Berkshire Hathaway Financial Analysis

Berkshire Hathaway
Business Analysis and Valuation

April 2010

Vinod Palikala [e-mail]

Business Analysis and Valuation by Vinod Palikala

Contents
1. 2. 3. Company Overview ............................................................................................................................... 3 Valuation Approach .............................................................................................................................. 4 Valuation ............................................................................................................................................... 6 3.1. 3.2. 3.3. 3.4. 3.5. 4. Insurance .......................................................................................................................................
However, it is managed on an extraordinarily decentralized basis with no centralized business processes like human resources or sales. The only centralized functions are capital allocation and selection of Chief Executive for each of the operating businesses. There is no attempt made to create synergies between the individual businesses. Profits from each of the businesses flow back to the parent company where it is allocated opportunistically to earn high rates of return. Insurance Berkshire’s insurance operations are carried out under four subsidiaries (1) GEICO (2) General Re (3) Berkshire Hathaway Reinsurance Group and (4) Berkshire Hathaway Primary Group. The main business of Berkshire is insurance and is the dominant driver of the company value. Utilities & Energy Berkshire owns 90% of MidAmerican Energy Holdings Company. MidAmerican has several operating units (1) PacifiCorp (2) MidAmerican Energy Company (3) Northern Natural Gas Company (4) Kern River Gas Transmission Company (5) CE Electric (6) CalEnergy (7) HomeServices of America. Burlington Northern Santa Fe railroad acquired in 2010 is also part of this group. Manufacturing, Service & Retail This segment consists of very diverse group of businesses the most significant of which are (1) 64% ownership of Marmon (2) Shaw Industries (3) McLane (4) 80% ownership of ISCAR Metalworking Companies (5) FlightSafety International (6) NetJets. Finance & Finance
For every one dollar of shareholder equity is supporting only one dollar of reserves and about half a dollar of insurance premiums. This shows that Berkshire is overcapitalized to a significant degree and that it is operated with extraordinarily low leverage levels. This is somewhat mitigated with a more aggressive allocation towards equities with the entire shareholder capital allocated to that segment. Overall the balance sheet shows low risk with an ability to support larger insurance business. Insurance Leverage Equities/ Reserves/ Statutory Statutory Surplus Surplus 0.8 1.1 1.0 1.3 0.9 0.8 0.9 1.0 1.1 0.9 0.9 1.1 0.9 0.8 0.9 0.9 1.1 1.5 1.5