Saturday, August 19, 2006

Berkshire Hathaway (BRK) or USG?

In this blog, we have analyzed BRKA and USG quite a few times. BRK and USG are both iconic figures and have a close relationship. BRKA owns upto 16% of USG. It is well known that both the companies are undervalued. In this segment, we look at which one is worth one's dollars today.

From various analysis, the consensus values of intrinsic value for USG and BRK are as follows.

USG consensus intrinsic value - low 75, median 95 and high of $100. USG has top notch management, good prospects and a favorable demographic. In addition, it is also expanding its distribution business. USG's business is cyclical with highs and lows coinciding with the economic cycle.

BRK current intrinsic value is - low 120, median of 130 and high 0f 145K. BRK is a well diversified business with solid cash flows and outstanding management. It is a safe conservative bet that BRK will increase its intrinsic value at 8-9% a year for the next five years.

BRKA IV in five years at 8% IV growth is going to be: Low end 175K, median 191K and high of 211K in 2011. Even with share prices lagging the IV, it is likely that BRKA will trade significantly higher than where it is trading today.

USG on the other hand because of its cyclic nature, in 2013 is likely to have an IV of low 95, median 105 and high of 120. This is using BCarter's USG intrinsic value calculation and assuming that all earnings are retained by the company and translates to book value.

Both are conservative estimates but looks like BRKA is more stable as it is not as cyclical as USG is. With a lack luster hurricane season, it is a safe bet that BRKA's intrinsic value will reach or cross 130K by the time the annual report is released in Q1 2007. BRKA is also a safe bet in a recessionary environment as its businesses will continue to churn out cash and BRKA can find better investment opportunities.

USG on the other hand is back stopped by Warren Buffett. He has also been buying the stock and has increased his ownership to more than 16% of USG. This has put a floor on the price at around 45 dollars.

The short term sentiment is for USG to remain stable or drop a bit along with the housing market. The sentiment for BRKA is to go up depending on the Hurricane season, perhaps crossing 100K by end of this year.

BRKA offered a compelling opportunity at ~92K right after Q2 earnings and I loaded up on it. The comparable large cap value funds have done extremely well this year racking up gains of upto 10% already with four and a half months to go in the year. BRKA is lagging this category and this may not last long.

As new cash comes online, one would do well to look at all the available opportunities, the price points of different shares and the short term and long term sentiments prevailing at the moment to make the appropriate decisions.

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