Sunday, June 24, 2007

Berkshire possible return on investment

Mohnish Pabrai, the author of the book "Dhandho Investor" and a hedge fund manager, recently interviewed with Bloomberg. The pointers to his interviews are noted below:

Part 1

Part 2

In Part 2 of this interview, he values BRKB at around $5000/share and expects 15% return for the next several years. Let us calibrate this with other forecasts and see if this is a good prediction.

For starters, let us assume that the current valuation of BRKB is indeed $5000=00. Currently, the stock is trading at 3578=00. This makes the stock about 40% undervalued compared to its market value. Even without additions to the intrinsic value for the next three-five years the returns would be as follows:
1. 3 years - 11.7%
2. 5 years - 6.9%.

This is the typical - heads I win, tails I dont lose position.

Let us take the second situation where the intrinsic value is a lower value of 4700 per share. Let us assume that Berkshire will be able to grow the intrinsic value at 8% per year for the next three-five years. For a three year period, the IV will be 5920/B share. For a period of five years, the IV will be 6905/B share.

If the per share value catches up with intrinsic value - the growth per share will be.

1. 3 years - 16.7%
2. 5 years - 14%.

Let us take another situation where the intrnsic value grows from the current value of 3578=00. The EPS growth will atleast be 8% a year as SP500 will continue to grow at around 7-8% for the next three years. The Berkshire equity portfolio will do as well or better. Then there is the cash generated by operating businesses which is growing at >20% a year. This should continue at a rapid 15-20% pace for the next five years. At the very minimum, one should continue to see 8% a year growth without doing anything with the existing cash horde.

This is a classic situation of "heads I win, tails I dont lose much". The upside is decent and downside is very low to non existent.

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