Monday, August 3, 2009

Whitney Tilson on Berkshire

From his July fund letter:

In late November Berkshire Hathaway tumbled into the mid-$70,000 range, at which point we backed up the truck, confident that we were seeing a once-in-a-decade buying opportunity for this superior company. At this price, we were only paying for Berkshire’s investment portfolio and getting all of its operating businesses for free. We were quickly rewarded, as the stock rose above $107,000 within a few weeks and we sold quite a bit of our position.

We were wrong, however, about it being a once-in-a-decade buying opportunity. As the market collapsed in the early months of this year, Berkshire also fell and hit a low of $70,050 on March 5th. We backed up the truck again and once again profited as the stock today sits at $97,000.

We have trimmed the position, but not as aggressive as we did last December, for a number of reasons. First, obviously $97,000 isn’t $107,000. Also, the stock has actually underperformed the S&P 500 by a bit more than 10 percentage points since March 5th, so while we’re not complaining, on a relative basis Berkshire is even cheaper than it was a few months ago. More importantly, Berkshire’s intrinsic value has risen smartly – not as much as the stock, but enough so that we still think it’s attractively priced. We think the stock is worth at least $120,000 today.

Finally, we don’t want to sell prior to Berkshire’s second quarter earnings release coming up this Friday because we think the news will be very good in many areas. First, the investment portfolio will show approximately $7 billion in after-tax gains, plus there will likely be another $1 billion in a reversal of losses on the equity index put positions, and the Goldman Sachs warrants will add another $1.5 billion or so in after-tax gains. Thus, Berkshire should report a 10% gain in book value before operating results.

On top of this, investment income will be roughly $1.3 billion, mostly interest from the many preferred stock and debt deals Buffett did with Goldman, GE and many other companies during the worst of the crisis. Lastly, among Berkshire’s operating businesses, the two largest areas, insurance and utilities should report solid earnings, while the other operating businesses will continue to be weak.

Overall, we expect a very strong earnings report that, based on the stock price, we don’t think the market is anticipating, so it’s an added bonus to have this as a catalyst for the stock.