{"id":228176,"date":"2010-01-25T13:30:00","date_gmt":"2010-01-25T18:30:00","guid":{"rendered":"tag:blogger.com,1999:blog-3087194156628161158.post-5909639125554522723"},"modified":"2010-01-25T13:33:31","modified_gmt":"2010-01-25T18:33:31","slug":"motley-fool-booking-value-in-berkshire","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/228176","title":{"rendered":"MOTLEY FOOL: Booking Value in Berkshire"},"content":{"rendered":"

By Stephen Mauzy, CFA <\/span><\/p>\n

January 25, 2010<\/span> |<\/span> <\/p>\n

Is it an insurance company, a holding company, a hedge fund, a conglomerate, a closed-end mutual fund, private equity? The answer depends on who you ask and when. The annual report says “holding company.” The SEC files it under “fire, marine, and causality insurance.” I use conglomerate in my vernacular, but I’m just a casual observer.<\/p>\n

I’m speaking of Berkshire Hathaway<\/strong> (NYSE: BRK-A<\/a>)<\/span>, of course, which, as most of us know, comprises a lot of moving parts. If you count everything — complete ownership, partial ownership, and passive ownership — you’re looking at least 80 different parts covering nearly as many different businesses. Berkshire covers a wide swath of the US, and increasingly world, economy.<\/p>\n

Book smarts
<\/strong>I’ll admit that I’ve always been intimidated by Berkshire. I’ve never been sure how to value<\/a> it — so much size, so much scope, so much Warren Buffett, so much opportunity for me to screw it up. Other analysts, many I’m sure possessing greater insight and sharper number-crunching skills than I do, are less reserve. Many of them are more than willing to proffer an opinion.<\/p>\n

Many of these opinions are centered on book value<\/a>, which I’ve always found a little odd.<\/p>\n

Rarely do I hear an analyst lead an argument with book value when opining about lesser companies. More often, the analysis leads with P\/E multiples, profit margins, earnings trends, revenue growth<\/a>, new product development. Book value is often a tertiary mention, if it’s mentioned at all.<\/p>\n

But with Berkshire, it’s different: Barron’s Jan. 11, 2010 edition featured a Berkshire-centric article, which included a very prominent book-value-centric opinion: “After rising just 3% in 2009, the stock, which is way below its late 2007 peak of $147,000, fetches a mere 1.2 times our estimate of the company’s year-end 2009 book value of $84,500 a share — compared with an average 1.65 times in the past decade. The stock rarely has been cheaper, relative to book value, in 15 years.”<\/p>\n

This focus on book value is understandable. After all, you could label Berkshire a financial company, or as the SEC says “a fire, marine, and casualty insurer.” What’s more, Berkshire has posted a remarkable streak of adding assets that generate persistently higher earnings, which is more than you can say about Dell<\/strong> (Nasdaq: DELL<\/a>)<\/span>, which trades at a rich 5.3 multiple of book value, or American International Group<\/strong> (NYSE: AIG<\/a>)<\/span>, which trades at a well-deserved 0.7 multiple, or even perhaps Blackstone Group<\/strong> (NYSE: BX<\/a>)<\/span>, which trades at a comparable multiple to Berkshire, yet has nowhere near Berkshire’s history nor its record of earnings persistence.<\/p>\n

Value and potential
<\/strong>But is a low price-to-book value a precursor to a higher share price, as Barron’s suggest? In 1995, Berkshire’s average price-to-book value multiple was 2.6, more than double what it is today. Berkshire was a much smaller, much more nimble entity then. In 1995, total revenue was a mere $4.5 billion, producing net income of $795 million. By 2000, total revenue had swelled to $34.9 billion, while EPS had more than trebled to $3.3 billion.<\/p>\n

You could easily argue Berkshire was worthy of the premium, particularly when considering the stock price — the most important measure for shareholders. Berkshire’s shares closed 1995 at $32,100 and then more than doubled over the subsequent five years to close 2000 at $72,400.<\/p>\n

But the book-value premium eroded along the way. The average book-value multiple was only 1.5 in 2000, a much lower multiple compared to 1995.<\/p>\n

So how would Berkshire shareholders fare over the subsequent five years? One would think admirably, given the implied value in the company’s price-to-book value multiple. In 2005, total revenue grew to $81.7 million, while net income increased to $8.5 billion. Impressive, to be sure, but the share price failed to maintain the torrid pace, increasing only to $88,620.<\/p>\n

Today, Berkshire’s shares trade around $100,000 each and, according to Barron’s, sport a 1.2 price multiple to book value.<\/p>\n

Buy, sell, hold, or consider the alternatives<\/strong>
Does that mean Berkshire is undervalued? The price doubled in five years from a high book-value multiple in 1995. The stock nearly doubled from a low book-value multiple in 2005 before trading lower to its current 15% premium. <\/p>\n

As we’ve learned over the years, it’s never a good idea to bet against Warren Buffett, but it is a good idea to be grounded in reality<\/a>. Reality says this isn’t 1995 when Berkshire’s book value per share was around $14,000. Today’s it’s around $84,000 a share. That’s a lot more girth, a lot more notoriety, and a lot more potential for diseconomies of scale.<\/p>\n

That said, Berkshire could be undervalued. If you are unsure (like me), or think Berkshire’s overvalued and that book-value is still important, here are two holding companies<\/a> that might be worthwhile surrogates: WR Berkley<\/strong> (NYSE: WRB<\/a>)<\/span>, with a price-to-book value multiple of 1.1, and Leucadia National<\/strong> (NYSE: LUK<\/a>)<\/span>, with a multiple of 1. Both remind me of Berkshire circa 1980: They are little less unwieldy, a little easier to analyze, and a lot less dependent upon a famous CEO.<\/p>\n

What’s more, both have easily outpaced Berkshire in the all-important measure of price appreciation over the past decade.<\/p>\n

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