Thursday, January 01, 2009

Berkshire Hathaway (BRKA) Analysis

Warren Buffett's Berkshire Hathaway has been hammered this year by a declining share market. We have analyzed Berkshire Hathaway several times in this blog. Warren Buffett has had an outstanding record handicapping winners and has been the greatest investor of all times.

In this analysis, we take a numbers view of Berkshire Hathaway, whose earnings have been lumpy. These are the numbers from Value Line publication. From 1998 to 2008, the EPS for Berkshire has grown from 1021/share to an estimated 5685/share in 2008. The book value of Berkshire has grown from 37,800/A share to an estimated 77,420 in 2008. The insurance premiums collected per share has grown from 3606/share to an estimated 16450/share.

However, 1998 and 2008 represent vastly different times. In 1998, the bull market was hitting a crescendo whereas in 2008, the bear market probably peaked. Berkshire share scaled new peaks in 1998 where as it has hit some historic lows in 2008.

Even in this scenario, Berkshire can be conservatively valued at $110K - 120K/A share. Now, this doesnt even take into account the prospects for 2009.

Several things stand out for 2009. The most skilled investor is in charge with Charlie Munger, who is second to none. Apparently Buffett has been getting better at investing in his seventies. The bear market provides a great investor good places to put his money to work. The sage of Omaha had about 40 billion to invest in 2008 and most of the money has been invested. Assuming 10% yield, we are looking at 4B in income to bolster the balance sheet which will contribute 2500/A share. Let us take a conservative estimate and assume that the earnings will be less and will only contribute $1500/A share.

In addition, many Berkshire companies will be solidifying their position in this downturn and enhance their moats. The operating earning after the downturn is over would be significantly higher. The second thing is that many hedgefunds writing catestrophe insurance have gone belly up reducing the competition for re-insurance. Lastly, the downturn is expected to last for sometime before the full recovery. This should provide the Oracle more opportunities to invest his ever increasing war chest.

If SP500 recovers in 2009, so will Berkshire's equity portfolio. This will provide the double whammy of increasing book value, decline in mark to market losses for the put contracts expires long time from now and increased income from other SP500 companies such as GS and GE. We are witnessing the transfer of wealth from the weak to the strong.

I am betting on atleast 20% rebound in BRKA in 2009 and may be more in 2009 and 2010.

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