Accounting Research Sample Paper on Prospective Analysis of Berkshire Hathaway

Prospective Analysis of Berkshire Hathaway

Abstract

Berkshire Hathaway Inc. (BRK-An) is the conclusive supported corporate achievement, and its name is related to riches even among individuals who are not certain what the organization does or of its contribution. Its per-offer book worth has expanded 6,952-fold from 1964, a rate of development so gigantic that it offers no recorded correlation. Berkshire Hathaway’s Class A stock is at present exchanging at over $200,000 an share, diverging from such apparently extravagant issues, for example, Google Inc. (GOOG), whose offer cost has yet to split four digits.

Berkshire Hathaway has been named after several 19th century New England cotton processes that combined operations in 1955. The company broadened past its textile operations starting several years ago, and today  operates an amazingly wide array of subsidiaries namely GEICO, Fruit of the Loom, RC Willey, Dairy Queen, Burlington Northern Santa Fe, Johns Manville, and the list is endless (Chan, 20100).

Prospective Analysis of Berkshire Hathaway

Company Background

Berkshire Hathaway, Inc. engages in assorted business exercises including property and setback protection and reinsurance, utilities and energy, cargo rail transportation, finance, assembling, retailing and services.

The firm’s  insurance operations offer protection and reinsurance of property and setback hazards and in addition life certification, mishap and security covers the world over (Berkshire, 2015). The organization works through a few business fragments in particular GEICO, General Re Corp., Berkshire Hathaway Reinsurance Bunch, Berkshire Hathaway Essential Gathering, BNSF, Berkshire Hathaway Vitality, McLane Organization, Assembling, Administration and retailing and Money and cash related things. The GEICO partakes in endorsing private traveler protection basically through direct response procedures. The General Re takes part in Endorsing overabundance of-misfortune, share offer and facultative reinsurance around the globe.

The Berkshire Hathaway Reinsurance Group takes part in guaranteeing overabundance of-misfortune and portion offer reinsurance for safety net providers and reinsurers (4-traders, 2015). The Berkshire Hathaway Energy controls electric and gas utilities, including force era and conveyance exercises, and household land business and financier franchising (4-traders, 2015).

The McLane organization is involved in wholesale dissemination of basic supplies and non-nourishment things. The Manufacturing fragment participates in makers of various items including mechanical and end-client items, building items and attire. The Service and retailing is a supplier of various administrations including fragmentary airplane proprietorship programs, aeronautics pilot preparing, electronic parts dissemination and retailing. The Finance and money related items section is produced lodging and related purchaser financing; transportation gear, assembling and renting; and furniture renting (4-traders, 2015). Berkshire Hathaway was established by Oliver Chace in 1839 and is headquartered in Omaha, NE.
Number of employees : 316 000 persons.

Shareholder Analysis

Table 1 below shows Berkshire’s shareholders and the proportion of shares held.

Shareholders
Name Shares % Warren Edward Buffet 321,000 38.9% Fidelity Management & Research Co. 29,231 3.54% David Sanford Gottesman, MBA 16,079 1.95% First Manhattan Co. 15,874 1.92% Capital Research & Management Co. (World Investors) 15,366 1.86% Ruane, Cunniff & Goldfarb, Inc. 9,497 1.15% Davis Selected Advisers LP 5,640 0.68% Gardner Russo & Gardner LLC 5,064 0.61% Charles Thomas Munger 4,904 0.59% Cascade Investment LLC 4,350 0.53%

Source: 4-traders. http://www.4-traders.com/BERKSHIRE-HATHAWAY-INC-11915/strategies/

Financial Analysis

The company’s net worth has grown tremendously over the years. Berkshire’s gain in net worth rose to $18.3 billion in 2014 and this raised the per-share book value of the company in both Class A and Class B stock by about 8.3%. The company’s per-share book value has grown at an annual compounded rate of 19.4% from $19 to $146,186. Over this period, a comparison of the yearly performance of the S&P 500 to the company’s per-share book value has revealed the company’s intrinsic business value. In the early years of the company’s growth trajectory, there was a closer relationship between the book value and intrinsic value than the case today owing to the fact that then the Company’s assets largely comprised of securities which had to be restated continually to reflect the prevailing market prices. However, the company has over the years shifted its asset composition and now owns and operates large businesses. Majority of these businesses are worth much more than their cost-based carrying value. However, this amount is seldom revalued upward regardless of the magnitude of increase of the value of these companies. As a result, the gap between Berkshire’s intrinsic value and book value has widened significantly.

