Warren Buffett Presentation v3

25
Berkshire Hathaway Board Meeting May 2005

Transcript of Warren Buffett Presentation v3

Page 1: Warren Buffett Presentation v3

Berkshire Hathaway Board Meeting

May 2005

Page 2: Warren Buffett Presentation v3

Agenda

• Berkshire Hathaway overview

• PacifiCorp Valuation– Valuation multiples– Discounted cash flows

• Results

• Afterthoughts

Page 3: Warren Buffett Presentation v3

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

Page 4: Warren Buffett Presentation v3

We have been outperforming the market for several years; However 2004 has been a difficult year…

Jan-03-1994

Sep-03-1994

May

-03-1995

Jan-03-1996

Sep-03-1996

May

-03-1997

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Sep-03-1998

May

-03-1999

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Sep-03-2002

May

-03-2003

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Sep-03-2004

0

1

2

3

4

5

6

7

Stock price(Indexed Jan 94 = 1)

Berkshire Hathaway

S&P 500

Source: Capital IQ

MidAmerican Energy Holdings

acquisition

Page 5: Warren Buffett Presentation v3

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

Page 6: Warren Buffett Presentation v3

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

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Agenda

• Berkshire Hathaway overview

• PacifiCorp Valuation– Valuation multiples

– Discounted cash flows

• Results

• Afterthoughts

Page 8: Warren Buffett Presentation v3

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

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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

Page 10: Warren Buffett Presentation v3

Agenda

• Berkshire Hathaway overview

• PacifiCorp Valuation– Valuation multiples

– Discounted cash flows

• Results

• Afterthoughts

Page 11: Warren Buffett Presentation v3

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

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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

Page 13: Warren Buffett Presentation v3

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%

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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

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Please vote “Yes” or “No” according to your decision regarding the acquisition of PacifiCorp

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Agenda

• Berkshire Hathaway overview

• PacifiCorp Valuation– Valuation multiples

– Discounted cash flows

• Results

• Afterthoughts

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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

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BH stock price increased 2.4% after announcing the acquisition; However it decreased soon after

Jan-03-2005

Jan-24-2005

Feb-14-2005

Mar-

07-2005

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28-2005

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May

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Stock price(Indexed Jan 94 = 1)

Berkshire Hathaway

Source: Capital IQ

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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

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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

Page 21: Warren Buffett Presentation v3

Agenda

• Berkshire Hathaway overview

• PacifiCorp Valuation– Valuation multiples

– Discounted cash flows

• Results

• Afterthoughts

Page 22: Warren Buffett Presentation v3

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

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BH’s stock price has performed admirably and continuously outperforms S&P 500

Jan-02-2002

Jul-3

1-2002

Feb-26-2003

Sep-24-2003

Apr-21-2004

Nov-17-2004

Jun-15-2005

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Mar-

07-2007

Oct-03-2007

Apr-30-2008

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16-2011

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0123456789

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Stock price(Indexed Jan 94 = 1)

Berkshire Hathaway

S&P 500

Source: Capital IQ

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A comparison between investment Gurus

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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