Berkshire Hathaway Worth $250 Billon Based on Look-Through Earnings

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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 as dividends. That leaves $4.5 billion that Berkshire will likely earn in 2012 that will not be reported. That is substantial. Buffett wrote in his 2010 letter that he estimated Berkshire’s normal after-tax earnings power to be $12 billion.

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Berkshire’s total 2012 after-tax earnings – including look-through earnings – could be as high as $16.5 billion, or more.

One other detail should be mentioned. Years ago, when Buffett would provide a calculation of look-through earnings in his shareholder letters, he would deduct an amount equal to the additional taxes that Berkshire would have paid if all owner earnings were paid as dividends. In my judgment, that is overly conservative. Buffett is generally a very long-term holder of common stocks. The present value of the deferred taxes on the capital gains that will be derived from these retained earnings will be far less than the taxes due if these earnings were distributed as dividends in the years they were earned. Nevertheless, some adjustment should be made to any estimate of intrinsic value based on look-through earnings to account for Berkshire’s deferred tax liability.

Finally, my estimate is largely based on consensus 2012 earnings estimates for Berkshire common stock investments.

Berkshire-Hathaway-Holdings

By Greg Speicher

Using at 15x multiple the stock could be worth $250 billion. The company currently trades at a market cap of $200 billion.

GregSpeicher.com was founded in 2009 by Greg Speicher. Greg is a private investor who has been investing, studying and writing about the the markets since 2006. Greg built several successful offline businesses including an Inc. 500 Company which he co-founded. Buffett stated, “I am a better investor because I am a businessman.” It is in that spirit that Greg brings his years of business experience to investing. ?? Greg received his B.A. in philosophy Magna Cum Laude from the University of St. Thomas in Rome, Italy, and attended the MBA Program at the Wharton School of the University of Pennsylvania. He also studied with Bruce Greenwald at the Value Investing Executive Education Course at Columbia University.
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