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Berkshire Hathaway BERKSHIRE HATHAWAY Background, Analysis, and Valuation FEBRUARY 28, 2010 This report provides background information and analysis of Berkshire Hathaway based on data including the recently released 2009 Annual Report and Warren Buffett’s annual letter to shareholders. Contrary to a common misconception, Berkshire Hathaway is not a closed end mutual fund run exclusively by Warren Buffett. The company is a large and growing conglomerate made up of subsidiaries with leading positions in many industries. A proper understanding of Berkshire Hathaway requires comprehension of the subsidiaries, with a particular focus on the insurance operations. Intrinsic value is impossible to estimate precisely but ranges of value are provided based on multiple models. We estimate the intrinsic value of Berkshire Hathaway stock at between $129,000 and $165,000 per Class A share or between $86 and $110 per Class B share. The Rational Walk Ravi Nagarajan www.rationalwalk.com [email protected] © Copyright 2010 by Ravi Nagarajan. The information contained herein is based on sources considered to be reliable, but no guarantees are made regarding accuracy. At the date of this report, the author owned shares of Berkshire Hathaway and may either buy or sell shares at any time in the future. This report is not investment advice nor is it a solicitation to buy or sell securities. The author is not a registered investment advisor. This publication may not be photocopied, electronically redistributed, or quoted without written permission from the author. Table of Contents Executive Summary ....................................................................................................................................... 1 From Cigar Butts to Business Supermodels .................................................................................................. 3 Warren Buffett’s Early Investment Philosophy......................................................................................... 3 From Cigar Butts to Insurance .................................................................................................................. 4 See’s Candies: The Turning Point ............................................................................................................. 5 Valuation Approach ...................................................................................................................................... 7 Insurance Subsidiaries .................................................................................................................................. 9 The Benefits and Perils of Float ................................................................................................................ 9 Float Based Valuation Principles ............................................................................................................. 11 GEICO: The Auto Insurance Powerhouse ............................................................................................... 12 General Re: It’s Finally “Fixed” ............................................................................................................... 14 Berkshire Hathaway Reinsurance: “There isn’t anyone like Ajit” .......................................................... 17 Berkshire Hathaway Primary Group ....................................................................................................... 19 Consolidated Insurance Group Data and Projections ............................................................................. 21 Insurance Subsidiaries Valuation ............................................................................................................ 23 Utilities and Energy ..................................................................................................................................... 26 Earnings Summary: 2003 to 2009 .......................................................................................................... 28 Utility and Energy Valuation ................................................................................................................... 29 Finance and Financial Products ................................................................................................................... 31 Clayton Homes: The Survivor ................................................................................................................. 31 CORT and XTRA ....................................................................................................................................... 33 Other Activities ....................................................................................................................................... 33 Finance and Financial Products Valuation .............................................................................................. 34 Manufacturing, Service, and Retailing ........................................................................................................ 35 Taking a Long Term View: 1999 to 2009 ................................................................................................ 36 Marmon .................................................................................................................................................. 37 McLane Company ................................................................................................................................... 38 The Rational Walk Ravi Nagarajan www.rationalwalk.com [email protected] © Copyright 2010 by Ravi Nagarajan. The information contained herein is based on sources considered to be reliable, but no guarantees are made regarding accuracy. At the date of this report, the author owned shares of Berkshire Hathaway and may either buy or sell shares at any time in the future. This report is not investment advice nor is it a solicitation to buy or sell securities. The author is not a registered investment advisor. This publication may not be photocopied, electronically redistributed, or quoted without written permission from the author. Shaw Industries ....................................................................................................................................... 39 Other Manufacturing .............................................................................................................................. 40 Other Service........................................................................................................................................... 41 Retailing .................................................................................................................................................. 43 Manufacturing, Service, and Retailing Valuation.................................................................................... 43 Berkshire Hathaway Valuation Summary ................................................................................................... 45 Alternative Valuation Approaches .............................................................................................................. 46 The “Two Column” Approach ................................................................................................................. 46 Multiple of Book Value Approach ........................................................................................................... 47 Q1 2010 Developments .............................................................................................................................. 50 Burlington Northern Acquisition ............................................................................................................. 50 Standard & Poor’s 500 Inclusion ............................................................................................................. 53 Management Succession Concerns ............................................................................................................ 54 Appendix 1: Further Reading ..................................................................................................................... 56 Appendix 2: 13-F Portfolio Positions .......................................................................................................... 61 Appendix 3: GEICO vs. Progressive ............................................................................................................ 63 Appendix 4: Berkshire’s Misunderstood Derivatives ................................................................................. 66 The Rational Walk Ravi Nagarajan www.rationalwalk.com [email protected] © Copyright 2010 by Ravi Nagarajan. The information contained herein is based on sources considered to be reliable, but no guarantees are made regarding accuracy. At the date of this report, the author owned shares of Berkshire Hathaway and may either buy or sell shares at any time in the future. This report is not investment advice nor is it a solicitation to buy or sell securities. The author is not a registered investment advisor. This publication may not be photocopied, electronically redistributed, or quoted without written permission from the author. P a g e | 1 Executive Summary Berkshire Hathaway has been the subject of a great deal of media attention in recent months. Berkshire’s recently completed acquisition of Burlington Northern Santa Fe, a highly unusual 50-for-1 stock split of the Class B shares, and Standard & Poor’s decision to add Berkshire to the S&P 500 Index
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