Sunday, 16 December 2012

Berkshire Hathaway's Amended Stock Buyback

Suddenly, Berkshire Hathaway recently announced an increase in the ceiling price for its share repurchase program, from a maximum of 110% of book value to 120%.  Though sudden, the move is not a shock: Warren Buffett has said in the past that he could live with a somewhat higher figure than the original 110%.  The announcement included the disclosure that the company had repurchased about $1.2 billion worth of stock from the estate of a long-time shareholder, as well.
There's reason to suspect that Buffett values Berkshire by attaching a multiple to normalized earnings, and adding that figure to book value.  In his 2010 Letter to Shareholders, Buffett estimated that "normal" earnings power was about $12 billion after-tax, assuming no extraordinary insurance losses or other outlying charges; that number is probably closer to $14 billion now. Assuming a 12x multiple, Berkshire's earnings are worth $168 billion, or about $102 000 per share, and its book value currently stands at around $115 000/share, giving the company an "intrinsic value" of around $217 000 per share.  Thus, at the present stock price, the company is selling for about 61 cents on the dollar.
Given Berkshire's sheer size, its universe of potential investments is a rather small one, and at minimum this move opens another avenue in Buffett's hunt for places invest - specifically, by doubling down on Berkshire's current collection of assets.  In the past, Buffett seemed to regard share repurchases as a mild form of admitting defeat, but given the present gulf between price and value, he's clearly more enthusiastic. The first buyback announcement had the effect of putting a floor under Berkshire's stock price, a floor that was mostly above the 110% threshold, meaning the company was able to repurchase only very few shares. The latest announcement appears to have had a similar effect, and it remains to be seen if the company will be able to act in a major way or not.  If it can, Buffett has created a low-risk, easy way to create meaningful value for shareholders.
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