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- Manlobbi
Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A) ❤
No. of Recommendations: 12
I normally do a two-part valuation for Berkshire: investments per share plus a multiple of earnings on non-investment-related stuff.
Plus a bunch of adjustments, but that's the broad approach.
Has anyone thought about how to adjust your valuation models based on the closing of the Alleghany transaction?
I'm not sure whether the report will include proforma statement of what earnings would have been had the transaction been in effect for the whole year.
Without that, the figures on the surface of things will be a bit misleading---
All the money went out the door for the acquisition, but only a very short period of earnings will be reported in the GAAP numbers for Berkshire's fiscal year.
That would count the whole downside (the money spent) but not the whole upside (the annual rate of earnings acquired).
FWIW, I found Alleghany's 2021 letter.
For those not au courant, they are a bit like Berkshire in that they have operating companies as well as their quite separate insurance operations.
The simple two-step valuation is to value the insurance operation as any other, and value the operating portion based on a multiple of earnings.
In 2021, Alleghany Capital (the operating units) had $1.338bn in equity and after-tax earnings (after non-controlling interests) of $150m.
(adjusted earnings divided by average equity was 12.3%...pretty good business)
So a quick first stab for BRK now would be
- take out any Alleghany earnings for the short period it was owned
- add ~150m as the annual earnings power proxy instead (unless they report the full year after-tax figure for us, then use that)
- apply multiple of choice to get a value for Alleghany
- remove $1.3bn from the apparent investments per share....not so sure about that step
It depends on how you calculate investments per share...whether the line items used includes Alleghany Capital's equity or not.
Anyone have any better thoughts on this subject?
Jim
No. of Recommendations: 1
Jim,
Re Alleghany I see how it can complicate your standard procedure. I can't improve your thoughts on that approach.
Why not just count it as an investment asset at this stage of things? By one definition, IV is the price a well informed buyer will pay a well informed seller. So we know it's IV at this point in time.
Maybe better than we know the value of the other equities.
No. of Recommendations: 4
Re Alleghany I see how it can complicate your standard procedure. I can't improve your thoughts on that approach.
Why not just count it as an investment asset at this stage of things? By one definition, IV is the price a well informed buyer will pay a well informed seller. So we know it's IV at this point in time.
That makes some sense, but...
I imagine it won't be listed as a separate holding, but rather all the assets will have been fully consolidated: broken into many line items all over the place.
Their float will be included in total float, their investments will be included in total equity and fixed income holdings, etc.
Most biggish acquisitions will get a dedicated note showing how the purchase value is broken up and allocated, including a fresh addition to goodwill.
I'll probably start there. With luck there will also be a pro forma line showing the net income (ex non-controlling interests) for the full calendar year.
Jim
