Berkshire Look-through Earnings
Below are tables that itemize the look-through earnings for
Berkshire Hathaway for the years 2003 and 2004. In his 1997
Chairman's Letter, Buffett explained this concept:
"Reported earnings are a poor measure of economic progress at
Berkshire, in part because the numbers shown in the table presented
earlier include only the dividends we receive from investees—though
these dividends typically represent only a small fraction of the
earnings attributable to our ownership. Not that we mind this
division of money, since on balance we regard the undistributed
earnings of investees as more valuable to us than the portion paid
out. The reason is simple: our investees often have the opportunity
to reinvest earnings at high rates of return. So why should we want
them paid out?
"To depict something closer to economic reality at Berkshire than
reported earnings, though, we employ the concept of "look-through"
earnings. As we calculate these, they consist of: 1) the operating
earnings reported in the previous section, plus; 2) our share of the
retained operating earnings of major investees that, under GAAP
accounting, are not reflected in our profits, less; 3) an allowance
for the tax that would be paid by Berkshire if these retained
earnings of investees had instead been distributed to us."
In 1997 Buffett listed look-through earnings of $1.930 billion,
which would have been $1,564 per share based on the 1,234,127 shares
that were outstanding on December 31, 1997. This would mean that per
share earnings growth for the seven year period was equal to 15.2%
on an annual basis, for the period that includes both the purchase
of General Re and 9/11. During the same period, GE has grown its
per-share earnings at an annual rate of 9.8%, and Microsoft at
15.8%. So, compared to the competition, Berkshire has been doing all
right. At a price of $83,000, Berkshire's trailing PE (for the 12
months ending 12/31/2004) would be 19.6. GE's PE is 21.1 and Mr.
Softy's is 26.8.
But "Reported earnings are a poor measure of economic progress at
Berkshire." This may not be quite as true today as it was in 1997,
but it is still true. Indeed, look-through earnings are helpful but
they still do not give anything close to a definitive window into
Berkshire's intrinsic value.
The attached tables are based on operating earnings only and so
ignore $5 billion in after-tax income that Berkshire received in
gains on its investments. Since 1997 Berkshire has logged $18.2
billion in after-tax operating earnings compared to $11.9 billion in
after-tax investment gain. While everyone knows that investment
gains are not predictive of future economic progress that does not
mean they are meaningless.
Income is still income, and the $11.9 billion from after-tax
investment gain can be used to fund future investment in the same
manner as cash from operating income. When we say that Berkshire's
trailing PE is 19.6, we are in effect ignoring $12 billion in
historical earnings.
The other problem with any earnings-based evaluation of Berkshire is
the company's liquidity. The company has on its balance sheet $47
billion in cash, $22 billion in bonds, $41 billion in marketable
equities, and $2 billion a quarter in new cash flow. With $110
billion and counting in liquid assets, the company does not need it
all to keep operating. If we subtract $70 billion for debt and
insurance obligations, you could probably remove $40 billion and not
impair the on going status of the business. Remove $40 billion, or
$26,000 per share, from the present market value and you are left
with $57,000 per share and divide it by $4,222 per share earnings
and it gives you a PE of 13.5. This is still ignoring the investment
gains.
Granted the above process lacks a certain analytical neatness, and
maybe 13.5 seems seem like a screwy number, but I like it better
than 19.6 or 22 (which is what Standard & Poor's says it is). The
reason I like it is that I feel it gives a simple and reasonable
picture of Berkshire's value relative to the over all market.
Something that simply comparing operating earnings to the market
price does not do.
