Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Save to My Library
Look up keyword
Like this
16Activity
0 of .
Results for:
No results containing your search query
P. 1
BRKA 080710 - Stifel Nicolaus

BRKA 080710 - Stifel Nicolaus

Ratings: (0)|Views: 2,086 |Likes:
Published by neo269

More info:

Categories:Business/Law, Finance
Published by: neo269 on Jul 09, 2010
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

06/13/2011

pdf

text

original

 
 All relevant disclosures and certifications appear on pages 10 - 11 of this report.
July 8, 2010
Blah-Shaped Recovery Not Priced in – Downgrading to Sell
Meyer Shields, FCAS
(443) 224-1331mshields@stifel.com
Vincent M. DeAugustino
(443) 224-1330deaugustinov@stifel.com
Arash Soleimani, CPA
(443) 224-1377soleimania@stifel.comCompany Update
We’re downgrading the shares of Berkshire Hathaway to Sell from Hold asour weak macroeconomic outlook implies poor 2H10 earnings. In this notewe outline the signs we see for a 2H10 economic retreat, and why BRKshould outpace market declines.We think declining consumer confidence will slow consumer spending, asemployment very slowly recovers. Additionally, a shrinking appetite forincreased public spending should limit the size of any future economicstimulus packages. Middle Eastern political instability could also drive realoil prices above $85 a barrel, further impacting consumers’ discretionaryexpenditures.Aside from Berkshire’s operating units’ exposure to economic weakness,its shares face a “double whammy,” as its equity portfolio and derivativepositions expose it to additional book value pressure. Investors’ focus onBerkshire’s book value for valuation imply that its shares could outpacebroader market’s declines.BRK’s YTD outperformance versus the S&P 500 is nearing an apex thatseems poised for a correction based on the shares' history.Berkshire’s property/casualty reserve releases have recently ramped up,but we see that as unsustainable in an enduring soft market, implyingadditional earnings pressure as releases slow.We’ve reduced our EPS estimates to reflect the expected challenging 2H10environment, with modest economic growth expected in 2011. Our EPSestimates move to $5,685 from $5,764 (2010E), and to $6,097 from $6,241(2011E). Our sum-of-the-parts valuation method suggests fair value for theshares at about $104,000, about 13% downside from current levels.
Berkshire Hathaway Inc.
BRK.A – NYSE
Sell Insurance: Standard/Specialty/Brokers
From ToChanges (Previous) (Current)
Rating Hold SellTarget Price FY10E EPS (Net) $5,764 $5,685FY11E EPS (Net) $6,241 $6,097FY10E Revenue (Net)$122.37B $121.91BFY11E Revenue (Net)$126.84B $125.19B
Stock Data
Price (07/07/10): $119,889.0052-Week Range: $125,252 $84,600Market Cap.(mm): 197,457Shr.O/S-Diluted (mm): 1.6 Avg Daily Vol (3 Mo): 937Dividend ($): $0.00Yield (%): 0.0%Book Value/Share: 89,374Stated Book: 89,374Price/Stated Book: 134%Tangible Book: 59,799Price/Tangible Book: 200%S&P Index: 1,060.27
EPS (Net) 2009A 2010E 2011EQ1
$1,100 $1,390A $1,488
Q2
1,147 1,319 1,437
Q3
1,325 1,459 1,564
Q4
1,306 1,518 1,608
FY Dec
$4,878A $5,685 $6,097
P/E
24.6x 21.1x 19.7x
Revenue (Net) 2009A 2010E 2011EFY Dec
$112.49B$121.91B$125.19B
Q2Q3Q1Q2Q3
60,00075,00090,000105,000120,000135,0002010
1 Year Price History for BRK/A
Created by BlueMatrix
Page 1
 
