Berkshire Hathaway Valuation

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Berkshire Hathaway
Business Analysis and Valuation

April 2010

Vinod Palikala vpalika@hotmail.com

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 ....................................................................................................................................... 7 Utilities and Energy ..................................................................................................................... 12 Manufacturing, Service and Retail .............................................................................................. 13 Finance and Financial Products................................................................................................... 14 Total Company Valuation............................................................................................................ 15

Alternative Valuation Methods........................................................................................................... 15 4.1. 4.2. 4.3. Book Value Growth ..................................................................................................................... 16 Look Through Earnings................................................................................................................ 17 Two Column Approach................................................................................................................ 17

5.

Recommendation................................................................................................................................ 18

Appendix ..................................................................................................................................................... 20 Float Value Calculation ........................................................................................................................... 20

2

Business Analysis and Valuation by Vinod Palikala

1. Company Overview
Berkshire Hathaway is a unique collection of diverse business operating in a variety of industries. Management segregates the business into the segments illustrated in the diagram below.

Berkshire is best viewed as a diversified conglomerate. 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%...
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