Berkshire Hathaway’s 2012 look-through earnings from stock investments look to be $4.5 billion

Buffett has long underscored that GAAP can sometimes obfuscate the economic performance of a business. To wit, Buffett introduced the notion of look-through earnings, which comprise both reported earnings AND any undistributed earnings of a company’s investees. (See Berkshire Hathaway’s Owner’s Manual for more details.) Buffett has underscored that including these earnings in a calculation of a business’s normal earnings power is highly useful in understanding where the business stands and in valuing the business. The tree still falls, even if nobody hears it.

In his 2011 letter to shareholders, Buffett made it a point to note that Berkshire’s share of the earnings of Coca-Cola, American Express, Wells Fargo and IBM – the “Big Four” – was $3.3 billion. Under GAAP, only $862 million of dividends were reported. The press mostly ignores or is ignorant of this reality in reporting Berkshire’s earnings. Therefore, many have a poor understanding of Berkshire’s true earnings power.

I made my own estimate of Berkshire’s 2012 look-through earnings from its equity investments. My estimate is $6.5 billion of which just under $2 billion will be paid to – and reported by – Berkshire as dividends. That leaves $4.5 billion that Berkshire will likely earn in 2012 that will not be reported. That is substantial. Buffett wrote in his 2010 letter that he estimated Berkshire’s normal after-tax earnings power to be $12 billion.

Berkshire’s total 2012 after-tax earnings – including look-through earnings – could be as high as $16.5 billion, or more.

One other detail should be mentioned. Years ago, when Buffett would provide a calculation of look-through earnings in his shareholder letters, he would deduct an amount equal to the additional taxes that Berkshire would have paid if all owner earnings were paid as dividends. In my judgment, that is overly conservative. Buffett is generally a very long-term holder of common stocks. The present value of the deferred taxes on the capital gains that will be derived from these retained earnings will be far less than the taxes due if these earnings were distributed as dividends in the years they were earned. Nevertheless, some adjustment should be made to any estimate of intrinsic value based on look-through earnings to account for Berkshire’s deferred tax liability.

Finally, my estimate is largely based on consensus 2012 earnings estimates for Berkshire common stock investments.

 

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11 thoughts on “Berkshire Hathaway’s 2012 look-through earnings from stock investments look to be $4.5 billion

  1. Canadian Munger

    Greg,

    Great article. You’re right, Berkshire’s look through earnings on its equity investments are often ignored.

    Based on the above 16.5 billion of after tax earnings power, what is Berkshire’s intrinsic value in your opinion?

    Thanks,

    CM

    Reply
    1. Greg Speicher Post author

      Canadian Munger, thanks for the comment. First, I think the $16.5 may be low, as it does not include profits from insurance which were $17 billion over the past 9 years, earnings from a housing recovery and under appreciated assets such as the BAC warrants. Just putting a market multiple of 15x on the $16.5 billion gets you to 150K to 160K for the A shares. I plan to write more on this subject.

      Reply
    2. Value Investor 1982

      Hi Greg / Canadian. What are your thoughts on the following:

      In my opinion when people do not include the look through earnings of BRK’s investments when valuing the stock, it is usually because they are valuing the company in the form of: Investments (& cash) per share plus [a multiple multiplied by] pre-tax earnings per share (excluding all income from investments). When I see people using look-through earnings it is on the basis of a pure multiple basis, i.e. pre-tax earnings per share including dividends and look through earnings (in other words all % income from investments). Is this your understanding?

      What are your thoughts on valuing the float, per Navi Nagarajan or PaineWebber or Goldman? This is often overlooked, but IMHO there is clear value in the float.

      Reply
  2. VPD

    Was going to comment that you should also consider normalized insurance underwriting profits to you $12bn, see that you mentioned in your reply above…

    2011 underwriting profit was $250m vs. $2,000m in 2010. Add another $2,000m to your look-through and you are talking about $280bn…market value @40% discount to intrinsic.

    Also important to note that S&P up 10% since Dec. ’11. Book value of investments was already $100,000 per/A-share. Assume 10% increase in equity portfolio (though I’m guessing positions in USB, WFC and AXP will make that a larger increase) and you have a book value of investments @$110,000 per/A-share!!!!

    Seeing as BRK’s stock repurchase program outlined by Buffett can be triggered @1.1x book value this means that once BRK reports 1Q’12 results they may already be there by looking at the book value of their investment portfolio only!!!

    Reply
  3. VPD

    Also…looks like on your financials you are using dividend payments prior to the recent increases. WFC for instance raised div. 90% ($0.88/year) on 400m shares that BRK owns is $350m.

    That’s an additional $160m in div. income @15x is another $2.4bn.

    If you update the same (maybe you have I haven’t checked) for USB, AXP you could be talking about another c.$4bn of value.

    Plus the BAC option you mentioned which @700m shares @$7.15 vs. todays price of $9.5 is another $1.5bn in incremental value(I’m not sure about the exercise options of this stake and if BAC can buyback at par).

    Point is you’re reaching c.$290bn-300bn in intrinsic value…

    Thanks for the post…one of the first summaries of look-through/intrinsic value that I’ve seen that is really concise and clear…helped me consolidate my thoughts.

    Reply
    1. Amit Dua

      dividend increase will decrease look through earnings.So dividend increase does not add value other than increasing reportable earnings

      Reply
      1. Greg Speicher Post author

        Some dividend increase is built into my data. I took the most recent quarter and exptrapolated for the entire year. Many companies had already put in place an increase vis-a-vis 2011. Certainly more will come with Wells Fargo having the potential to be material. The key is to not double count. If you make an assumption that investment income will grow in 2012 as a result of dividend increases a equal adjustment must be made to look-through earnings.

        Thanks for the comment.

        Reply
  4. Amit Dua

    Greg Speicher,

    Nice article. I agree with you. But I believe earning power is more because

    1) Berkshire got Lubrizol( This is after he said earning power is 12 billion)
    2) he has been buying additional ownership of Marmon.
    3) Many bolt in acquisitions.

    Reply
    1. Jonathan

      Amit is 100% correct. Warren’s $12 billion estimate was made in March of 2011. Every time Berkshire makes a new acquisition you have to add to the normalized earnings power.

      Reply
  5. TSteven

    Gains from look through earnings are unfortunately discounted by BH’s excessive capex.

    Last 5 years
    GAAP Net Income $52 B
    Depreciation $17.1 B
    Capex $30.6 B

    Estimated total Owners Earnings over last 5 years $38.5 B (52+17.1-30.6). This is about a 26% discount to GAAP earnings.

    EST 2012 earnings
    = owner earnings + look through
    = $8.9 Bil (12 B x .74) + 3.4 B (after 25% tax) = $12.3 B

    Calculating look through “owners” earnings would probably discount the estimate a little further.

    Reply

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