186,601
  • Downside to the Buffett repurchase put: 8%
  • P/B: 1.30x
  • Float (Q4 '15): $88 billion
  • Revenue: $211 billion
  • Berkshire Hathaway today is the 15th 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

Berkshire Hathaway: A Great company With With 52% Upside - Whitney Tilson

Berkshire's Culture Is Powerful and Unique: "A Seamless Web of Deserved Trust"

  • Berkshire operates via extreme decentralization: though it is one of the largest businesses in the world with approximately 340,000 employees, only 25 of them are at headquarters in Omaha
    - There is no general counsel or human resources department
  • "By the standards of the rest of the world, we overtrust. So far it has worked very well for us. Some would see it as weakness." – Charlie Munger, 5/14
  • "A lot of people think if you just had more process and more compliance — checks and double-checks and so forth — you could create a better result in the world. Well, Berkshire has had practically no process. We had hardly any internal auditing until they forced it on us. We just try to operate in a seamless web of deserved trust and be careful whom we trust." – Munger, 5/07
  • "We will have a problem of some sort at some time…300,000 people are not all going to behave properly all the time." – Warren Buffett, 5/14
  • "Behavioral scientists and psychologists have long contended that 'trust' is, to some degree, one of the most powerful forces within organizations. Mr. Munger and Mr. Buffett argue that with the right basic controls, finding trustworthy managers and giving them an enormous amount of leeway creates more value than if they are forced to constantly look over their shoulders at human resources departments and lawyers monitoring their every move." – NY Times, 5/5/14

Earnings of Non-Insurance Businesses Have Soared

Berkshire Hathaway Whitney Tilson

Berkshire Is Becoming Less of an Investment Company and More of an Operating Business

Berkshire Hathaway Whitney Tilson

Buffett Continues to Put Berkshire's Cash to Work at a Healthy Clip

Berkshire Hathaway Whitney Tilson

  • Buffett is doing a good job investing – the latest examples being Precision Castparts and Kraft – but the cash is coming in so fast (a high-class problem)!
    - Berkshire will generate free cash flow equal to the $32 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

Buffett Invested Large Amounts of Capital During the Downturn in 2008

Berkshire Hathaway Whitney Tilson

Valuing Berkshire Hathaway

"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 Hathaway'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

Berkshire Hathaway Whitney Tilson

"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

See full slides below.