No. of Recommendations: 5
I like your PV of $549! :) Could you advise what you used as the starting point for the growth rate of earnings. There has been such a variation over the last 5 years, I am wondering about the starting input value.I simplify the calculation by just using today's share price ($399) and, assuming P/E multiples remain the same as today, calculating growth rates from today's share price (8% baseline assumption) and discounting this by the 10y treasury rate (4.6%). This implicity makes a major assumption that the current P/E multiple is not out of line with the historical level.
Using current earnings and extrapolating them is not a straightforward thing to do, since Berkshire's earnings (including unrealized investment gains) are extremely volatile, as are its insurance underwriting results. Rather than using a multiple of earnings for calculating fair value, something like the 5-grove system would probably be better, except good luck finding all the numbers going back 20 years.
A simpler variant of this approach is the one Tilson uses*, where he calculates fair value based on the total of all investments plus a fixed multiple (Tilson uses 11) of the pre-tax operating earnings from the wholly owned businesses, similar to Jim's 2 1/2 column approach. The end of 2023 IV per A-share, calculated this way, was $639,679, with A-shares trading at $542,625, a 15% discount. The average discount, going back to 2002, has been 20%, so on that basis, you might say that at year end 2023, shares were trading at 6% above their 22 year average, with respect to intrinsic value. That was Dec 31st, 2023, when B-shares were at $356.66; at a share price of $399, and with intrinsic value up maybe 2.5% after 4 months, we would have shares currently 15% over their average.
If I recalculate, assuming we are currently 15% above the usual multiple and that we will revert to the 2002-2023 average multiple over the next 10 years, I get intrinsic values of $398, $480 and $576, for expected growth rates of 6%, 8% and 10%.
Maybe Buffett's 'conservative range' of IVs doesn't go as low as 10-year annual returns of only 6%, but the low end of my range is close to today's price. Maybe I am being TOO conservative, and should repurchase as he has been doing.
dtb
*
https://stansberryresearch.com/articles/my-updated...
