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Agenda
Results Afterthoughts
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
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 ($M USD, 2004)
8000 7000 6000 5000 4000 3000 2000 1000 0
BH has chosen its portfolio wisely and has profited considerably, mainly from its Big 4
Major investments of Berkshire Hathaway ($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
Results Afterthoughts
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
Then we use the multiples to calculate the value of PacifiCorp based on its performance
PacifiCorp valuation $M USD (2004)
10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Range: 3037 Median Mean
9289
8775
9023
9076
7596
Revenue
6252
6584
EBIT
EBITDA
Net Income
The range between the different multiples is considerable; We recommend to complement with additional valuation
Source: Value Line Investment Survey
7553
Agenda
Results Afterthoughts
Based on historical figures, we assumed CAPEX to remain 9% and increase revenues by 12% per year
Pacificorp CAPEX and Revenue growth (Yearly, 2006-2010 ) 12% Conservative 10% 8% 6% 4% 2% 0% CAPEX CAPEX Revenue
approach: CAPEX for MidAmerican has increased 20% CAGR in 5 years
We determined expected cash flows for each year from 2006 to 2010
PacifiCorp cashflow ($M USD, E2010)
1800 1600 1400 1200 1000 800 600 400 200 0 EXAMPLE
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
Please vote Yes or No according to your decision regarding the acquisition of PacifiCorp
Agenda
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%
BH stock price increased 2.4% after announcing the acquisition; However it decreased soon after
Stock price (Indexed Jan 94 = 1)
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
Agenda
Results Afterthoughts
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
Source: Capital IQ
Jim Rogers
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