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Berkshire Hathaway Board Meeting May 2005

Agenda

Berkshire Hathaway overview PacifiCorp Valuation


Valuation multiples Discounted cash flows

Results Afterthoughts

Warren Buffetts investment philosophy


Economic reality, not accounting reality Invests by the motto be fearful when others are greedy and greedy when others are fearful Good returns on equity while having little or no debt The larger the company, the better it is. To acquire businesses in the $5- $20B USD range Does not believe in diversification, There is no risk if you know what youre doing Intrinsic value is the present value of future expected performance Contrary to conventional market practices, he uses risk free discount rate to discount expected cash flows Investments should be driven by information and analysis Does not believe in the efficient market hypothesis and efficient frontier. It is possible to beat the market.

Source: Berkshire Hathaway Business Case

We have been outperforming the market for several years; However 2004 has been a difficult year
Stock price (Indexed Jan 94 = 1)

7 6 5 4 3 2 1 0

MidAmerican Energy Holdings acquisition

Berkshire Hathaway S&P 500

Source: Capital IQ

Insurance represents 59% of BH s EBIT; We are looking to advance our growth via a different industry
EBIT from Berkshire Hathaway subsidiaries per industry ($M USD, 2004)
8000 7000 6000 5000 4000 3000 2000 1000 0

Source: Berkshire Hathaway Annual Report 2004

BH has chosen its portfolio wisely and has profited considerably, mainly from its Big 4
Major investments of Berkshire Hathaway ($M USD)
40000 35000 30000 25000 20000 15000 10000 5000 0 3832 5224 1992 (Cost) 2004 (Market value) 24681 Big 4
240% % Growth (92 04)

13036

Other Investment

372%

Note: Big 4 represents American Express, Coca Cola, Gillette and Wells Fargo & Co Source: Berkshire Hathaway Annual Report 2004

Agenda

Berkshire Hathaway overview PacifiCorp Valuation


Valuation multiples Discounted cash flows

Results Afterthoughts

First, we determine multiples based on the performance of comparable companies


Enterprise Value as Multiple of:

Enterprise Value
Alliant Energy Corp. Cinergy Corp. NSTAR SCANA Corp. Wisconsin Energy Corp. Median Mean $5600 $13,231 $5287 $7967 $7691 $7691 $7955

Revenue
1.89x 2.82x 1.79x 2.05x 2.24x 2.05x 2.16x

EBIT
13.33x 17.93x 11.62x 13.37x 14.51x 13.37x 14.15x

EBITDA
7.45x Na. 7.53x 9.25x 8.97x 8.25x 8.30x

Net Income
34.15x 32.75x 27.83x 30.18x 25.13x 30.18x 30.01x

Source: Value Line Investment Survey

Then we use the multiples to calculate the value of PacifiCorp based on its performance
PacifiCorp valuation $M USD (2004)
10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Range: 3037 Median Mean

9289

8775

9023

9076

7596

Revenue

6252

6584

EBIT

EBITDA

Net Income

The range between the different multiples is considerable; We recommend to complement with additional valuation
Source: Value Line Investment Survey

7553

Agenda

Berkshire Hathaway overview PacifiCorp Valuation


Valuation multiples Discounted cash flows

Results Afterthoughts

Based on historical figures, we assumed CAPEX to remain 9% and increase revenues by 12% per year
Pacificorp CAPEX and Revenue growth (Yearly, 2006-2010 ) 12% Conservative 10% 8% 6% 4% 2% 0% CAPEX CAPEX Revenue
approach: CAPEX for MidAmerican has increased 20% CAGR in 5 years

Assumption Historical value

Source: PacifiCorp Financial Results; BH Economic Projections for PacifiCorp

We determined expected cash flows for each year from 2006 to 2010
PacifiCorp cashflow ($M USD, E2010)
1800 1600 1400 1200 1000 800 600 400 200 0 EXAMPLE

Source: PacifiCorp Financial Results; BH Economic Projections for PacifiCorp

We then estimated perpetual value and discounted the cash flows considering a free risk discount rate of 5.76%
2005 2006 100 95 137 180 225 272 5.76% 2007 153 2008 213 2009 281 2010 360 Perpetuity 368

