Saturday, May 03, 2008

Berkshire Hathaway Q1 Analysis

In this article, we examine Berkshire Hathaway's Q1 numbers and try to put an intrinisic value around the business. First, we will look at Berkshire's performance relative to SP500. Secondly, we will look at the strength of operating businesses. Then we will take a look at new investments. Lastly, we will take a look at overall outlook for the business.

The SP500 index dropped by about 7% in Q1 of 08. Compared to this, Berkshire's share holder equity dropped by 1.2% in the same period. So Berkshire handily out performed SP500 in Q1.

Let us next look at the operating businesses and cash flow. The insurance premiums earned declined by half - this is primarily because of the decline in premiums in the Berkshire Hathaway ReInsurance Group. Overall, there was a 22% drop in revenue. In the utilities sector, there was a slight gain in the mid american unit. In the finance/financial products sector, there was a mark to market loss of 1.6 billion. It is unlikely that this loss will be realized as the losses are on a logn term PUT option that is unlikely to be paid out. Taking this out, the Q1 earnings are roughly comparable to Q1 of last year.

Of all the businesses reported, Berkshire Hathaway Reinsurance Group has reduced the number of policies it is underwriting which contributes to the decline in revenue. Other operating companies have continues to do well in the face of a tough economy. Not writing insurance policies when the pricing environment is not right is a good way to operate the business. So, this points to good underwriting practices.

Then, the last piece of the puzzle is investments. From the balance sheet, the cash flow from operating activities declined to 3.3 billion from 4.6 billion for the quarter. On the other hand, 10.5 billion dollars were deployed in fixed income securities in the quarter. 1.5 billion was spent on equities. 4.8 billion was deployed to acquire Marmon group with further capital outlays in the future. Cash and cash equivalents declined by about 9 billion dollars in the first quarter. It declined by about 10.5 billion on a year over year basis. With another six billion pledged for the Wrigley deal, the 30 billion dollar barrier is close to being broken. If the bear market is prolonged as Buffett thinks, it is likely that more investment opportunties will arise for Berkshire and money will be deployed.

The IV of the company is 147K per my estimates as of end of Q1. It should be around 155-160K range as of now because of the stock market rebound. If the stock drops, it should provide a great entry point this year.

In case of a dip in the markets next week, it may present a great buying opportunity for a company which will continue to grow in the 10% range in the long term.