This is the second article in a series describing Berkshire Hathaway's business units. Part 1 described its insurance subsidiaries. Part 2 describes MidAmerican Energy.
Many investors view Berkshire Hathaway (BRK.A) as essentially a mutual fund run by Warren Buffett. Even on Seeking Alpha, most discussions of Berkshire focus on "What Berkshire Hathaway Bought this Quarter" and "Should you buy Bank of America since Berkshire did?" But Berkshire Hathaway is not a mutual fund and is much more than the sum of its investments. Berkshire Hathaway is more accurately viewed as a conglomerate.
Yes, Berkshire's investment portfolio is an important component of Berkshire's assets. And Warren Buffett's investing has been an important part of Berkshire Hathaway's historical growth and stock returns. But Buffett is more than an investor in common stock - he is an allocator of capital, and he prefers (recently, at least) to buy whole companies rather than a minority interest in a publicly traded company. To accurately determine a value for Berkshire stock, then, requires a more detailed analysis than simple computation of a price/earnings or price/book value ratio. It requires careful consideration of each of Berkshire's diverse businesses. In a previous article I discussed Berkshire's insurance subsidies; in this article I focus on its utilities and energy businesses.
Berkshire's utility and energy businesses combined for $11.3 billion in 2010 revenue, down 1.2% from 2009. Their net earnings (after taxes and interest) was $1.13 billion, up 5.6% from 2009, matching the annualized increase in earnings of 5.0% since 2006. This represents 8.5% of Berkshire sales and 8.7% of Berkshire earnings.
These businesses are organized under the MidAmerican Energy Holdings Company, of which Berkshire Hathaway owns about 90%. This unit has both domestic and international businesses, including PacifiCorp, an electric utility in 9 Western states; MidAmerican Energy Company, an electric company operating in 4 Midwestern states; two natural gas pipeline companies; and two electric distribution companies in the United Kingdom. Interestingly, this portion of the company also operates a real estate brokerage with just over $1 billion in annual sales and $42 million in earnings before income and taxes.
So how much is this portion of Berkshire worth? To determine this I examined several companies similar to MidAmerican Energy, including Dominion Resources (D), Exelon (EXC), NextEra Energy (NEE), FirstEnergy (FE), Sempra Energy (SRE), and National Grid (NGG). These companies have an average price to sales ratio of 1.4 ± 0.1, and an average price to earnings ratio of 12.9 ± 1.4. These figures are based on the closing price on September 21, 2011, and on 2010 sales and earnings—directly comparable to the 2010 numbers I gave for Berkshire.
Applying these ratios to Berkshire's energy and utilities division suggests that, based on sales data, the division would be valued around $15.8 billion. On an earnings basis, the division would be valued at around $14.6 billion. In other words, if the market valued Berkshire's energy and utilities division as it does the average of these other 6 similar utilities, it would be valued at approximately $15 billion. This corresponds to $6 per B share (the two estimates give a range of $5.90 - $6.40), or $9000 per A share (range of $8800 - $9600).
In a vacuum, these numbers are mere nuggets. Delicious, shiny nuggets, but not nearly a full meal. To evaluate Berkshire's Buffett lode, I will combine them with similar calculations for each of Berkshire's businesses. Next on the list is the railroad company Burlington Northern Santa Fe.
Disclosure: I am long BRK.B.