Warren Buffett Presentation v3
Transcript of Warren Buffett Presentation v3
Berkshire Hathaway Board Meeting
May 2005
Agenda
• Berkshire Hathaway overview
• PacifiCorp Valuation– Valuation multiples– Discounted cash flows
• Results
• Afterthoughts
Warren Buffett’s investment philosophy
• Economic reality, not accounting reality• Invests by the motto “be fearful when others are greedy and
greedy when others are fearful”• Good returns on equity while having little or no debt• The larger the company, the better it is. To acquire businesses in
the $5- $20B USD range• Does not believe in diversification, “There is no risk if you know
what you’re doing”• Intrinsic value is the present value of future expected
performance• Contrary to conventional market practices, he uses risk free
discount rate to discount expected cash flows • Investments should be driven by information and analysis• Does not believe in the efficient market hypothesis and efficient
frontier. “It is possible to beat the market”.
Source: Berkshire Hathaway Business Case
We have been outperforming the market for several years; However 2004 has been a difficult year…
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Stock price(Indexed Jan 94 = 1)
Berkshire Hathaway
S&P 500
Source: Capital IQ
MidAmerican Energy Holdings
acquisition
Insurance represents 59% of BH’s EBIT; We are looking to advance our growth via a different industry
Insuran
ce
Building
Finan
cial
Carpet a
nd cove
rings
Others
Apparel
Groce
ry dist
Fligh
tRetai
lTotal
010002000300040005000600070008000
EBIT from Berkshire Hathaway subsidiaries per industry($M USD, 2004)
Source: Berkshire Hathaway Annual Report 2004
BH has chosen its portfolio wisely and has profited considerably, mainly from its ‘Big 4’
1992 (Cost) 2004 (Market value)0
5000
10000
15000
20000
25000
30000
35000
40000
5224
24681
3832
13036
Major investments of Berkshire Hathaway($M USD)
Other In-vestment
Big 4
% Growth(92 – 04)
372%
240%
Note: Big 4 represents American Express, Coca Cola, Gillette and Wells Fargo & CoSource: Berkshire Hathaway Annual Report 2004
Agenda
• Berkshire Hathaway overview
• PacifiCorp Valuation– Valuation multiples
– Discounted cash flows
• Results
• Afterthoughts
First, we determine multiples based on the performance of comparable companies
Enterprise Value as Multiple of:
Enterprise Value Revenue EBIT EBITDA Net Income
Alliant Energy Corp. $5600 1.89x 13.33x 7.45x 34.15x
Cinergy Corp. $13,231 2.82x 17.93x Na. 32.75x
NSTAR $5287 1.79x 11.62x 7.53x 27.83x
SCANA Corp. $7967 2.05x 13.37x 9.25x 30.18x
Wisconsin Energy Corp. $7691 2.24x 14.51x 8.97x 25.13x
Median $7691 2.05x 13.37x 8.25x 30.18x
Mean $7955 2.16x 14.15x 8.30x 30.01x
Source: Value Line Investment Survey
Then we use the multiples to calculate the value of PacifiCorp based on its performance
Revenue EBIT EBITDA Net Income 0
100020003000400050006000700080009000
10000
6252 87
75
9023
7596
6584
9289
9076
7553
PacifiCorp valuation$M USD (2004)
MedianMean
Source: Value Line Investment Survey
The range between the different multiples is considerable; We recommend to complement
with additional valuation
Range: 3037
Agenda
• Berkshire Hathaway overview
• PacifiCorp Valuation– Valuation multiples
– Discounted cash flows
• Results
• Afterthoughts
Based on historical figures, we assumed CAPEX to remain 9% and increase revenues by 12% per year
CAPEX CAPEX Revenue0%
2%
4%
6%
8%
10%
12%
Pacificorp CAPEX and Revenue growth(Yearly, 2006-2010 )
AssumptionHistorical value
Conservative approach: CAPEX for MidAmerican
has increased 20% CAGR in 5
years
Source: PacifiCorp Financial Results; BH Economic Projections for PacifiCorp
We determined expected cash flows for each year from 2006 to 2010
EBIT*
(1-t)
Depre
ciatio
n
CAPE
X
Delta N
WC
Tota
l CF
0200400600800
10001200140016001800
PacifiCorp cashflow($M USD, E2010)
Source: PacifiCorp Financial Results; BH Economic Projections for PacifiCorp
+ - - =
EXAMPLE
We then estimated perpetual value and discounted the cash flows considering a free risk discount rate of 5.76%
Note: Free risk discount rate of 5.76% used according to Warren Buffet’s valuation policies; GDP growth of 2.3% used for perpetuity growth as 12% growth is not sustainable on a long termSource: Warren Buffet Case Study; BH Economic Projections for PacifiCorp
