What's in a Berkshire Hathaway Share, Anyway?

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Includes: BRK.A, BRK.B
by: Analytical Chemist

Warren Buffett is an avid customer of NetJets, a Berkshire Hathway subsidiary (NYSE:BRK.A). We can only speculate whether he is as avid a customer of Fruit of the Loom. We are, however, aware that Warren Buffett is a tremendously successful investor. He turned a purchase of then-textile manufacturer Berkshire Hathaway in 1964 into what is today a large conglomerate; owning businesses from insurance companies to a railroad. Berkshire is currently the 8th most valuable company in the United States (nestled just behind Google (NASDAQ:GOOG) and ahead of Wal-Mart (NYSE:WMT)).

Berkshire is no longer a textile manufacturer, it completely exited that business in 1985. Starting in 1967 with the purchase of National Indemnity, Berkshire began a series of acquisitions. Many have been insurance companies, and many people think of Berkshire primarily as an insurer. But Warren Buffett has shown a wide and varying array of corporate interests, to the point that Berkshire now owns such diverse businesses as a regulated electric and gas utility (MidAmerican), the leading U.S. manufactured homes maker (Clayton Homes), apparel maker Fruit of the Loom, and a fractional aircraft ownership company (NetJets). With so many industries represented, how can an average investor evaluate Berkshire as a stock? I’ve pored over Berkshire’s annual report to bring you this table. It breaks down how much one share of Berkshire represents of each of the holding company's major businesses.

Berkshire's largest segment by revenues is its “Manufacturing, Service, and Retailing” segment. The largest component of this is Marmon, which is itself a diversified company with 130 different businesses. Though Berkshire is only a partial owner of this company, Berkshire will complete the purchase of Marmon from the Pritzker family in 2013 or 2014. The next largest is McLane, a grocery and food service supply chain company with $32 billion in sales. Third in this segment is Iscar, a manufacturer of cutting tools for metalworking. Other companies in this segment include Acme Brick, MiTek, and Shaw. Total earnings in this segment have increased 8% since 2008, after a down year in 2009.

The segment of Berkshire’s business most commonly associated with Berkshire is insurance. Berkshire actually owns several insurance companies, including Berkshire Hathaway Reinsurance Group, General Re, and GEICO. Insurance companies make money in two ways: First, in collecting more money in premiums than they pay out in claims; and second, by the use of the premiums already collected but not yet paid out (called the “float”). These companies have run a net underwriting profit for 8 consecutive years, including $2 billion in 2010 alone. In addition, they provide Berkshire with a current float of $65.8 billion.

Berkshire Hathaway owns 89.8% of MidAmerican Energy, a regulated utility serving 2.4 million customers in states such as Iowa, Wyoming, and Utah. MidAmerican has continually increased its operating efficiency, has kept costs in Iowa constant since 1999, and has poured $5.4 billion into wind energy, making it the largest generated of wind power of any regulated electric utility in the U.S. Earnings of MidAmerican grew 5.6% in 2010 over 2009.

Burlington Northern Santa Fe is Berkshire’s most recent purchase, acquired in February 2010. While seemingly a staid business, rail volumes have been increasing, and rail transport remains far more efficient than trucking for inter-city shipping. Some 42% of America’s inter-city shipping volumes goes by rail, and BNSF has the largest share of this at 28%. BNSF revenues increased 20% in 2010, and earnings increased by 43%. Growth is unlikely to continue at anywhere near this rate, but BNSF appears to be a company that will throw off significant cash flows to its parent company for reallocation and to better enhance shareholder value.

Ultimately, the advantage of a conglomerate is that cash flows generated from every subsidiary business can be allocated wherever the greatest return will be. Patience is required in this approach, and Warren Buffet has certainly shown patience. His cash hoard allowed him to extend financing to General Electric (NYSE:GE), Goldman Sachs (NYSE:GS), and Swiss Re (OTC:SWCEY) when no other lenders were willing and able. Buffett and Berkshire received excellent terms, and shareholders have well benefitted.

Berkshire Hathaway continues to keep a large $38 billion war chest of cash for future purchases; it is fun speculation to identify companies that might be next on the list of large acquisitions (how about Illinois Tool Works (NYSE:ITW)?). Additionally, one of Berkshire’s advantages is the ability to deploy cash into the stock market when few or no appealing purchases of whole companies are available. Berkshire currently has $55 billion in stocks; this represents over 28% of the market capitalization of Berkshire. With the $38 billion in cash and short term securities, over 46% of the market capitalization of Berkshire is in relatively liquid investments. And if we subtract that 46% of the market cap, we find that Berkshire trades at a P/E under 8. With the S&P 500 trading at a trailing P/E over 17, this is an unbelievable deal and a strong buy.

Per Class A Share

Per Class B Share

Insurance

Premiums

18,657.02

12.44

Earnings

1,221.39

0.81

Investment Income

3,121.74

2.08

Float

39,943.69

26.63

Manufacturing, Service, and Retailing

Revenues

40,415.75

26.94

Net earnings

1,493.82

1.00

MidAmerican Energy

Revenues

6,859.33

4.57

Earnings

686.24

0.46

BNSF

Revenues

10,223.77

6.82

Earnings

1,492.00

0.99

Finance and Financial Products

Total Revenues

2,587.19

1.72

Profit

418.05

0.28

Total Revenues

78,743.05

52.50

Total Earnings

8,433.25

5.62

Investments

American Express (NYSE:AXP)

3,957.41

2.64

BYD Company (NYSE:BYD)

583.72

0.39

Coca-Cola (NYSE:KO)

7,818.61

5.21

ConocoPhillips (NYSE:COP)

1,382.08

0.92

Johnson & Johnson (NYSE:JNJ)

1,661.18

1.11

Kraft (KFT)

1,857.44

1.24

Munich Re

1,836.34

1.22

POSCO (NYSE:PKX)

991.96

0.66

Procter & Gamble (NYSE:PG)

2,741.26

1.83

Sanofi-Aventis (NYSE:SNY)

1,101.72

0.73

Tesco (NASDAQ:TESO)

975.66

0.65

US Bancorp (NYSE:USB)

1,271.71

0.85

Wal-Mart (WMT)

1,230.95

0.82

Wells Fargo (NYSE:WFC)

6,871.12

4.58

Others

3,007.06

2.00

Total Stocks

37,288.22

24.86

Cash

23,056.57

15.37

Click to enlarge


Disclosure: I am long BRK.B.