Saturday, March 04, 2006

Berkshire Hathaway (BRK.A/BRK.B) Analysis

In the previous report, we analyzed Berkshire Hathaway's third quarter results. which were good accounting for Hurricanes Katrina and Rita. In this section, we analyze Berkshire's earnings for 2005 and its outlook for 2006.

The fourth quarter earnings and Warren Buffetts letter to share holders are both a bonus. First, Berkshire did remarkably well in the earnings front in the fourth quarter. Berkshire earned 3,331 dollars in the fourth quarter to put up the best year ever in terms of earnings. Investment and derivative gains made 41% of the earnings this year. Even considering that, Berkshire's earnings in the fourth quarter beat the analyst estimates by almost a thousand dollars to 1965.00.

Let us do a rough estimate of Berkshire's intrinsic value. As denoted in the annual report, the per share amount is 59,377.00 dollars. This is an increase of 6.35% from the year before. In addition to this, Berkshire earned $5538/share. The average in the last three years has hovered around $5000=00. Putting a P/E of 10 against the earnings yields $50000=00/share. Adding the two, one gets an intrinsic value of 109,377=00/share.

This however doesnt account for the company operations in 2006. The companies revenues increased by 9.8% in 2005 compared to 2004. This compares to growth rates of 16% in 2004 from 2003. The company should do well in 2006 as MidAmerican comes under Berkshire fold where Berkshire will own 89% of the holdings. As the merger of Pacificorp goes through this year, it should add further to Berkshire's bottom line. Even if large hurricanes hit the gulf coast, the company has taken adequate precautions to underwrite policies more carefully. All in all, 2006 looks like a good year for Berkshire.

Separately, Warren Buffett also cleared the issue of succession which has been holding this stock back clearly in his letter to share holders. Warren disclosed that a person has been chosen to replace him if were to pass away or get incapicitated. He also mentioned that he remains in excellent health which is a good news to Berkshire share holders. It remains to be seen how Berkshire stock does in the coming week. As we discussed in the previous article, the stock will be a great buy below $86,000=00/share. In the past several years, the stock has done badly after announcing full year results. It is unlikely the scenario will repeat this year - however, I am ready to pick up some stocks if the price points fall below $86,000=00/share.

No comments: