Professional Documents
Culture Documents
BRK.A – NYSE
Sell
Insurance: Standard/Specialty/Brokers
EPS (Net) 2009A 2010E 2011E • BRK’s YTD outperformance versus the S&P 500 is nearing an apex that
seems poised for a correction based on the shares' history.
Q1 $1,100 $1,390A $1,488
Q2 1,147 1,319 1,437 • Berkshire’s property/casualty reserve releases have recently ramped up,
but we see that as unsustainable in an enduring soft market, implying
Q3 1,325 1,459 1,564 additional earnings pressure as releases slow.
Q4 1,306 1,518 1,608
We’ve reduced our EPS estimates to reflect the expected challenging 2H10
FY Dec $4,878A $5,685 $6,097
environment, with modest economic growth expected in 2011. Our EPS
P/E 24.6x 21.1x 19.7x estimates move to $5,685 from $5,764 (2010E), and to $6,097 from $6,241
Revenue (Net) 2009A 2010E 2011E
(2011E). Our sum-of-the-parts valuation method suggests fair value for the
shares at about $104,000, about 13% downside from current levels.
FY Dec $112.49B $121.91B $125.19B
135,000
120,000
105,000
90,000
75,000
60,000
Q2 Q3 Q1 Q2 Q3
2010
Created by BlueMatrix
All relevant disclosures and certifications appear on pages 10 - 11 of this report. Page 1
Berkshire Hathaway Inc. (BRK.A) July 8, 2010
73
71
69
$1,000
Employment Ratio
65
63
$100
61
?
59
57
55 $10
1E
1
1
M
M
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
Employment to Population Ratio (12MMA) SPX Price
Source: FactSet Research and BLS, Stifel Nicolaus analyst Barry Bannister’s format
Figure 2 traces the employment headcount trajectory for the current and recent recessions (i.e., headcounts indexed
to the point of initial employment decline), which illustrates the severity of the current employment environment, and the
likely protracted recovery timeline.
Figure 2: Employment Recovery Trajectories during Past Recessions
1970 1974 1981 1991 2001
101% 2008
100%
99% 2001
98%
97% 1990
96%
95% 1981
Page 2
Berkshire Hathaway Inc. (BRK.A) July 8, 2010
Given that we think the current employment situation will take longer than most consumers and many investors are
expecting, consumer confidence will probably suffer as expectations reconcile with reality. Figure 3 tracks the inverse
relationship between unemployment and consumer confidence.
Figure 3: Slower-than-Expected Employment Recovery Likely to Drag on Consumer Confidence
Unemployment Rate (SA)
13% 8%
11% 6%
Expenditures
4%
9%
2%
7%
0%
5% -2%
3% -4%
0
8
-8
-8
-8
-8
-8
-9
-9
-9
-9
-9
-0
-0
-0
-0
-0
n
n
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Unemployment Rate Expenditures
Source: BLS and Consumer Conference Board, via FactSet Research, Inc.
In turn, weak consumer confidence tends to go hand-in-hand with weak personal expenditures (Figure 4), which would
otherwise be the key to a sustained economic recovery, as the “shot in the arm” of increased government spending
subsides.
Figure 4: Consumer Confidence and Personal Spending
8% 160
140
Y/Y Expenditures
6%
120
4% 100
CCI
2% 80
0% 60
40
-2% 20
-4% 0
1980M6
1982M6
1984M6
1986M6
1988M6
1990M6
1992M6
1994M6
1996M6
1998M6
2000M6
2002M6
2004M6
2006M6
2008M6
Source: BLS and Consumer Conference Board, via FactSet Research, Inc.
The Chicken and the Egg: We think consumers are waiting for an employment recovery, while the employment
recovery is waiting on increased consumer spending. We’re concerned government spending won’t provide the same
relative stimulus strength as a temporary proxy for consumer spending this time around, for two reasons. First, even
though the drop in personal expenditures, and consequently GDP, is much deeper than in other recent recessions, the
increase in government spending is trailing off (Figure 5). Second, we don’t see much political appetite for additional
stimulus spending without either offsetting budget reductions, or at least definitive repayment plans. Although fiscal
responsibility is (temporarily) great for voter support, zero-sum spending initiatives do little to stimulate increased
spending (the recently failed Senate extension of unemployment benefits is a good example of a faltering appetite for
increased stimulus spending, in our view).
Page 3
Berkshire Hathaway Inc. (BRK.A) July 8, 2010
2005Q2
2005Q3
2005Q4
2006Q1
2006Q2
2006Q3
2006Q4
2007Q1
2007Q2
2007Q3
2007Q4
2008Q1
2008Q2
2008Q3
2008Q4
2009Q1
2009Q2
2009Q3
2009Q4
2010Q1
Treasury Outlays Personal Consumption & Gross Investment
30% 10%
Change, Y/Y
Change, Y/Y
15% 5%
0% 0%
-15% -5%
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
Source: BLS
The Oil Wild Card: While the U.S. is not directly dependent on Iranian oil, any Iranian/Israeli conflict intensification
could induce a worldwide oil supply shock. We think such a scenario could push real oil prices well above $85 a barrel.
Figure 7 illustrates that rising oil prices have foretold recessions, with oil above $85 per barrel leading to particularly
deep recessions (late 70’s and current recession). Rising oil prices deter GDP growth even without a shock, but the
situation could get far worse if geopolitical tensions worsen.
Page 4
Berkshire Hathaway Inc. (BRK.A) July 8, 2010
Jan-77
Jan-79
Jan-81
Jan-83
Jan-85
Jan-87
Jan-89
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Real Crude Oil $ per Barrel Real GDP Y/Y%
Source: EIA, and BLS
(2) Double-Dip's Double-Whammy Impact to Book Value
We’ve taken our EPS estimates down to $5,685 from $5,764 (2010E) and $6,097 from $6,241 (2011E). Using the
sum-of-the-parts calculator built into our model (available for clients to alter per their assumptions), our more
conservative earnings outlook and float-based valuation assumption changes produce an estimated fair value of
$104,000 (Table 1) - implying 13% downside from current levels.
Table 1: Sum-of-the-Parts Valuation
$ in millions, except per share data
Step Float Valuation Input Result
(1) Estimated "float" (Insurance Float at 3/31/10, Derivative Float at 12/31/09) 69,800.0
(2) After-tax "look-though" investment return on float 7.50%
(3) Projected "look-through" investment growth 2.0%
Total 171,303
Page 5
Berkshire Hathaway Inc. (BRK.A) July 8, 2010
In particular, we think that widespread institutional ownership of BRK's Class B shares means that the stock will
behave less like a cult stock, and more like a "normal" stock following earnings beats and misses - in other words, we
expect a much higher 'beta' than in the past.
Given Berkshire’s sizable investment portfolio and derivative positions, many investors use book value as a valuation
basis. In that vein, we adjust Berkshire’s investment portfolio (and book value) for an expected 8% market pullback in
2H10. Table 2 includes a +/-10% scale for its equity and derivative portfolios, while we assume its fixed income
portfolio remains unchanged, reflecting expected sustained low yields.
Table 2: Book Value Impact from Declining Equity Markets
$ millions except per share amounts
Base Case
Total BVPS Impact 112,691 -2,496 -1,987 -1,478 -969 -460 0 558 1,067 1,576 2,085 2,594
Price Change w/ 1.3x P/BVPS -3,245 -2,583 -1,921 -1,260 -598 0 726 1,387 2,049 2,711 3,373
% of Current -2.8% -2.2% -1.7% -1.1% -0.5% 0.0% 0.6% 1.2% 1.8% 2.3% 2.9%
40% $140,000
30%
$120,000
BRK.A Price
20%
10% $100,000
0% $80,000
-10% $60,000
-20%
-30% $40,000
-40% $20,000
-50% $0
2009 YTD
12/31/1991
12/31/1992
12/31/1993
12/30/1994
12/29/1995
12/31/1996
12/31/1997
12/31/1998
12/31/1999
12/29/2000
12/31/2001
12/31/2002
12/31/2003
12/31/2004
12/30/2005
12/29/2006
12/31/2007
12/31/2008
12/31/2009
Page 6
Berkshire Hathaway Inc. (BRK.A) July 8, 2010
Table 3 shows Berkshire’s performance vs. the S&P since several key dates. Most recently the shares have
outperformed the S&P since the beginning of June without much of a catalyst, putting it at risk for a correction, in our
view.
Table 3: Relative Performance from Key Dates
Event Date BRK.A SPX Diff
Start of Relative Outperformance Resurgence June 7th, 2010 14.2% 0.9% 13.3%
Recent Market High April 23rd, 2010 1.3% -12.9% 14.2%
BRK Addition to S&P Announcement January 26th, 2010 17.8% -2.9% 20.8%
Year Ago July 7th, 2009 37.5% 20.3% 17.2%
BRK Bear Market Low March 5th, 2009 65.6% 55.3% 10.3%
Source: FactSet Research Systems, Inc.
Estimate Changes
Table 4 includes a summary of our earnings model and estimate changes.
Table 4: Model and Estimate Change Summary
($ in millions, except per share data) Previous Estimates % Change
2008 2009 2010E 2011E 2010E 2011E 2010E 2011E
Revenues
Insurance and Other: $95,698 $92,780 $92,572 $93,172 $92,649 $94,118 0% -1%
Utilities and Energy: 13,971 11,443 24,448 27,535 24,809 28,217 -1% -2%
Finance and Financial Products: (1,883) 8,270 4,891 4,483 4,907 4,500 0% 0%
Total revenues 107,786 112,493 121,910 125,190 122,365 126,835 0% -1%
Pretax operating income 15,035 10,765 13,716 14,729 13,915 15,104 -1% -2%
Income tax on operating income 4,794 2,812 3,698 4,242 3,767 4,378 -2% -3%
Minority shareholders' interests 602 386 479 420 479 420 0% 0%
Operating income 9,639 7,567 9,540 10,067 9,669 10,306 -1% -2%
W eighted average common shares outstanding (Class A basis) 1.549 1.551 1.636 1.651 1.636 1.651 0% 0%
Operating EPS $6,223 $4,878 $5,685 $6,097 $5,764 $6,241 -1% -2%
Non-operating EPS ($2,999) $313 $973 $121 $973 $121 0% 0%
Net EPS $3,224 $5,190 $6,658 $6,218 $6,737 $6,363 -1% -2%
Book value per share $70,530 $84,487 $90,883 $96,914 $93,702 $99,871 -3% -3%
TTM Operating ROE 6.5% 6.5% 6.4% 6.5% 6.4% 6.5% 1% 1%
TTM Net ROE 6.9% 6.9% 7.5% 6.6% 7.5% 6.6% 1% 1%
Page 7
Berkshire Hathaway Inc. (BRK.A) July 8, 2010
Page 8
Berkshire Hathaway Inc. (BRK.A) July 8, 2010
Berkshire Hathaway Inc. 6,223 4,878 5,685 6,097 1,100 1,147 1,325 1,306 1,390 1,319 1,459 1,518 1,488 1,437 1,564 1,608
6,223 4,878 5,739 6,240 1,100 1,147 1,325 1,306 1,262 1,415 1,513 1,549 1,433 1,495 1,626 1,686
$ in millions, except per share data 0 0 (53) (143) 0 0 0 0 128 (97) (54) (31) 55 (58) (62) (79)
2008 2009 2010E 2011E 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10E 3Q10E 4Q10E 1Q11E 2Q11E 3Q11E 4Q11E
Revenues
Insurance and Other:
Insurance premiums earned $25,525 $27,884 $27,167 $26,902 $8,183 $6,485 $6,595 $6,621 $7,426 $6,446 $6,672 $6,623 $6,478 $6,614 $6,921 $6,888
Sales and service revenues 65,854 62,555 59,290 61,242 14,310 15,587 16,178 16,480 15,531 14,462 14,983 14,314 16,086 14,928 15,468 14,760
Interest, dividend, and other investment income 4,966 5,245 4,800 5,029 1,374 1,454 1,361 1,056 1,295 1,143 1,168 1,193 1,219 1,244 1,270 1,296
Investment gains/(losses) (647) 251 1,315 0 (370) 33 115 473 1,315 0 0 0 0 0 0 0
Other-than-temporary impairments of investments 0 (3,155) 0 0 (3,096) (30) (25) (4) 0 0 0 0 0 0 0 0
Total, insurance and other 95,698 92,780 92,572 93,172 20,401 23,529 24,224 24,626 25,567 22,051 22,823 22,131 23,783 22,786 23,659 22,944
Total Revenues 107,786 112,493 121,910 125,190 22,784 29,607 29,904 30,198 32,037 29,097 30,454 30,322 31,938 30,144 31,667 31,441
Total Costs and Expenses 100,212 100,941 106,465 110,461 25,327 24,816 25,065 25,733 26,939 25,931 26,935 26,659 28,354 26,681 27,879 27,548
Earnings before income taxes and minority interests 7,574 11,552 15,445 14,729 (2,543) 4,791 4,839 4,465 5,098 3,166 3,518 3,663 3,584 3,463 3,788 3,893
Income taxes 1,978 3,538 4,303 4,242 (1,014) 1,520 1,601 1,431 1,336 893 1,014 1,060 1,024 986 1,100 1,132
Earnings from equity method investments 0 427 200 200 83 113 111 120 50 50 50 50 50 50 50 50
Net earnings 5,596 8,441 11,343 10,687 (1,446) 3,384 3,349 3,154 3,812 2,323 2,554 2,653 2,610 2,528 2,738 2,811
Earnings attributable to noncontrolling interests 602 386 479 420 88 89 111 98 179 100 100 100 105 105 105 105
Net earnings attributable to Berkshire Hathaway 4,994 8,055 10,864 10,267 (1,534) 3,295 3,238 3,056 3,633 2,223 2,454 2,553 2,505 2,423 2,633 2,706
Pretax operating income 15,035 10,765 13,716 14,729 2,440 2,461 3,022 2,842 3,369 3,166 3,518 3,663 3,584 3,463 3,788 3,893
Income tax on operating income 4,794 2,812 3,698 4,242 648 592 855 717 968 893 1,014 1,060 1,024 986 1,100 1,132
Minority shareholders' interests 602 386 479 420 88 89 111 98 179 100 100 100 105 105 105 105
Operating income 9,639 7,567 9,540 10,067 1,704 1,780 2,056 2,027 2,222 2,173 2,404 2,503 2,455 2,373 2,583 2,656
Weighted average common shares outstanding (Class A basis) 1.549 1.551 1.636 1.651 1.549 1.552 1.552 1.552 1.59917 1.648 1.648 1.649 1.650 1.651 1.652 1.652
Operating EPS $6,223 $4,878 $5,685 $6,097 $1,100 $1,147 $1,325 $1,306 $1,390 $1,319 $1,459 $1,518 $1,488 $1,437 $1,564 $1,608
Non-operating EPS (2,999) 313 973 121 (2,090) 976 762 665 882 30 30 30 30 30 30 30
Net EPS $3,224 $5,190 $6,658 $6,218 ($990) $2,123 $2,087 $1,969 $2,272 $1,349 $1,489 $1,548 $1,518 $1,467 $1,594 $1,638
Book value per share $70,530 $84,487 $90,883 $96,914 $66,248 $73,806 $81,247 $84,487 $89,374 $87,936 $89,380 $90,883 $92,356 $93,777 $95,324 $96,914
TTM Operating ROE 6.5% 6.5% 6.4% 6.5% 8.3% 7.9% 7.8% 6.5% 6.5% 6.4% 6.3% 6.4% 6.4% 6.5% 6.5% 6.5%
TTM Net ROE 6.9% 6.9% 7.5% 6.6% 2.2% 2.6% 4.5% 6.9% 10.7% 9.2% 8.2% 7.5% 6.6% 6.6% 6.6% 6.6%
Source: Company reports and Stifel Nicolaus estimates
Page 9
Berkshire Hathaway Inc. (BRK.A) July 8, 2010
Rating and Price Target History for: Berkshire Hathaway Inc. (BRK/A) as of 07-02-2010
10/01/09
I:H:NA
175,000
150,000
125,000
100,000
75,000
50,000
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
2008 2009 2010
Rating Key
Created by BlueMatrix
For a price chart with our ratings and target price changes for BRK.A go to
http://sf.bluematrix.com/bluematrix/Disclosure?ticker=BRK.A
Stifel, Nicolaus & Company, Inc.'s research analysts receive compensation that is based upon (among other factors)
Stifel Nicolaus' overall investment banking revenues.
BUY -We expect this stock to outperform the S&P 500 by more than 10% over the next 12 months. For higher-yielding
equities such as REITs and Utilities, we expect a total return in excess of 12% over the next 12 months.
HOLD -We expect this stock to perform within 10% (plus or minus) of the S&P 500 over the next 12 months. A Hold
rating is also used for those higher-yielding securities where we are comfortable with the safety of the dividend, but
believe that upside in the share price is limited.
SELL -We expect this stock to underperform the S&P 500 by more than 10% over the next 12 months and believe the
stock could decline in value.
Of the securities we rate, 43% are rated Buy, 54% are rated Hold, and 3% are rated Sell.
Within the last 12 months, Stifel, Nicolaus & Company, Inc. or an affiliate has provided investment banking services for
17%, 11% and 8% of the companies whose shares are rated Buy, Hold and Sell, respectively.
Additional Disclosures
Please visit the Research Page at www.stifel.com for the current research disclosures applicable to the companies
mentioned in this publication that are within Stifel Nicolaus' coverage universe. For a discussion of risks to target price
please see our stand-alone company reports and notes for all Buy-rated stocks.
The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us
and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any
securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the
Page 10
Berkshire Hathaway Inc. (BRK.A) July 8, 2010
particular investment objectives, financial situation or needs of individual investors. Employees of Stifel, Nicolaus &
Company, Inc. or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies
that differ from the opinions expressed within. Past performance should not and cannot be viewed as an indicator of
future performance.
Stifel, Nicolaus & Company, Inc. is a multi-disciplined financial services firm that regularly seeks investment banking
assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an
offering or financial advisor in a merger or acquisition, or serving as a placement agent in private transactions.
Moreover, Stifel Nicolaus and its affiliates and their respective shareholders, directors, officers and/or employees, may
from time to time have long or short positions in such securities or in options or other derivative instruments based
thereon.These materials have been approved by Stifel Nicolaus Limited, authorized and regulated by the Financial
Services Authority (UK), in connection with its distribution to professional clients and eligible counterparties in the
European Economic Area. (Stifel Nicolaus Limited home office: London +44 20 7557 6030.) No investments or
services mentioned are available in the European Economic Area to retail clients or to anyone in Canada other than a
Designated Institution. This investment research report is classified as objective for the purposes of the FSA rules.
Please contact a Stifel Nicolaus entity in your jurisdiction if you require additional information.
The use of information or data in this research report provided by or derived from Standard & Poor’s Financial
Services, LLC is © 2010, Standard & Poor’s Financial Services, LLC (“S&P”). Reproduction of Compustat data and/or
information in any form is prohibited except with the prior written permission of S&P. Because of the possibility of
human or mechanical error by S&P’s sources, S&P or others, S&P does not guarantee the accuracy, adequacy,
completeness or availability of any information and is not responsible for any errors or omissions or for the results
obtained from the use of such information. S&P GIVES NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT
NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
USE. In no event shall S&P be liable for any indirect, special or consequential damages in connection with subscriber’s
or others’ use of Compustat data and/or information. For recipient’s internal use only.
Page 11