I was reading Whitney Tilson’s recent presentation on his valuation of Berkshire Hathaway which he pegged at $178,000/share. His report made me think about how I would value Berkshite Hathaway if I wanted to buy the entire company. Tilson’s approach uses a 10x pre-tax earnings multiple on Berkshire’s wholly-owned subsidiaries which is $80,000 ($8,000 x 10x) plus the investments per share ($98,000) to arrive at his valuation.
One issue I have with Tilson’s method is that he ignores the right side of Berkshire’s balance sheet and is treating the float as if Berkshire owned it, which they do not. As of 12/31/11, Berkshire had $63.8 billion of losses and loss adjustment expenses as liabilities on its balance sheet. It also had notes payable and other borrowings in its insurance/other segment of $13.8 billion. The total of these items is $77.6 billion which is about $47,000 per share. Netting these out of the investments per share results in about $51,000 of net investments per share. This would reduce the value per share to $131,000 per share.
How would you value Berkshire Hathaway? Berkshire’s Class A shares closed at $117,434/share on Friday.
two methods…(1) NAV calc where you basically take asset less liab and revalue the underlying assets based on their earnings potential, having 70+ subs means you won’t be able to do this properly but NAV calcs are always inaccurate from that perspective
afterwards, you add back the value of the float…the NAV calc explicitely accounts fort he right side…but there is value to the float they have…also,you have to place a value on the derivativies which takes a bit of judgement…
Other way is to treat it on a basic earnings power basis adjusted for non earnings pick ups…looks like Tilson did this method more so than the NAV way…
Given that BRK normally trades around its BV, doing the NAV calculation is more precise…
So how much of the float do you add back?
The way I would value Berkshire is PV of FCFF + Cash + Investments - Debt - Float…but I assumed that the float didn’t belong to them.
the float should be reserves+unearned premiums…how you value it depends on the underwriting profitability and returns that can be generated…conservative assumption may be 2% so you capitalize that
how do you determine the FCFF of BRK? that is 70 subs so its pretty much eyeball method
dont’ forget about the derivatives that are m2m at a lost at the moment…
BRK technically speaking is one of the hardest types of companies to value due to its conglomerate structure and insurance related businesses…
if you’re going to do FCFF, you can’t properly evaluate the insurance side as insurance is not normally valued strictly on FCFF, actually, nobody i have seen values insurance that way…FCFF as applied to insurance makes almost no sense…
buffet breaks out the 3 divisions seperately, so you can try and do a sum of the parts with FCFF+expected BV of the insurance+others…