Berkshire Hathaway Look-through Earnings 2003
| Company | Shares Held | Earnings per Share 2003 | Dividends 2003 | Undistributed Earnings per Share | Look-through Earnings 2003 |
|---|---|---|---|---|---|
| American Express | 151,611,000 | $2.310 | $0.360 | $1.950 | $295,641,450.00 |
| Amer Standard | 3,232,000 | $1.830 | $0.000 | $1.830 | $5,914,560.00 |
| Automatic Data | 1,416,000 | $1.670 | $0.430 | $1.240 | $1,755,840.00 |
| H&R Block, Inc. | 14,611,000 | $1.580 | $0.350 | $1.230 | $17,971,530.00 |
| Cadbury Schwepps | 10,000,000 | $0.440 | $0.200 | $0.240 | $2,400,000.00 |
| Coca Cola Co. | 200,000,000 | $1.710 | $0.880 | $0.830 | $166,000,000.00 |
| Comdisco | 1,489,000 | $1.440 | $0.000 | $1.440 | $2,144,160.00 |
| Costco Wholesale | 5,254,000 | $1.540 | $0.000 | $1.540 | $8,091,160.00 |
| Dover Corporation | 2,000,000 | $1.400 | $0.570 | $0.830 | $1,660,000.00 |
| First Data Corp | 8,000,000 | $1.860 | $0.080 | $1.780 | $14,240,000.00 |
| Gannett Co. Inc. | 3,457,000 | $4.470 | $0.970 | $3.500 | $12,099,500.00 |
| Gap Inc. | 15,000,000 | $1.090 | $0.090 | $1.000 | $15,000,000.00 |
| The Gillette Company | 96,000,000 | $1.350 | $0.650 | $0.700 | $67,200,000.00 |
| HCA Inc. | 15,477,000 | $2.610 | $0.080 | $2.530 | $39,156,810.00 |
| Iron Mountain Inc. | 5,019,000 | $0.650 | $0.000 | $0.650 | $3,262,350.00 |
| M&T Bank | 6,708,760 | $4.970 | $1.200 | $3.770 | $25,292,025.20 |
| Moody's Corporation | 24,000,000 | $2.400 | $0.180 | $2.220 | $53,280,000.00 |
| Mueller Industries | 2,447,000 | $1.230 | $0.490 | $0.740 | $1,810,780.00 |
| Nike, Inc. | 6,000,000 | $2.780 | $0.680 | $2.100 | $12,600,000.00 |
| Outback Steak | 1,868,000 | $2.210 | $0.490 | $1.720 | $3,212,960.00 |
| Petrochina adr | 659,000 | $4.830 | $2.040 | $2.790 | $1,838,610.00 |
| Petrochina H | 2,273,063,000 | $0.048 | $0.020 | $0.028 | $63,645,764.00 |
| Sealed Air | 1,113,300 | $1.990 | $0.000 | $1.990 | $2,215,467.00 |
| Shaw Comm | 22,000,000 | -$0.260 | $0.030 | -$0.290 | -$6,380,000.00 |
| SunTrust | 5,806,000 | $4.730 | $1.800 | $2.930 | $17,011,580.00 |
| Torchmark Corp | 1,938,000 | $3.730 | $0.380 | $3.350 | $6,492,300.00 |
| USG Corp | 6,500,000 | $3.190 | $0.000 | $3.190 | $20,735,000.00 |
| Washington Post | 1,727,765 | $25.120 | $5.800 | $19.320 | $33,380,419.80 |
| Wells Fargo & Co. | 56,448,000 | $3.650 | $1.500 | $2.150 | $121,363,200.00 |
| Zenith National | 157,000 | $3.370 | $1.000 | $2.370 | $372,090.00 |
| Total Undistributed Investee Operating Earnings | $1,009,407,556.00 | ||||
| Tax on Investee Earnings | -$141,317,057.00 | ||||
| Berkshire Operating Earnings | $5,422,000,000.00 | ||||
| Total Look-through Operating Earnings 2003 | $6,290,090,499.00 | ||||
| Per Share | $4,096.70 | ||||
Berkshire Hathaway Look-through Earnings 2004