(1) Economic Pullback Investor and Consumer Expectations Poised for Disappointment: 
We think the market’s recent 13% pullback anddeteriorating consumer confidence reflect investorsand consumers’ disillusioned hopes for a robust economicrecovery that looks less likely, primarily because of steadily high unemployment data. Our skepticism stems fromrecent recessions' pattern of slowing employment recovery highlighted in
Figure 1
.
Figure 1: Employment Recovery Takes Increasingly Longer Each Time
5557596163656769717375
  1  9   7  0   M  1  1  9   7  2   M  1  1  9   7  4   M  1  1  9   7  6   M  1  1  9   7  8   M  1  1  9  8  0   M  1  1  9  8  2   M  1  1  9  8  4   M  1  1  9  8  6   M  1  1  9  8  8   M  1  1  9  9  0   M  1  1  9  9  2   M  1  1  9  9  4   M  1  1  9  9  6   M  1  1  9  9  8   M  1  2  0  0  0   M  1  2  0  0  2   M  1  2  0  0  4   M  1  2  0  0  6   M  1  2  0  0  8   M  1  2  0  1  0   M  1  2  0  1  2   M  1   E
   E  m  p   l  o  y  m  e  n   t   R  a   t   i  o
$10$100$1,000$10,000
   S   P   X   (   L  o  g   S  c  a   l  e   )
Employment to Population Ratio (12MMA) SPX Price
?
Source: FactSet Research and BLS, Stifel Nicolaus analyst Barry Bannister’s format 
Figure 2
traces the employment headcount trajectory for the current and recent recessions (i.e., headcounts indexedto the point of initial employment decline), which illustrates the severity of the current employment environment, and thelikely protracted recovery timeline.
Figure 2: Employment Recovery Trajectories during Past Recessions
93%94%95%96%97%98%99%100%101%1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51Months Since Recession Start2008200119901981197419702001Current excl. census1970 1974 1981 1991
Source: BLS, Stifel Nicolaus analyst Michael Widner’s Format 
Page 2
Berkshire Hathaway Inc. (BRK.A)
July 8, 2010
 
Given that we think the current employment situation will take longer than most consumers and many investors areexpecting, consumer confidence will probably suffer as expectations reconcile with reality.
Figure 3
tracks the inverserelationship between unemployment and consumer confidence.
Figure 3: Slower-than-Expected Employment Recovery Likely to Drag on Consumer Confidence
3%5%7%9%11%13%
  J  u  n -  8  0  J  u  n -  8  2  J  u  n -  8  4  J  u  n -  8  6  J  u  n -  8  8  J  u  n -  9  0  J  u  n -  9  2  J  u  n -  9  4  J  u  n -  9  6  J  u  n -  9  8  J  u  n -  0  0  J  u  n -  0  2  J  u  n -  0  4  J  u  n -  0  6  J  u  n -  0  8
   U  n  e  m  p   l  o  y  m  e  n   t   R  a   t  e   (   S   A   )
-4%-2%0%2%4%6%8%
   E  x  p  e  n   d   i   t  u  r  e  s
Unemployment Rate Expenditures
Source: BLS and Consumer Conference Board, via FactSet Research, Inc.
In turn, weak consumer confidence tends to go hand-in-hand with weak personal expenditures (
Figure 4
), which wouldotherwise be the key to a sustained economic recovery, as the “shot in the arm” of increased government spendingsubsides.
Figure 4: Consumer Confidence and Personal Spending
-4%-2%0%2%4%6%8%
   1   9   8   0   M   6   1   9   8   2   M   6   1   9   8   4   M   6   1   9   8   6   M   6   1   9   8   8   M   6   1   9   9   0   M   6   1   9   9   2   M   6   1   9   9   4   M   6   1   9   9   6   M   6   1   9   9   8   M   6   2   0   0   0   M   6   2   0   0   2   M   6   2   0   0   4   M   6   2   0   0   6   M   6   2   0   0   8   M   6
   Y   /   Y   E  x  p  e  n   d   i   t  u  r  e  s
020406080100120140160
   C   C   I
Personal Consumption Expenditures, (Bil. $, SAAR) CCI
Source: BLS and Consumer Conference Board, via FactSet Research, Inc.
The Chicken and the Egg: 
We think consumers are waiting for an employment recovery, while the employmentrecovery is waiting on increased consumer spending. We’re concerned government spending won’t provide the samerelative stimulus strength as a temporary proxy for consumer spending this time around, for two reasons. First, eventhough the drop in personal expenditures, and consequently GDP, is much deeper than in other recent recessions, theincrease in government spending is trailing off (
Figure 5
). Second, we don’t see much political appetite for additionalstimulus spending without either offsetting budget reductions, or at least definitive repayment plans. Although fiscalresponsibility is (temporarily) great for voter support, zero-sum spending initiatives do little to stimulate increasedspending (the recently failed Senate extension of unemployment benefits is a good example of a faltering appetite forincreased stimulus spending, in our view).
Page 3
Berkshire Hathaway Inc. (BRK.A)
July 8, 2010

Activity (16)

You've already reviewed this. Edit your review.
1 thousand reads
1 hundred reads
dgrimes23 liked this
pmella liked this
SWHM liked this
kannanpothi liked this
atechglobal liked this
marbarak liked this

You're Reading a Free Preview

Download
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->