Berkshire Hathaway Update
Berkshire Hathaway released its second quarter results on Friday. The numbers were within our expectations. Valor is extremely concentrated in Berkshire Hathaway, making up around a third of our clients portfolios on average. With around 80 different businesses under the banner, there is significant diversification within the stock. We believe that Berkshire is the best company in the world by a very large margin. It makes sense to have a far larger position in Berkshire than any other business due to the extraordinary cash that it generates.
Here are the numbers in summary:
Cash from operations for 6 months: $15.3 Billion giving us a yearly figure estimate of around $33 Billion (assuming railroad freight recovers somewhat and no major insurance losses)
Cash in the bank (Short term Treasuries): $61.8 Billion
Look through cash flows from listed equities on top of dividends (approximately): $6billion
Maintenance capital expenditure (approximately): $6billion
Market Cap: $360 Billion
Owners earnings yield of approximately: $33/($360-$62) = 11%
This is extremely rough and not meant to be accurate to more than a few billion or so. Whether you are getting a 10% or 12% yield is immaterial and not able to be calculated accurately anyway. Even Buffett doesn’t know what cash-flow will come from insurance, railroad, Precision Cast Parts or energy earnings in the next 12 months to any degree of accuracy. The key point is that you are getting roughly an 11% owners earning yield, not a 1.5% yield from a government bond (let alone a negative yield which is very common).
Those that are investing in the lowest government bond yields in economic history may be patting themselves on the back for good guess work for the last 12 months performance, however the next decade may be far less kind.
If you view Berkshire with a book value focus (still rational, although becoming far less relevant over time), we calculate that the book value at the end of the second quarter was $107.30 for the “B” shares. This gives a buyback figure that Warren would be “delighted” to repurchase at 120% of book value of around $128.80. This was the figure for 30th June and if you calculate that growing at around 11% per annum, then the figure for August is very close to $130.
So you have the worlds best company with an approximate 11% owners earning yield with roughly an 11% downside before the buyback price. This is why we are so comfortable with our very large holding.
If the share price dropped to the rough $130 buyback price, we would not be concerned as it would be very beneficial to our holdings over time. If this doesn’t happen, the increasing gap between the book value and growth in cash-flows leads us to expect that over the next few years, it is likely that Buffett increases the buyback to a higher percentage of book value. In a low return world with most other stocks offering such poor value, Buffett might be looking at his own stock and thinking that buying back at a slightly increased number is the best use for the cash. Perhaps he has another elephant in his sights that we don’t know about?