Berkshire Hathaway (BRK) reported its yearly earning on Friday, 29th of February. The comapny did well, advancing its book value by 11% compared to 2006 and beating SP500 handily. SP500 returned 5.5% in the same period. Berkshire has beaten SP500 for three years in a row now.
Some special notes from Buffett's letter:
Return on invested capital on See's candy - 200+%
Return on capital in Flight Safet - 27%
Return on capital in Microsoft - ~100%.
See's candy is a better business than Google or Microsoft, though a lot smaller in scale :-). Microsoft's profit margins and return on capital likely will continue to erode.
The other point of interest is the value of stocks owned by Berkshire is now 75 billion dollars. There are several that will do well in the next three-five years, some probably by a huge margin. In the mean time, they will kick in dividends to Berkshire in the range of a billion+ dollars a year. The stock portfolio will be at 95 billion with just 8% return in the next three years.
Warren Buffett has invested about 27 billion dollars in the last two years. All the free cash generated in the last two years has been deployed and will continue to get deployed in the next two-three years. I expect the free cash on the balance sheet to decline on a year over year basis in the next two-three years. The way cash is generated, even if the cash is deployed in the last three year's pace, we are looking a total of around 65 billion dollar investment from 2005-2010 inclusive. If one gets a return on capital of 10%, ( 10.8% is Berkshire historical record ), one an look at earnings going up by about 30%. Meanwhile the stock portfolio should also increase by about 25-30% excluding dividends.
I put my intrinsic value between 148-156K for berkshire at the end of 2007. It should be possible for the IV to go north of 200K by the end of 2010. This is a conservative estimate and the actual returns could be much higher.