Table 2 below shows Berkshire’s sales from its major business segments n 2013 and 2014

Table 2: Berkshire Hathaway Inc. Sales per Business

20132014Delta
USD (in Millions)%USD (in Millions)%
McLane Company45,93025.20%46,64024%1.52%
Other Businesses42,38223.30%
Insurance Group41,41922.70%45,62323.40%9.21%
Burlington Northern Santa Fe22,01412.10%23,23911.90%5.27%
Berkshire Hathaway Energy12,7437%17,6149%27.65%
Marmon6,9793.80%
Investment and Derivative Gains/Losses6,6733.70%4,0812.10%-63.51%
Finance & Financial Products4,2912.40%6,5263.40%34.25%
Interest Expense, Not Allocated to Segments
Other-281-0.20%-99-0.10%
Manufacturing36,77318.90%
Service & Retailing14,2767.30%

Source: Berkshire Inc 2014 Financial Statements

As per Table 2 above, the company’s sales increased in 2014, which has also been the company’s trend in sales over time and these figures are expected to increase further in 2015 and beyond. The company’s prospects for growth are still high and it remains a viable company for any prospecting investor.

We have extracted the company’s annual income statement data over the last three years and used the data to project the company’s performance in 2016 and 2017. As per Table 3 below, Berkshire Hathaway’s income statement figures are expected to increase in 2015 and 2016, as the company’s growth trajectory continues on an upward trend.

Table 3: Annual Income Statement Data

Actual in M $Estimates in M $
Financial Year Ending December201220132014201520162017
Sales162 463182 150194 673209 430221 453
Operating income (EBITDA)
Operating profit (EBIT)
Pre-Tax Profit (EBT)22 23628 796
Net income14 82419 47619 87219 69119 977
EPS ( $)8 97711 85012 09211 48511 555
Dividend per Share ( $)
Yield

Source: 4-traders. http://www.4-traders.com/BERKSHIRE-HATHAWAY-INC-11915/company/

Stock Analysis

Berkshire has two classes of common stock designated Class A common stock and Class B common stock. Each share of Class A Common stock is convertible at the option of the stockholder into 1,500 shares of Class B common stock. However, shares of Class B common stock are not convertible into Class A common stock. The Company had about 2,700 record holders of its Class A common stock and 21,500 record holders of its class B common stock as at February 2015. The record owners include nominees holding at least 445,000 shares of Class A common stock and 1.22 billion shares of Class B common stock on behalf of beneficial-but-not-of-record owners.

The price ranges of the company’s Class A and class B common stock are shown in Table 4 below and are as listed on the New York Stock Exchange (NYSE) where the company trades with the trading symbols BRK.A and BRK.B. We set forth the highs and lows selling prices per share as they have been reported on the NYSE Composite List in 2013 and 2014.

Table 4: Berkshire Hathaway Inc. Class A and Class B Common Stock Prices

20142013
Class AClass BClass AClass B
HighLowHighLowHighLowHighLow
First Quarter         188,853         163,039      125.91      108.12         156,634           36,850      104.48        91.29
Second Quarter         194,670         181,785      129.73      121.09         173,810         154,145      115.98      102.69
Third Quarter         213,612         185,005      142.45      122.72         178,900         166,168      119.30      110.72
Fourth Quarter         229,374         198,000      152.94      132.03         177,950         166,510      118.66      110.84

Source: Berkshire Hathaway 2014 Report

The company’s stock prices increased in 2014 as shown in the table above and are expected to increase further in the coming years.

Dividends

Berkshire has not declared any cash dividend since 1967. However, the company has been active in share repurchases through which it has extended considerable value to its shareholders. This is especially because share buy-packs act as a creative way of earning a tax-free dividend. The company’s growth model has been in buying a few widely respected corporations (Berkshire, 2015).

Investors’ Prospects

Although Berkshire has always had billions of dollars of cash available for repatriation, the prospect of paying dividends has remained dim and may be so over the next couple of years if Warren Buffet’s policy prevails. The company has only paid dividend once since 1967. However, research has proved that this policy has brought immense benefits to stockholders as it has made them far much wealthier than they would be if they had received dividends (Fekete, 2007). This can be illustrated by the fact that the company’s stock price has exponentially grown by about 700,000% for the 50 year period 1964 to 2014. Simple statistics reveal that an investor who put $1,000 in Berkshire in 1980 has turned millionaire by 2014.

Although Berkshire has not redistributed its wealth in form of dividends, it has distributed this wealth to its stockholders via its philanthropic stock buybacks where the company has paid up to 120% of its book value. Through this, the investors have benefitted two-fold. First, they have been able to offload some or all of their stocks and earned premiums that are not commonplace in the open market. The remaining stockholders have also benefitted in that as some of the shareholders continue to offload their stock, their share of ownership has been increasing.

Berkshire Hathaway therefore remains a company with a considerable competitive advantage and high prospects of stockholders returns. The company’s investors should expect to reap from the company’s durable competitive advantage.

References

Berkshire Hathaway (2015). 2014 Company Report. Retrieved at http://www.berkshirehathaway.com/2014ar/linksannual14.html

Chan, R. (2010). Behind the Berkshire Hathaway Curtain: Lessons from Warren Buffett’s Top Business Leaders. Hoboken: John Wiley & Sons.

Fekete, K. (2007). Habits of the master traders: Use their mental models to become one of them. iUniverse.

4-Traders (2015). Berkshire Hathaway Inc. (BRK.A). Web 24 June, 2015. Retrieved at http://www.4-traders.com/BERKSHIRE-HATHAWAY-INC-11915/strategies/