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
Vincent M. DeAugustino
Arash Soleimani, CPA
(443) firstname.lastname@example.orgCompany 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
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
1,147 1,319 1,437
1,325 1,459 1,564
1,306 1,518 1,608
$4,878A $5,685 $6,097
24.6x 21.1x 19.7x
Revenue (Net) 2009A 2010E 2011EFY Dec
1 Year Price History for BRK/A
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