$ in billions (click to enlarge)
Berkshire Hathaway is getting closer to full valuation, especially with the conglomerate discount. This sum of the parts valuation makes a lot of assumptions and that is to be expected - Warren Buffett and Charlie Munger don't even agree on the exact valuation number. We're looking at the numbers through the June 30, 2013 filings.
1. Berkshire Hathaway June 30, 2013 10-Q - CIK 0001067983, IRS ID 47-0813844
2. Burlington Northern June 30, 2013 10-Q - CIK 0000934612, IRS ID 27-1754839
3. MidAmerican June 30, 2013 10-Q - CIK 0001081316, IRS ID 94-2213782
Preliminary Sub Totals
Add: Operating Businesses: 187.9b
Add: *Investments: 149.9b (gets reduced to prevent negative slices)
Add: *Excess Cash: 21.6b (gets eliminated to prevent negative slices)
Add: *Interest Free Loan: 10b (gets eliminated to prevent negative slices)
Less: Holding Company Debt: 13.3b
Less: Derivative Contract Liabilities: 6.2b
Less: Float Liability: 25b (1/3rd of 75b)
Less: Upcoming NV Energy Inc acquisition by MidAmerican: 5.6b
Equals: Intrinsic Value: Around 319.3b
Preliminary Slice Summaries (in billions - bold slices do not tie to the pie chart)
Interest Free Loan
Holding Company Debt
NV Energy Liability
Todd & Ted
GS & GE
*The bold slices above do not tie to the pie chart but they show what things look like before we remove negative slices
(13.3b) Holding Company Debt
We'll take this out of the cash piece of the pie.
(6.2b) Derivative Contract Liabilities
This liability lowers the value of investments so we'll take it out of the investment part of the pie. Specifically, the fixed maturities.
(25b) Float Liability
This will wipe out the 10b interest free loan piece and the remaining 15b will come out of cash and fixed maturities.
(5.6b) Upcoming NV Energy Inc acquisition by MidAmerican
We take this out of fixed maturities.
Adjusted Sub Totals (after removing liabilities to prevent negative slices)
Add: Operating Businesses: 187.9b
Add: *Investments: 131.4b (slices changed to prevent negative slices)
Equals: Intrinsic Value: Around 319.3b
Adjusted Slice Summaries (in billions - these tie to the pie chart but the bold slice changed)
Todd & Ted
GS & GE
61.5b Burlington Northern (BNSF)
Berkshire owns 89% of the company.
We'll use the Christopher Owens logic for valuation:
For valuation purposes, the author assumes that MA would distribute 75% of net income as dividends and trade in line with utility peers at a 5% yield.
A little algebra shows why this implies a valuation of 15x earnings:
x = valuation
.05x = .75*earnings
x = .75*earnings/.05
x = 15*earnings
Berkshire's 10-Q tells us we have six month net earnings attributable to Berkshire of 673m. Annualizing these earnings, we have a valuation of about 20.2b (673m*2*15 = 20,190m).
Having recently announced a planned 5.6b acquisition of NV Energy Inc, this slice of the pie is growing. We'll also add in the 5.6b for the upcoming NV Energy Inc acquisition and take that 5.6b out of cash. This brings the total to 25.8b.
Also, the MidAmerican Jun 30 10-Q ties back to the Berkshire 10-Q once we add in equity income. In other words, the MidAmerican 10-Q shows 948m in income before income tax expense and equity income. It then shows 40m in equity income. This ties to the Note 19 business segment data section on the Berkshire 10-Q where we see 988m in earnings before income taxes for MidAmerican.
Buffett valued this position at 12.6b in his 2012 letter to shareholders.
Iscar is valued at 10b based on the price Berkshire recently paid to acquire the last 20% of the company.
For now we'll stay with the 10b figure Christopher Owens came up with. It is unfortunate that big positions like Iscar and Lubrizol are not broken out separately in the 10-Q business segment data note. After all, McLane is itemized here and its earnings before income taxes are much smaller than Iscar's and Lubrizol's.
The author arbitrarily assigns a multiple of 8x pretax earnings. Per the latest 10-Q, McLane earned 246m pretax in Q1 2013. 246*2*8 = 3.9b.
19.6b Other Businesses
The author arbitrarily assigns a multiple of 10x pretax earnings. Per the latest 10-Q, Other businesses earned 2,474m pre tax in the first six months of 2013. 2,474*2*8 = 39.6b. Note that this includes Lubrizol and Iscar so we need to back out 10b for each to get a total of 19.6b.
Per the Christopher Owens Berkshire article, Finance is worth about 6.8 billion.
35b Insurance Operations (non-Float)
Per GEICO Corporate Information, the company has over 11 million auto policyholders. Buffett said each new policyholder adds $1,500 of intrinsic value to the company. We'll value the existing GEICO policyholders at 16.5b.
General Re, BHRG and BH Primary also bring significant value to the company. People like Ajit Jain don't show up in book value.
0 Interest Free Loan
When valuing Wesco, Charlie Munger used to take 20% of the deferred tax liability and add it back in as an interest free loan. We'll do the same type of thing - 20% of Berkshire's 49.5b deferred tax is about 10b.
This slice would have been 10b but we're using it to wipe out 10b of the 25b float liability. The consequence is that the interest free loan slice is gone and the float liability is down to 15b.
0 Excess Cash
Here is how Christopher Owens calculated cash and equivalents in his December article:
As of their latest 10-Q, Berkshire held cash and cash equivalents of $47.8 billion. $41.8 billion of this was held at insurance subsidiaries. $4.2 billion was held in the railroads and utilities segment, much of which will be swept as a dividend to the holding company at year end. The author estimates free cash flow approximates $13 billion in 2012, implying year-end cash balances of $51 billion.
