Berkshire Hathaway 2008 Annual Report

Berkshire Hathaway released its Q4 and annual report today. We have covered Berkshire in other sections in this blog. For the previous sections please take a look at this report:

The last report in this blog.

Now fast forward to the current year, will Berkshire be a sound investment for 2009 and 2010?

The company continues to be very sound and is increasing its moat in many segments of its operating businesses. Let us do a quick intrinsic value check as of 12/31/2008. If we use Warren Buffett's two column method, we have 122 billion in cash and investments + earnings per share of 3224. At the end of 2008, the intrinsic value of the company was around 110K/A share.

Berkshire as a company earns between 10-12 billion dollars a year from its various operations. This is accretive to the book value of the company. Typically, this money is invested to return 10-15% returns. It is very important to note that Berkshire is a compounding asset even when the markets are down as opposed to some of the other companies which rely on the consumer spending to rebound.

To see how the operating businesses will do, let us look at how the operating businesses did in Q4 of 2008 and equate it to 2009. In 2009, we have:

1. Insurance, Re-insurance:
This should do better than 2008. Primarily this is because of the financial position of hedge funds and other businesses having problems with capital.

2. Utility sector:
This sector should continue to do well in 2009 inspite of the economy. We can peg its earnings at par with 2008 if not more.

3. Investment and derivative gains/losses:
This should abate from its 2008 levels. My expectation is that it should start posting a gain from 2010 onwards.

4. Dividend and interest income:
I believe this should increase significantly in 2009 compared to 2008. This declined slightly in 2008 compared to 2008 but should pick up in 2009, 2010.

5. Income from manufacturing and other businesses:
This may decline by upto 20% but such a decline will reduce operating earnings by about 500 million dollars. I believe this should be made up by the gains in insurance which is gaining market share.

6. Investment portfolio:
This should recover from current position by end of 2009 or atleast in 2010.

From a three-five year horizon, Berkshire looks attractive. It looks more attractive than many other stand alone businesses which are trading at low prices in today's market.