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STREETSMART GUIDE TO VALUING A STOCK
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ties. Our entry for short-term liabilities for Berkshire was $105.132 billion the total amount of liabilities, plus minority shareholders interests, as shown on Berkshire s third-quarter balance sheet. Stock Price. Berkshire s closing stock price for its Class A shares on December 18, 2002 was $72,000. Shares Outstanding. The third-quarter balance sheet noted that 1,527,234 average common shares were outstanding on September 30, 2002. Debt Outstanding. As we discussed previously, we include debt outstanding for financial companies in the entry for short-term liabilities. Our entry for debt outstanding was 0. Preferred Stock Outstanding. Berkshire had no preferred stock outstanding, 0. Preferred Stock Yield. 0. Risk-Free Rate. We used the 10-year Treasury yield on December 18, 2002 of 4.06 percent. Bond Spread to Treasury. Since we had a 0 entry for debt outstanding, our entry was 0. Beta. According to Yahoo Finance, Berkshire s beta was 0.54, and that was our entry for the ValuePro 2002 software. Equity Risk Premium. We used 3 percent for this input for our valuation examples.
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Berkshire Hathaway Valuation Baseline Scenario: 11-Percent Growth Rate, 10.2-Percent NOPM, Value $70,330
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The results of the base-line valuation are shown in ValuePro general input screen (Exhibit 8-20), which shows Berkshire to have cost of equity of 5.68 percent. In this scenario, Berkshire s stock has an intrinsic value of $70,330 2 percent lower than its closing price on December 18th of $72,000.
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Berkshire Hathaway Valuation Higher NOPM, Higher Rate Scenario: 14-Percent NOPM, 5.06-Percent Treasury Rate, Value $80,627
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It was our belief that the three-year average NOPM of 10.2 percent that we used in the base-line valuation was too low for Berkshire. The 2001 NOPM of 3.9 percent was due in large part to the losses suffered by the insurance subsidiaries for claims relating to the 9/11 terrorist at-
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Valuing a Stock Putting It All Together
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EXHIBIT 8-20
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Berkshire Hathaway General Input Screen Baseline Scenario
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tack. In 2000, the NOPM for Berkshire was 16.4 percent and it was running at 14.4 percent through the third quarter of 2002. Let s assume that Berkshire operates at an NOPM level of 14 percent. This positively affects Berkshire s intrinsic value. Conversely, interest rates on the date of the valuation were at historically low levels. The 10-year Treasury rate was 4.06 percent. We believe that interest rates will rise to a more normal level. Let s assume that rise will average 1 percent, increasing the 10-year Treasury rate to 5.06 percent. When we keep other inputs constant, and plug 5.06 percent into the 10-year Treasury rate window, and 14 percent into the net operating profit margin window of the general input screen (Exhibit 8-21), we see that Berkshire s intrinsic value is $80,627.
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Berkshire Valuation Lower Growth, Higher NOPM, Higher Rate Scenario: 7-Percent Growth Rate, 14-Percent NOPM, 5.06 Treasury Rate, Value $63,028
Excessive growth rates always concern us when we value a company. It may be difficult for management, even as astute as Warren Buffett and Charlie Munger, to keep a company as large as Berkshire Hathaway growing at an 11-percent rate. Let s keep everything else the same from our last scenario, but reduce the growth rate assumption to 7 per-
STREETSMART GUIDE TO VALUING A STOCK
EXHIBIT 8-21 Scenario
Berkshire Hathaway General Input Screen Higher NOPM
cent. This is a rate with which we feel more comfortable, and one that will produce a more conservative valuation. What happens to intrinsic value if Berkshire s growth rate in the future averages 7 percent If we keep other inputs constant and plug 7 percent into the growth rate window of the general input screen (Exhibit 8-22), we see that Berkshire s intrinsic value is $63,028. This is 10 percent below the current price for Berkshire stock.
EXHIBIT 8-22 Scenario
Berkshire Hathaway General Input Screen Lower Growth
Valuing a Stock Putting It All Together
Berkshire Hathaway Stock Buy Sell Hold
In valuing Berkshire Hathaway, we looked at three scenarios: a baseline scenario with an 11-percent growth rate and a 10.2-percent NOPM that resulted in an intrinsic value of $70,330; an 11-percent growth, 14percent NOPM, 1-percent higher Treasury rate scenario, which had a value of $80,627; and a 7 percent growth, 14 percent NOPM, 1 percent higher rate scenario that gave a value of $63,038. Berkshire Hathaway is a great company with terrific management. However, at the price of $72,000 per share, it was not a bargain. The price was midway between our low valuation of $63,038 and our high valuation of $80,627. At that level, we viewed Berkshire Hathaway as a hold.
Valuing Washington REIT December 20, 2002
Price $25.55, Value $24.81 to $17.38, Sell General Description of Washington REIT a Real Estate Investment Trust
Washington Real Estate Investment Trust (WRE: www.writ.com/ ) is an equity real estate investment trust that owns and operates 59 properties in the Baltimore-Washington corridor. Their properties consist of 24 office buildings, 15 industrial buildings, 11 retail centers, and 9 multifamily properties. WRE s objective is to invest in real properties in prime locations, to improve the properties, and to manage, develop, and lease the projects to improve their economic performance. WRE s market equity is only $1 billion a small cap stock. That market value is 20 times earnings and 3 times book value of $8.38 per share. WRE pays an annual dividend of $1.41 per share and has a dividend yield of 5.52 percent. From third quarter of 2001 to third quarter of 2002, income from real estate was flat, and earnings have declined. WRE s stock price history is shown in Exhibit 8-23.
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