7,981 =8,889
Note: Free risk discount rate of 5.76% used according to Warren Buffet s valuation policies; GDP growth of 2.3% used for perpetuity growth as 12% growth is not sustainable on a long term Source: Warren Buffet Case Study; BH Economic Projections for PacifiCorp

The results set the value of PacifiCorp between $6,200M and $9,289M
PacifiCorp Valuation ($M USD, 2004) 10000 9000 8000 7000 6000 5000 4000 6252 3000 2000 1000 0 Minimum value valuation mult

8889

9289

Discounted CF

Maximum value valuation mult

We propose to buy PacifiCorp for $9.4B USD


Source: PacifiCorp Financial Results; BH Economic Projections for PacifiCorp

Please vote Yes or No according to your decision regarding the acquisition of PacifiCorp

Agenda

Berkshire Hathaway overview PacifiCorp Valuation


Valuation multiples Discounted cash flows

Results Afterthoughts

The valuation of PacifiCorp is considerably sensitive to changes in growth rate and discount rate
Valuation for PacifiCorp ($M USD using DCF method) Growth 9% Disc. rate 5.76% 6.46% 7.00% 8.00% 9.00% $4,723 $3,896 $3,425 $2,790 $2,344 $7,447 $6,133 $5,387 $4,379 $3,673 Free Risk $8,889 $7,318 $6,425 $5,219 $4,375 WACC $10,387 $8,548 $7,503 $6,091 $5,103 $13,555 $11,148 $9,781 $7,934 $6,641 11% 12% 13% 15%

Source: Economic Projections for PacifiCorp

BH stock price increased 2.4% after announcing the acquisition; However it decreased soon after
Stock price (Indexed Jan 94 = 1)

5.8 5.6 5.4 5.2 5 4.8 4.6 4.4

Berkshire Hathaway

Source: Capital IQ

Conclusion
BH paid $9.4B USD for PacifiCorp, apparently more than its intrinsic value
Valuation multiples set highest value in $9.2B DCF set value in $8.9B with free risk discount rate. Real market rates will decrease this value Valuation using WACC of 6.46% is $7.3B

We believe PacifiCorp was not a very good investment


The stock market had lukewarm reaction to the acquisition. Stock price was stable for the following 6 months

So why didnt stock price fall?


Warren Buffet is known for his long term investments; Investors believe on PacifiCorps results on a long term Even though WB says he does not believe in diversification, PacifiCorp reduced its risk from its insurance companies

There is no such thing as a free risk investment

We disagree with several points of WBs philosophy


Economic reality, not accounting reality be fearful when others are greedy and greedy when others are fearful Good returns on equity while having little or no debt The larger the company, the better it is Does not believe in diversification Intrinsic value =PV of future expected performance Risk free discount rate for DCF Investments driven by information and analysis Does not believe in the efficient market hypothesis and efficient frontier

Source: Berkshire Hathaway Business Case

Agenda

Berkshire Hathaway overview PacifiCorp Valuation


Valuation multiples Discounted cash flows

Results Afterthoughts

Berkshire Hathaways latest investments

10% perpetual preferred stock of Goldman Sachs $66.7B on stocks of GE $11B on stocks of IBM $34B to acquire Burlington Northern Santa Fe Corp, US railway $2.6B on Swiss Re, a reinsurance company

BH s stock price has performed admirably and continuously outperforms S&P 500
Stock price (Indexed Jan 94 = 1)

10 9 8 7 6 5 4 3 2 1 0

Berkshire Hathaway S&P 500

Source: Capital IQ

A comparison between investment Gurus

A comparison between investment Gurus


Warren Buffet Bill Miller
Has knowledge about technology sector although he also doesn t know about the world situation in 10 years. He invested in companies like ebay and DirecTv. He is a Growth stock investor

Jim Rogers

Stays within own circle of competence. He is a Value stock investor

Do your own work. Don t be afraid of being a loner. Be selective in your investing and look for one good idea Every investment should be considered a commodity that will be affected by supply and demand changes. It s just a question of when

Successfully forecasting the short term stock price movement is something beyond the scope of anyone Keep your losses down and everything else will take care of it. The best investments offers great reward with little actual risk

A few years ago stated that the market could gain 15% in the following year

Aggressive and Bold manager that is based on thorough and creative research

Good investors need a historical perspective-. Don t buy stocks at high multiples

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