2005 2006 2007 2008 2009 2010 Perpetuity
95
137
180
225
272
7,981
100 153 213 281 360 368
𝑇𝑉=𝐷5∗(1+𝑔)(𝑅𝑓 −𝑔)
𝑇𝑉=368
(5.76 %−2.3%)
=8,889
5.76%
The results set the value of PacifiCorp between $6,200M and $9,289M
Minimum value valuation mult
Discounted CF Maximum value valuation mult
0100020003000400050006000700080009000
10000
6252
8889 9289
PacifiCorp Valuation($M USD, 2004)
Source: PacifiCorp Financial Results; BH Economic Projections for PacifiCorp
We propose to buy PacifiCorp for $9.4B USD
Please vote “Yes” or “No” according to your decision regarding the acquisition of PacifiCorp
Agenda
• Berkshire Hathaway overview
• PacifiCorp Valuation– Valuation multiples
– Discounted cash flows
• Results
• Afterthoughts
The valuation of PacifiCorp is considerably sensitive to changes in growth rate and discount rate
Growth Disc. rate
9% 11% 12% 13% 15%
5.76% $4,723 $7,447 $8,889 $10,387 $13,555
6.46% $3,896 $6,133 $7,318 $8,548 $11,148
7.00% $3,425 $5,387 $6,425 $7,503 $9,781
8.00% $2,790 $4,379 $5,219 $6,091 $7,934
9.00% $2,344 $3,673 $4,375 $5,103 $6,641
Valuation for PacifiCorp ($M USD using DCF method)
Source: Economic Projections for PacifiCorp Free Risk WACC
BH stock price increased 2.4% after announcing the acquisition; However it decreased soon after
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Berkshire Hathaway
Source: Capital IQ
Conclusion
• BH paid $9.4B USD for PacifiCorp, apparently more than its intrinsic value– Valuation multiples set highest value in $9.2B– DCF set value in $8.9B with free risk discount rate. Real market
rates will decrease this value– Valuation using WACC of 6.46% is $7.3B
• We believe PacifiCorp was not a very good investment– The stock market had lukewarm reaction to the acquisition. Stock
price was stable for the following 6 months
• So why didn’t stock price fall?– Warren Buffet is known for his long term investments; Investors
believe on PacifiCorp’s results on a long term– Even though WB says he does not believe in diversification,
PacifiCorp reduced its risk from its insurance companies
• There is no such thing as a free risk investment
We disagree with several points of WB’s philosophy
• Economic reality, not accounting reality
• “be fearful when others are greedy and greedy when others are fearful”
• Good returns on equity while having little or no debt
• The larger the company, the better it is
• Does not believe in diversification
• Intrinsic value =PV of future expected performance
• Risk free discount rate for DCF
• Investments driven by information and analysis
• Does not believe in the efficient market hypothesis and efficient frontier
Source: Berkshire Hathaway Business Case
Agenda
• Berkshire Hathaway overview
• PacifiCorp Valuation– Valuation multiples
– Discounted cash flows
• Results
• Afterthoughts
Berkshire Hathaway’s latest investments
• 10% perpetual preferred stock of Goldman Sachs
• $66.7B on stocks of GE
• $11B on stocks of IBM
• $34B to acquire Burlington Northern Santa Fe Corp, US railway
• $2.6B on Swiss Re, a reinsurance company
BH’s stock price has performed admirably and continuously outperforms S&P 500
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Stock price(Indexed Jan 94 = 1)
Berkshire Hathaway
S&P 500
Source: Capital IQ
A comparison between investment Gurus
A comparison between investment Gurus
Warren Buffet Bill Miller Jim Rogers
Stays within own circle of competence. He is a ‘Value stock’
investor
Has knowledge about technology sector although he also doesn’t know about the world situation
in 10 years. He invested in companies like ebay and DirecTv.
He is a ‘Growth stock’ investor
Do your own work. Don’t be afraid of being a loner. Be
selective in your investing and look for one good idea
“Successfully forecasting the short term stock price movement is something beyond the scope of
anyone”
A few years ago stated that the market could gain 15% in the
following year
Every investment should be considered a commodity that will
be affected by supply and demand changes. It’s just a
question of when
Keep your losses down and everything else will take care of it. The best investments offers
great reward with little actual risk
Aggressive and Bold manager that is based on thorough and
creative research
Good investors need a historical perspective . Don’t buy stocks at
high multiples