| Company | Shares Held | Earnings per Share 2004 | Dividends 2004 | Undistributed Earnings per Share | Look-through Earnings 2004 |
|---|---|---|---|---|---|
| American Express | 151,610,000 | $2.740 | $0.420 | $2.320 | $351,735,200.00 |
| Amer Standard | 10,498,000 | $1.430 | $0.000 | $1.430 | $15,012,140.00 |
| H&R Block Inc. | 14,351,000 | $1.920 | $0.430 | $1.490 | $21,382,990.00 |
| Cadbury Schwepps | 10,000,000 | $0.600 | $0.230 | $0.370 | $3,700,000.00 |
| Coca Cola Co. | 200,000,000 | $2.000 | $1.000 | $1.000 | $200,000,000.00 |
| Comcast Corp | 5,000,000 | $0.440 | $0.000 | $0.440 | $2,200,000.00 |
| Comdisco | 1,490,000 | $0.000 | $0.000 | $0.000 | $0.00 |
| Costco Wholesale | 5,254,000 | $1.860 | $0.200 | $1.660 | $8,721,640.00 |
| Dean Foods | 376,000 | $1.780 | $0.000 | $1.780 | $669,280.00 |
| First Data Corp | 8,000,000 | $2.240 | $0.080 | $2.160 | $17,280,000.00 |
| Gannett Co. Inc. | 3,448,000 | $4.930 | $1.020 | $3.910 | $13,481,680.00 |
| Gap Inc. | 15,000,000 | $1.210 | $0.090 | $1.120 | $16,800,000.00 |
| The Gillette Company | 96,000,000 | $1.680 | $0.650 | $1.030 | $98,880,000.00 |
| HCA Inc. | 13,500,000 | $2.580 | $0.410 | $2.170 | $29,295,000.00 |
| Iron Mountain Inc. | 6,935,750 | $0.710 | $0.000 | $0.710 | $4,924,382.50 |
| M&T Bank Corp | 6,708,760 | $6.000 | $1.200 | $4.800 | $32,202,048.00 |
| Moody's Corporation | 24,000,000 | $2.800 | $0.150 | $2.650 | $63,600,000.00 |
| Mueller Industries | 1,362,000 | $2.150 | $15.600 | -$13.450 | -$18,318,900.00 |
| Nike | 6,000,000 | $3.510 | $0.950 | $2.560 | $15,360,000.00 |
| Outback Steak | 1,818,800 | $2.020 | $0.520 | $1.500 | $2,728,200.00 |
| Petrochina Co. ADR | 659,000 | $7.180 | $2.360 | $4.820 | $3,176,380.00 |
| Petrochina Co H | 2,273,061,000 | $0.071 | $0.024 | $0.047 | $106,833,867.00 |
| Pier 1 Imports | 8,000,000 | $0.680 | $0.400 | $0.280 | $2,240,000.00 |
| Sealed Air Corp | 1,113,300 | $2.260 | $0.000 | $2.260 | $2,516,058.00 |
| Shaw Comm | 22,000,000 | $0.150 | $0.300 | -$0.150 | -$3,300,000.00 |
| Servicemaster Co. | 5,611,600 | $1.100 | $0.430 | $0.670 | $3,759,772.00 |
| SunTrust | 3,205,000 | $5.160 | $2.000 | $3.160 | $10,127,800.00 |
| Torchmark Corp | 2,038,979 | $4.260 | $0.440 | $3.820 | $7,788,899.78 |
| USG Corp | 6,500,000 | $7.270 | $0.000 | $7.270 | $47,255,000.00 |
| Washington Post | 1,727,765 | $34.590 | $7.000 | $27.590 | $47,669,036.35 |
| Wells Fargo & Co. | 56,448,380 | $4.090 | $1.860 | $2.230 | $125,879,887.40 |
| Zenith National | 53,955 | $5.070 | $1.090 | $3.980 | $214,740.90 |
| Total Undistributed Investee Operating Earnings | $1,233,815,101.93 | ||||
| Tax on Investee Earnings | -$172,734,114.00 | ||||
| Berkshire Operating Earnings | $5,422,000,000.00 | ||||
| Total Look-through Operating Earnings 2003 | $6,483,080,987.93 | ||||
| Per Share | $4,222.39 | ||||