Thursday, March 16, 2006

Berkshire Hathaway (BRKA) Analysis Updated

In the previous articles ( links noted below ), we analyzed Berkshire Hathaway's annual earnings and its potential liquidation value.

In the article in January, we expected the liquidation value to be around 83,100 by the end of 2005 with more solid growth this year. Let us revisit the analysis and the factors for and against further appreciation in Berkshire's sharevalue.

Looking at the creativeacademics site, we get the following numbers.

current liquidation value: 83476
current conservative value: 112127
current cost of capital value: 123029
current optimistic value: 161427

The intrinsic value grew by 8.2% between 2005, 13.2% in 2004, 17% in 2003 and 13.5% in 2002.

The intrinsic value growth declined in 2005 compared the previous two years - does this mean the prospects for continued growth in intrinsic value are lower moving forward? Probably not as the hurricanes Katrina and Rita wreaked havoc this hurricane season. We would need to see further acquisitions for the IV to grow years down stream and an increase in equity investments in the large cap, international sectors.

Another factor not working in Berkshire favor is that the large cap value stocks are out of favor with the market at the moment. This is causing some very good buying opportunities. The small cap rally has lasted for a while and is likely continue this year. However, in general small caps are not as attractive from a valuation view point as large caps are at the moment. When the large caps come into favor, expect the rally to last four-five years with significant upside in share prices in the entire sector. analyzed the returns by large cap and small cap value, growth over the past eighty years and came up with these numbers.

Large Cap Value: 9.21%
Large Cap Growth: 6.17%
Small Cap Value: 12.13%
Small Cap Growth: 5.77%
Total Stock market:6.72%

Currently, large value is lower in price compared to small value from P/E perspective by atleast two points if not more. If the hurricane seasons dont end up being as bad as 2005, the next few years should be good in general for the economy and the market as a whole.

As for the price of Berkshire - impossible to say when it will start moving, but this stock is currently in the deep value territory with solid earnings. If the Fama and French three factor model holds good ( ), this stock should eventually do well.

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