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Valuing a Stock Putting It All Together
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EXHIBIT 8-16
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Berkshire Hathaway Stock Price Chart
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price. From fiscal year 2000 to 2001, earnings fell over 75 percent. Earnings have recovered during fiscal year 2002. Berkshire s stock price history is shown in Exhibit 8-16.
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The fiscal year for Berkshire Hathaway ends on December 31st. On November 8, 2002, Berkshire issued a third-quarter report to shareholders for the quarter ending September 30, 2002, and posted it on its Web site. We included the audited 2001 income statement, balance sheet, and cash flow statement of Berkshire as Exhibits 8-17, 8-18, and 8-19, respectively. We used information provided in the third-quarter earnings release, in Berkshire Hathaway s 2001 Annual Report, and on financial Web sites to develop our valuation inputs. Revenues. In order of importance, the revenue sources for Berkshire are: insurance premiums earned; sales and service revenues; interest, dividend, and other investment income; realized investment gains; and income from financial products. According to the 2001 income statement, the most recent annual revenue for Berkshire was $37.668 billion. Revenue Growth Rate. The historic revenue growth of Berkshire has been significant, growing by 41 percent from $24 billion in 1999 to
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EXHIBIT 8-17
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Berkshire Hathaway 2001 Income Statement
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$34 billion in 2000, and then increasing by 11 percent in 2001 to $37.7 billion. Total revenues were up 5.1 percent in the third quarter of 2002 when compared to the third quarter of 2001. Berkshire s earnings before income taxes grew 228 percent from 1999 to 2000, and then dropped 74 percent between 2000 and 2001. Again, a large portion of the blame was due to 9/11 considerations. During the third quarter of 2002, earnings before income taxes increased 390 percent above the level of the third quarter of 2001. What is Berkshire s growth potential A consensus analyst expectation of earnings-per-share growth over the next five years for Berk-
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Valuing a Stock Putting It All Together
EXHIBIT 8-18
Berkshire Hathaway 2001 Balance Sheet
shire was 11 percent. Zacks polled the three analysts that covered Berkshire. All rated it a buy. For our initial valuation of Berkshire, we used an 11-percent growth rate. We also used a growth rate of 7 percent in a lower growth scenario, which gave us a more conservative valuation for Berkshire.
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EXHIBIT 8-19
Berkshire Hathaway 2001 Cash Flow Statement
Valuing a Stock Putting It All Together
Excess Return Period. We consider Berkshire a well-managed, great financial/diversified firm, and we used a 10-year excess return period in our valuations. NOPM Estimate. In order of importance, Berkshire s expenses are: insurance losses and loss adjustment expenses, cost of products and services sold, insurance underwriting expenses, and SG&A. To calculate operating income for Berkshire, we subtracted total expenses from total revenue. To arrive at Berkshire s NOPM, we divided operating income by revenue. Over the past three fiscal years, NOPMs were 10.2 percent in 1999, 16.4 percent in 2000, and 3.9 percent in 2001, for an average of 10.2 percent. It the nine months ending September 30th, Berkshire Hathaway s NOPM jumped to 14.41 percent. We used the 10.2-percent three-year average NOPM in the base-line valuation, and adjusted the NOPM upward in a subsequent valuation. Income Tax Rates. Income tax expense for Berkshire averaged 37.7 percent over the three-year period from 1999 to 2001. We used that 37.7 percent rate in our baseline valuation. New Investment and Depreciation. To fuel its growth, Berkshire Hathaway actively purchases other businesses. Berkshire s business acquisitions, net of cash acquired, has averaged 8.09 percent of revenue over the past three years, which we used for the investment rate input. Berkshire had depreciation charges that averaged 2.88 percent of yearly revenue over the past three years, which we used as our depreciation rate input. Incremental Working Capital. Our entry for working capital was 0. Short-Term Assets. Like other financial firms, Berkshire s balance sheet does not differentiate between current assets and long-term assets. The third-quarter balance sheet of Berkshire lists total assets of $167.7 billion. Principal assets are: investments, loans and receivables, cash and cash equivalents, trading account assets, inventories, goodwill, PP&E, and other assets. From that total, we eliminated long-term fixed assets of PP&E $5.2 billion, and assets of questionable value, such as goodwill $22.2 billion, and other assets $6.6 billion, which gave us a short-term asset entry of $133.682 billion. Short-Term Liabilities. Berkshire s principal liabilities are: losses and loss adjustment expenses, unearned premiums, accounts payable, repurchase and investment agreements, and trading account liabili-
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