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Berkshire Hathaway - Barclays Capital

Berkshire Hathaway - Barclays Capital

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warren buffett berkshire hathway
warren buffett berkshire hathway

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Published by: neo269 on Apr 20, 2010
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08/24/2012

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Equity Research
 
Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should beaware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.
PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 60 AND IMPORTANT DISCLOSURES BEGINNINGON PAGE 61
1
Note: This report is a summary of our forthcoming full report on Berkshire Hathaway. A conference call for BarclaysCapital clients is being held Monday, April 12, 2010 at 11:00AM ET. Dial in details: U.S. (800) 706-8249, International(706) 634-5881, Passcode: 67690752.
April 12, 2010
Berkshire Hathaway Inc.
(BRK.B - US$ 80.49) 2-Equal Weight
 
Initiation of Coverage
BRK.B: Initiating Coverage With 2-EW 
Investment Conclusion
We are initiating coverage of BRK.B with a 2-EWrating and $88 price target, which is 1.30x YE11estimated book value of $68. Led by WarrenBuffett, we expect Berkshire to generate stable
 
operating EPS, slowing book value growth, andreduced return on equity through 2011. 
Summary
We expect earnings to decline in Insurance (50%of earnings), and recover slowly in MidAmerican(utility), as well as the cyclical Manufacturing,Service & Retail segment. The addition of Burlington Northern (railroad) should be animportant contributor to BRK's earnings. We donot expect any large acquisitions near term.
BRK's operations appear strong, although wedoubt the stock will benefit from valuation multipleexpansion in a weakening P&C (re)insurancemarket, and CEO succession issues persist.
BRK shares are up 21% YTD versus a 6%increase in the S&P 500, and appear to alreadyreflect being added to the S&P 500 Index and
 
expectations of improved results as the economyrecovers. Conference call is April 12 at 11ET.
Jay Gelb, CFA1.212.526.1561jay.gelb@barcap.comBCI, New York
United States of AmericaFinancial ServicesInsurance/Non-Life
Reuters BRK.BBloomberg BRK.BADR
EPS (US$)
(FY Dec)
2009 2010 2011 % Change
ActualOld New St. Est.Old New St. Est.2010 20111Q
0.73A N/A 0.71E N/A N/A N/A N/A -3% N/A
2Q
0.76A N/A 0.83E N/A N/A N/A N/A 9% N/A
3Q
0.88A N/A 0.88E N/A N/A N/A N/A 0% N/A
4Q
0.87A N/A 0.92E N/A N/A N/A N/A 6% N/A
 Year 
3.25A N/A 3.34E N/A N/A 3.47E N/A 3% 4%
P/E
24.1 23.2
Market Data
Market Cap (Mil.) 196767Dividend Yield N/A52 Week Range 83.57 - 54.66
Financial Summary
Revenue TTM (Mil.) 112493.0
Stock Overview
 
Berkshire Hathaway Inc. - 04/ 09/ 2010
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Ap
Source: Barclays Capital Live
55657585Volume100M300M
Stock Rating Target Price
New: 2-Equal Weight New: US$ 88.00Old: 0-Not Rated Old: N/A
Sector View:
2-Neutral
 
 
 
Equity Research
 
2
INITIATING COVERAGE ON BERKSHIRE HATHAWAY WITH A 2-EW RATING
We are initiating coverage on Berkshire Hathaway with a 2-Equal Weight rating and $88 price target ($132,000 per Class Ashare) based on 1.30x YE11 estimated book value per Class B share of approximately $68 ($101,500 per Class A share).Berkshire Hathaway, led by Warren Buffett, is a holding company with significant operations in investments, insurance,railroads, utilities, manufacturing, services, retail, and homebuilding. We estimate the company’s annual earning power to be$8-$9 billion including the recently completed Burlington Northern Santa Fe (BNSF) railroad acquisition, and investmentresults recovered in 2009 after a disappointing outcome in 2008.Warren Buffett anticipates that business conditions will improve at a slow place and currently are nowhere near 2007 levels.Based on our projections, Berkshire’s operating EPS growth will likely be constrained through 2011, reflecting decliningearnings in Insurance, a strong contribution from BNSF, and a slow recovery in the other major units including MidAmerican(utilities and energy), Manufacturing, Service, and Retail, and Finance and Financial Products (Clayton Homes).
We Recommend Waiting For A More Attractive Entry Point Before Adding To Positions
Berkshire Hathaway shares rose 21% (versus a 6% increase in the S&P 500) year-to-date 2010 in part, we believe, becauseof increased demand and liquidity in BRK shares resulting from being added to the S&P 500 Index and the Class B sharesplit, as well as anticipated benefits from an economic recovery. The stock’s current valuation of 1.41x book value per shareprobably already reflects anticipated benefits of an economic recovery. Plus, our 2010 and 2011 operating EPS estimates are8%-10% below consensus expectations, reflecting our outlook for a modest earnings recovery including contributions from theBNSF acquisition. As a result, we recommend investors wait for a more attractive entry point before adding to positions.
Berkshire Hathaway’s Operating Business Is Diversified
The largest contributors to Berkshire’s operating earnings are the Insurance, BNSF, and the Manufacturing, Service, andRetail segments. We expect BNSF (railway operator) to generate the strongest earnings growth among the operatingsegments. Meanwhile, we anticipate earnings could decline in Insurance (accounts for one-half of Berkshire’s operatingearnings), and recover slowly in MidAmerican (utilities and energy), as well as in the economically sensitive Manufacturing,Service, and Retail, and Finance and Financial Services units.
Figure 1. Berkshire Hathaway’s Business Mix - 2009
Total 2009 Revenues Proforma for BNSF Acquisition: $124.8 billion
Manufacturing,Service, and Retail49%BNSF11%Finance andFinancial Products4%MidAmerican9%Insurance27%
RevenuesTotal 2009 Pre-tax Earnings Proforma for BNSF Acquisition: $13.7 billion
Insurance49%MidAmerican11%Finance andFinancial Products6%BNSF19%Manufacturing,Service, and Retail15%
Pre-tax Earnings
 