Using newer numbers, we have 31.2b in cash under Insurance and Other per the Q2 2013 balance sheet. It also shows 2.6b under Railroad, Utilities and Energy. We'll stay with the 13b cash flow estimate giving us a total of 31.2 minus 2.6 plus 13 or 41.6b. If the company continues to keep about 20b on hand then that leaves about 21.6b for shareholders.
We're taking the (13.3b) Holding Company Debt out of this slice. This brings the slice down to 8.3b.
We took 10b of the 25b float liability from the interest free loan. We'll take another 8.3b from this cash slice meaning the cash slice is gone and the float liability is down to 6.7b.
Fixed Securities are found in the latest 10-Q under Note 4 - Investments in fixed maturity securities. The fair value is 29.5b and there are unrealized gains of 2.5b. A 35% tax rate on the unrealized gains brings the total down to 28.6b.
Looking at Note 5 - Investments in equity securities on the latest 10-Q, we see the fair value of investments in equity securities is 103.3b. These have unrealized gains of 47.8b and a 35% tax rate on these gains is 16.7b. This brings the equity securities down to 86.6b. The latest 10-Q says that approximately 58% of the fair value of equity securities was concentrated within four companies. These four companies are Wells Fargo (WFC), Coca-Cola (KO), International Business Machines (IBM) and American Express (AXP). We could use this information to make sure these slices are sized accordingly if there were no tax issues. However, Buffett is using his 58% before taxes on gains are considered. Rather than look at taxes for the stocks individually, we'll go ahead and overstate the slices for Coca-Cola and American Express and understate the slice for remaining stocks. The 13-F filings can be helpful although they don't match up 100% for a variety of reasons. Still, it is probably simplest to just use the 13-F based June 30, 2013 weightings from GuruFocus for the big positions. Again, this will overstate positions like Coca-Cola and American Express with big gains but things would get messy otherwise.
Hybrid securities are a special case. It looks like the company is using conservative accounting and showing them at undervalued levels. As such, we won't apply taxes on the gains here.
Note 6 - Other investments on the 10-Q shows these positions have a carrying value of 34.7b and that is what we will use.
10.1b Fixed Securities
As said above, this slice starts out as 28.6b after taxes from unrealized gains.
We already took part of the float liability from the interest free loan and part from cash. We're taking the remaining 6.7b from this slice so that it is now down to 21.9b.
We're also taking the 6.2b derivative liability from this slice so it is now down to 15.7b.
Finally, we're taking 5.6b due to the NV Energy acquisition so this slice is down to 10.1b.
19.1b Wells Fargo (WFC)
Wells Fargo is now Berkshire's biggest equity position.
Berkshire has been holding Coca-Cola for a long time so there are tax implications here.
13b International Business Machines (IBM)
IBM is a fairly new position.
11.3b American Express (AXP)
American Express is another longtime favorite of Berkshire's with tax implications.
12b Todd and Tedd
15.2b Other Stocks
Again, this slice is under-represented due to tax issues. Procter & Gamble (PG), Wal-Mart (WMT), U.S. Bancorp (USB), Phillips 66 (PSX), Moody's (MCO) and ConocoPhillips (COP) are a big part of this slice.
Again, this is conservatively valued at 34.7b on the latest 10-Q (22.4b excluding Heinz).
My Berkshire Hathaway's Hybrid Investments Are A Competitive Advantage article gives more details about these positions. Excluding Heinz, it came to a total of 23.8b. We'll take the difference of 1.4b off the Bank of America (BAC) and Wrigley pieces (700m off of each).
Note 15 - Fair value measurements from the latest 10-Q tells us we have the following:
17.2b Other investments carried at fair value
17.5b Other investments carried at cost
This means we have 5.2b worth of these investments carried at cost along with the 12.3b Heinz position carried at cost.
1.5b Goldman Sachs (GS)
The Goldman Sachs preferred stock has been redeemed but these warrants are still outstanding.
.2b General Electric (GE)
This tiny warrants slice is too small to show on its own so we merge it with the Goldman Sachs warrants in the pie chart.
This is carried at cost on the latest 10-Q.
10.9b Bank of America (BAC)
The Bank of America investment turned out to be a home run.
Wrigley is a long time favorite of Warren Buffett.
3b Dow Chemical (DOW)
It is beyond the scope of this article to add the convertible factor to this valuation.
YCharts says the market cap was 275.8b on June 28th which was the last trading day of the quarter.
At the time of this writing the market cap is a little higher.
At some point the company will lose two of the greatest investors of all time in Warren Buffett and Charlie Munger. However, the future is still bright given the way they have positioned things. BNSF, MidAmerican and many other parts of the company should continue to flourish.
Taking every detail down to the individual slice level is beyond the scope of this article. There are some issues with things like double counting and taxes. For example, the deferred taxes are 49.5b but 16.5b of this comes from BNSF which was already fully valued based on the UNP market cap. Similarly, MidAmerican was already fully valued but it contributed 8.2b of the 49.5b deferred taxes. The low 13b cash flow figure and the low hybrid investment figures make up for things like this and it gets too messy if we take everything down to the individual slice level.
I am grateful to many writers for direct and indirect help with this article. Christopher Owens set things in motion in December of 2012 when his Berkshire article provided a logical template for future sum of the parts valuation articles. Greg Feirman looked over the hybrid investments with me. It was nice having insurance discussions with Martin Vlcek.
Additional disclosure: Any material in this article should not be relied on as a formal investment recommendation.