TIP346: Masterclass in Valuation w/ Chris Bloomstran

Episode Summary

Executive Summary: Chris Broomstrand gives a deep Berkshire Hathaway valuation masterclass, arguing that true value comes from normalized per-share earning power rather than headline profits. He explains how to segment Berkshire, adjust for cash, insurance float, portfolio volatility, pensions, and write-downs, and why Berkshire’s buybacks and capital allocation may signal a more disciplined, smaller, but more profitable future.

Main Topics: How to normalize Berkshire’s earnings and intrinsic value (Priority: 5/5): Broomstrand explains his valuation framework: focus on per-share economics, normalize recurring earnings, and strip out accounting noise such as write-downs, pension assumptions, and market-driven volatility. Segmenting Berkshire into usable valuation buckets (Priority: 5/5): He breaks Berkshire into operating businesses, cash, equity portfolio, and insurance/holding-company assets, arguing that each segment must be valued separately to understand the whole company. Cash balance and opportunity cost (Priority: 4/5): He argues Berkshire’s headline cash pile is overstated as deployable capital; after reserving for insurance losses and subsidiary working capital, the spendable amount is much smaller and should be judged against a 10% hurdle rate. Valuing the equity portfolio and insurance float (Priority: 5/5): He treats the equity portfolio as a source of earnings power rather than mark-to-market noise, while also normalizing underwriting profits and recognizing Berkshire’s advantage of investing float in stocks instead of mostly bonds. Buybacks, share issuance, and capital allocation history (Priority: 4/5): Broomstrand sees Berkshire’s repurchases as potentially a major pivot, comparable in significance to prior uses of Berkshire stock as currency in acquisitions like Gen Re and BNSF. Book value versus intrinsic value (Priority: 4/5): He argues book value remains useful but increasingly distorted by buybacks, accounting changes, and inflation, so his fair-value multiple to book should drift upward over time. Succession and post-Buffett Berkshire (Priority: 3/5): He expresses confidence in Greg Abel and Berkshire’s bench, but says the key risks to watch are regulatory pressure, energy-transition politics, and potential interference with Berkshire’s wide moats.

Key Arguments: Per-share value matters more than absolute cash or profits because Berkshire has repurchased shares and changed its capital structure. Reported earnings are distorted by write-downs, goodwill/intangibles accounting, pensions, and mark-to-market equity gains/losses; normalization is required. Berkshire’s cash balance is not fully deployable; after reserving for insurance losses and subsidiary needs, the available deployable cash is much closer to about $70 billion. Berkshire’s hurdle rate is around 10%, so cash, buybacks, acquisitions, and capital expenditures should be judged relative to that threshold. The insurance portfolio should be valued on underlying earnings power, not quarterly market fluctuations; insurance float plus stock ownership gives Berkshire a structural advantage. BNSF and Berkshire Hathaway Energy are large, durable, capital-intensive businesses with substantial value, and public-market comps imply higher valuations than his conservative estimates. Share repurchases at prices below intrinsic value are highly accretive and may imply Berkshire is now smaller and more focused rather than empire-building. Book value understates intrinsic value over time because buybacks at premiums, inflation, and historical-cost accounting all distort the metric. Berkshire’s use of its own stock as acquisition currency in the past was extremely effective when its stock was expensive, especially in the Gen Re deal. Post-Buffett performance should remain strong if Berkshire preserves its capital-allocation discipline and avoids regulatory erosion of its moats.

Data Points: Intrinsic value growth (2020): 10.7% - Broomstrand cites Berkshire’s per-share intrinsic value growth for 2020. Normalized profitability: ~$42 billion - His estimate of Berkshire’s normalized annual profitability. Cash balance: $133 billion - Headline cash at year-end, excluding energy and railroad cash. Deployable cash: ~$70 billion - Estimated cash available for deployment after reserving for insurance losses and working capital. Total assets: almost $900 billion - Used to show Berkshire’s cash is not as large relative to assets as headlines suggest. Insurance losses reserve: ~$37 billion annually - He says this amount should effectively be treated as permanent cash reserve for the insurance operations. Insurance stock portfolio: about $270-$300 billion - Size of the equity portfolio inside Berkshire’s insurance operation. Retained earnings of portfolio companies: ~$10 billion - Annual retained earnings attributable to Berkshire’s equity portfolio holdings. Dividends from portfolio companies: ~$4.5 billion - Cash dividends received from portfolio holdings. Insurance underwriting margin assumption: 5% pre-tax - His long-run normalized underwriting profit assumption for Berkshire’s insurance operations. Berkshire insurance premiums: more than $60 billion - Aggregate annual premiums underwritten by Berkshire insurance operations. Railroad revenue: ~$20 billion - BNSF revenue scale in his segmentation of Berkshire. Energy revenue: ~$20 billion - Berkshire Hathaway Energy revenue scale in his segmentation of Berkshire. BNSF ROE: low teens (13-14%) - His estimate of railroad returns on equity capital. BHE value estimate: $60-$70 billion - His valuation range for Berkshire Hathaway Energy. BNSF value estimate: ~$110 billion - His midpoint valuation for the railroad, based on normalized earnings and comparables. MSR group revenue: ~$140 billion - Manufacturing, service, retail, and finance group revenue base. MSR group expected revenue: ~$155 billion - Projected revenue after V-shaped recovery from COVID. MSR group ROE: ~7% - His estimate of return on equity for the MSR group. Book value per share (2020 year-end): $195.31 - Used to derive a rough fair-value estimate from his multiple-to-book framework. Fair value multiple to book: 1.75x - His simplifying rule-of-thumb for Berkshire intrinsic value relative to book value. Estimated fair value (B share): ~$335 - Derived from 1.75x book value per B share at year-end 2020. Intrinsic value range (B share): $325-$365 - Range from his different Berkshire valuation methods. Current B share price at time of interview: $257 - Discussed as below his intrinsic value estimate. Berkshire repurchases in 2020: $24.7 billion - Amount spent buying back shares in 2020. Share count retired: 5.7% - Portion of Berkshire stock retired via buybacks in 2020. Buyback price vs book: ~105% of book - Average price paid for 2020 repurchases. Berkshire stock portfolio CAGR since 1998: 7.6% - Performance of Berkshire’s stock portfolio from 12/31/1998 through 2020. S&P 500 CAGR since 1998: 7.2% - Benchmark comparison over the same period. Berkshire common stock CAGR since 1998: 7.5% - Berkshire share performance over the same period. Gen Re purchase price: $22 billion - Nominal price paid in Berkshire stock currency. Gen Re float at closing: ~$15 billion - Added float from the Gen Re acquisition. Combined float after Gen Re: $22.7 billion - Resulting float after merging Berkshire and Gen Re insurance operations. Capital gains tax rate referenced: 35% - Used to explain why selling appreciated stocks would have been tax-inefficient.

Pivotal Quotes: "We’re really trying to get to the cash that inures for the shareholder and the price you’re willing to pay on a per-share basis." — Chris Broomstrand: Summarizing his core valuation philosophy "Smaller and profitable is better than larger and less profitable." — Chris Broomstrand: Discussing Berkshire’s buybacks, capital discipline, and possible future size "I think the use of the shares with the stock being as undervalued relative to what I’d call intrinsic value may represent a material pivot." — Chris Broomstrand: Explaining why Berkshire’s large repurchases may signal a strategic shift

Implications: For investors, Berkshire should be judged on normalized per-share earning power and capital allocation, not headline cash or accounting earnings. If buybacks continue below intrinsic value and succession stays disciplined, Berkshire can remain a compounding machine even without Buffett and Munger.