Note: Revenues and pre-tax earnings are pro forma for BNSF acquisition.Source: Barclays Capital research.
Book Value per Share Growth Has Resumed
Berkshire Hathaway has a successful long-term track record of increasing book value per share (a key valuation metric).Berkshire’s book value per share increased 20% to an all-time high of $56 per Class B share ($84,487 per Class A share) in2009 helped by a recovery in investment and derivative valuations after declining 10% to $47 per Class B share ($70,530 per Class A share) in 2008 due to the financial crisis. By year-end 2011, we anticipate Berkshire’s book value per Class B sharecould increase to roughly $68 ($101,500 per Class A share) driven in part by estimated operating EPS of $3.34 per B Classshare ($5,015 per Class A share) in 2010 and $3.47 per Class B share ($5,200 per Class A share) in 2011 and assumingongoing 8% annualized equity investment returns. Despite losing its AAA ratings from the rating agencies, the company’sbalance sheet and liquidity position remain strong, in our view. As a point of reference, Class B shares are valued at 1/1,500
th
 of Class A shares.
 
 
Equity Research
 
3
Figure 2. Berkshire Hathaway’s Book Value Per Class B Share
$0$10$20$30$40$50$60$70$80199920002001200220032004200520062007200820092010E2011E
   B  o  o   k   V  a   l  u  e   P  e  r   C   l  a  s  s   B   S   h  a  r  e
-15%-10%-5%0%5%10%15%20%25%
   %    C   h  a  n  g  e   i  n   B   V
Book Value Per Class B Share% Change in BV
 
Source: Company data, Barclays Capital research.
Operating Earnings Appear Stalled
Berkshire’s operating earnings per share could be mostly unchanged, and we expect return on equity to decline through 2011reflecting our outlook of reduced earnings in property-casualty (P&C) Insurance, the new contribution to earnings from BNSF,and a slow recovery in earnings elsewhere in the enterprise. Berkshire’s annual earning power is roughly $8-$9 billion, webelieve.Accurately estimating the company’s future operating EPS and book value per share present significant challenges becauseBerkshire Hathaway is highly diversified, with volatile earnings in its reinsurance business, and it offers limited transparencyinto business and investment operations for modeling purposes, in our view. Berkshire’s excess cash appears to be largelydeployed in the early 2010 acquisition of the remainder of BNSF not already owned by Berkshire. As a result, opportunities togenerate earnings growth from additional large acquisitions appear curtailed.
Figure 3. Berkshire Hathaway Operating EPS Per Class B Share and ROE
Book Value Per Class B Share and ROE$0$10$20$30$40$50$60$70$80200520062007200820092010E2011E0%1%2%3%4%5%6%7%8%9%10%
   O  p  e  r  a   t   i  n  g   R   O   E
Book Value Per Class B ShareOperating ROEOperating Earnings Per Class B Share$4.15$3.47$3.34$3.25$4.02$2.16$4.16$0$1$2$3$4$5200520062007200820092010E2011E
 
Source: Company data, Barclays Capital Research
We expect Berkshire’s Insurance business to generate reduced operating income through 2011 due to declining underwritingprofits and reduced investment income. These underwriting results should be driven by:
GEICO’s underwriting margins are compressing and growth is expected to slow in 2010.
We expect General Re to be disciplined, which could result in flat premium volume, and catastrophe losses couldincrease from low levels.

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