Wednesday, March 10, 2010

Berkshire Hathaway's Operating Businesses

In addition to the many common stocks (Coca-Cola, Wells Fargo etc.), the 2009 Annual Report provides a convenient summary of the operating subsidiaries that Berkshire owns.
  • GEICO, the third largest private passenger auto insurer in the United States.
  • General Re and the Berkshire Hathaway Reinsurance Group - Two of the largest reinsurers in the world.
  • National Indemnity Company and affiliated insurance entities, Medical Protective Company, Applied Underwriters, U.S. Liability Insurance Company, Central States Indemnity Company, Kansas Bankers Surety, Cypress Insurance Company, BoatU.S. and several other subsidiaries referred to as the "Homestate Companies."
  • MidAmerican Energy Holdings Company (“MidAmerican”) - an international energy holding company owning a wide variety of operating companies engaged in the generation, transmission and distribution of energy. MidAmerican’s operating energy companies are Northern Electric and Yorkshire Electricity; MidAmerican Energy Company; Pacific Power and Rocky Mountain Power; and Kern River Gas Transmission Company and Northern Natural Gas.
  • HomeServices of America - a real estate brokerage firm (owned by MidAmerican).
  • Burlington Northern Santa Fe Corporation (“BNSF”) - acquired by Berkshire on February 12, 2010, operates one of the largest railroad systems in North America. In serving the Midwest, Pacific Northwest and the Western, Southwestern and Southeastern regions and ports of the U.S., BNSF transports a range of products and commodities derived from manufacturing, agricultural and natural resource industries.
  • Berkshire's finance and financial products businesses primarily engage in proprietary investing strategies (BH Finance), commercial and consumer lending (Berkshire Hathaway Credit Corporation and Clayton Homes) and transportation equipment and furniture leasing (XTRA and CORT).
  • McLane Company - a wholesale distributor of groceries and nonfood items to discount retailers, convenience stores, quick service restaurants and others.
  • The Marmon Group - an international association of approximately 130 manufacturing and service businesses that operate independently within diverse business sectors.
  • Shaw Industries - the world’s largest manufacturer of tufted broadloom carpet.
  • Benjamin Moore - a formulator, manufacturer and retailer of architectural and industrial coatings.
  • Johns Manville - a leading manufacturer of insulation and building products.
  • Acme Building Brands - a manufacturer of face brick and concrete masonry products.
  • MiTek Inc. - produces steel connector products and engineering software for the building components market.
  • Fruit of the Loom - Licenses and distributes apparel.
  • Russell - Licenses and distributes apparel.
  • Vanity Fair, Garan, Fechheimer, H.H. Brown Shoe Group and Justin Brands manufacture - also license and distribute apparel and footwear under a variety of brand names.
  • FlightSafety International - provides training to aircraft operators.
  • NetJets - provides fractional ownership programs for general aviation aircraft.
  • Nebraska Furniture Mart, R.C. Willey Home Furnishings, Star Furniture, and Jordan’s Furniture - retailers of home furnishings.
  • Borsheims, Helzberg Diamond Shops and Ben Bridge Jeweler - retailers of fine jewelry.
  • The Buffalo News - a publisher of a daily and Sunday newspaper.
  • See's Candies - a manufacturer and seller of boxed chocolates and other confectionery products.
  • Scott Fetzer - a diversified manufacturer and distributor of commercial and industrial products.
  • Albecca - a designer, manufacturer and distributor of high-quality picture framing products.
  • CTB International - a manufacturer of equipment for the livestock and agricultural industries.
  • International Dairy Queen - a licensor and service provider to about 5,800 stores that offer prepared dairy treats and food.
  • The Pampered Chef - the premier direct seller of kitchen tools in the U.S.
  • Forest River - a leading manufacturer of leisure vehicles in the U.S.
  • Business Wire - the leading global distributor of corporate news, multimedia and regulatory filings.
  • Iscar Metalworking Companies - an industry leader in the metal cutting tools business.
  • TTI, Inc. - a leading distributor of electronic components.
  • Richline Group - a leading jewelry manufacturer.
In 40 years, through smart capital allocation, a small New England textile mill, banking, and insurance operation producing less than $ 5 million in earnings in 1970 has been converted into:

1) The operating subsidiaries listed above employing over 270,000 people and earning an average of $ 9 billion/year* and

2) a $ 140 billion portfolio of predominantly stocks, bonds, cash.

Intrinsic value is an approximation. There's no one absolutely correct estimate of it. Still, using the numbers above it should not be difficult to see why Berkshire's intrinsic value is now over $ 200 billion. If the $ 140 billion portfolio can grow at 7%/year (excluding dividends) it will ~ $ 10 billion in new value next year. So lets assume Berkshire can also earn $ 10 billion from the operating businesses (not much more than the 5 year average and Berkshire now owns Burlington Northern which should easily earn an additional ~$ 1.5 billion/year). So, in this case, a reasonable forecast of near term growth in intrinsic value is in the $ 20 billion/year range.

Would you pay $ 200 billion for a company that owns a variety of durable businesses that can grow its intrinsic value at a $ 20 billion/year?
(on my current Stocks to Watch list the buy @ or below price for Berkshire corresponds with $ 165 billion valuation because it includes a margin of safety.)

There are a number of embedded assumptions here that should by no means taken as a given. Each needs to be thought through and challenged but in an attempt to bring clarity, I've deliberately simplified this analysis. It's easy to get lost in the weeds with so much information. Ultimately, Berkshire is a very complex company these days.

If you think the assumptions are too conservative or aggressive adjust accordingly. Again, it's just an estimate.

BTW - In 1970, Berkshire's intrinsic value was probably not much more than $ 100 million.

Adam

* Average earnings over the last 5 years. It will likely be substantially higher than that over the next 5 years.
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