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Berkshire vs. S&P 500

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December 12, 2012 – Comments (1) | RELATED TICKERS: BRK-A

Board: Berkshire Hathaway

Author: rationalwalk

Warren Buffett's "scorecard", printed at the front of each annual report, shows Berkshire's change in book value per share compared to the total return of the S&P 500. Since 1965, Berkshire's book value per share growth has trailed the S&P 500 total return for only eight years (1967, 1975, 1980, 1999, 2003, 2004, 2009, and 2010). Of course, half of those eight years have come since the turn of the century and five of the eight since 1990, but it should be noted that in cumulative terms Berkshire has continued to leave the S&P 500 in the dust since 2000.

It appears likely that Berkshire will end the year with book value per share in the neighborhood of $112K-$113K which would represent a 12-13% increase over book value at the end of 2011. But this could very well be lower than the S&P 500 total return unless we get a year-end bear market due to fiscal cliff or other concerns. The "scorecard" would likely show a 3-4 point deficit vs. the S&P 500 if the year ended today.

This is of no major relevance when it comes to intrinsic value but expect the media to harp on a "sixth year of under performance over the past fourteen years". Or more likely the focus will be on the "third year of under performance in the past four years".

I suspect such articles will appear after the annual report is released with little attention paid to Berkshire's cumulative advantage over the S&P 500 over reasonable lengths of time and no analysis given to Berkshire's valuation relative to book value.

In other words, more "Buffett has lost his touch" articles should be on tap for late February/early March 2013. With the "1.1x book value" level likely to be in the $123K-$125K range based on year-end book value, we could be in for some interesting times that will test Buffett's willingness to repurchase shares in large quantities.

If we theoretically assume that Berkshire can repurchase 40,000 shares at $125K over the course of 2013, that would represent a $5 billion repurchase program and would reduce share count by 2.4%. If we conservatively assume that intrinsic value is 1.4x year-end book of $112.5K, IV would be $157,500 meaning that we get $32,500 of value for each share repurchased. $32,500 x 40,000 = $1.3 billion of value created by repurchasing 40,000 shares at $125K during 2013.

$1.3 billion may seem like peanuts for Berkshire but it represents around a month of typical normalized after-tax income. So this theoretical repurchase would be like having a 13th month of value generation next year.

Ironically, a repurchase at 1.1x book would be dilutive to book value (any repurchase above 1x book would be) so the preferred metric of performance would be slightly depressed vs. the S&P 500 next year even as intrinsic value per share is rising due to intelligent buybacks. The scorecard has always been an understated measure anyway since IV growth has exceeded BV growth since 1965, and by a large margin since IV was probably equal to BV at best in 1965 and today far exceeds BV.

Anyway, these are just some random thoughts on Berkshire's impending "underperformance" for 2012 and hoping for repurchases in 2013 as a result of a crop of "Buffett is over the hill" reporting next spring... 

1 Comments – Post Your Own

#1) On December 13, 2012 at 3:50 AM, valuemoney (99.99) wrote:

Good post!

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