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Fin6406 Corporate Finance Buffett's Berkshire Battle Buffett's Berkshire Battle By SERENA NG By Warren Buffett's reckoning, his company had a good...

This question was answered on Jan 04, 2013. View the Answer
I need help answering these 3 questions (according to the reading attached)

1. How did Berkshire Hathaway's book and market values change over the past year? How does its
market-to-book ratio today compare to its average over the past 20 years?
2. How would you explain the change in Berkshire Hathaway's market-to-book ratio?
3. Why might Berkshire Hathaway's past performance provide little indication of its future
performance?
Fin6406 Corporate Finance ©2012 Florida International University Page 1 of 2 Buffett’s Berkshire Battle Buffett's Berkshire Battle By SERENA NG By Warren Buffett's reckoning, his company had a good 2011. But you would hardly know it to look at Berkshire Hathaway Inc.'s BRKB -0.20% stock price. When Mr. Buffett releases his annual letter to shareholders on Saturday, the renowned investor is expected to emphasize that his company's value increased faster than the stock market last year, the first such performance in three years. The Omaha, Neb., conglomerate's growth in book value per share—a measure of net worth, and the performance yardstick Mr. Buffett favors—likely beat the Standard & Poor's 500-stock index's 2.1% return last year by a few percentage points, several analysts estimate. Berkshire likely saw improved earnings at its railroad and manufacturing businesses as well as stock-investment gains in 2011, they say. But in a twist that puzzles many Berkshire Hathaway followers, the company run by the 81-year-old billionaire has by some measures rarely been more ignored by the market. After dropping 4.7% in 2011 and rising only half as much as the S&P 500 index so far this year, Berkshire shares are trading near their lowest valuation in decades: close to 1.1 times book value, versus its average valuation of about 1.6 times book value over the past two decades. Those who think the shares are worth more have struggled to explain why, but many say succession concerns play a role. While Mr. Buffett has no plans to step back from his dual roles of running Berkshire and overseeing most of its investments, investors are skeptical that his successors will be able to replicate his performance. The company's enormous size—its net assets exceed $160 billion—makes beating the market more difficult, and potentially presents management challenges for Mr. Buffett as well as whoever succeeds him. Some believe the stock's underperformance also is a result of how Berkshire's shareholder base has evolved from mostly longtime loyal investors to include many large mutual funds and financial institutions, after the company issued more stock to help pay for acquisitions over the past decade and a half. They suspect a fair amount of shareholders nowadays have shorter investment horizons and may not fully understand the company, which has more than 70 operating businesses in addition to a giant investment portfolio.
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Fin6406 Corporate Finance ©2012 Florida International University Page 2 of 2 Even though Berkshire consistently outperforms the market over long periods, not all shareholders "have the patience to wait" for that to materialize, says Max Olson, who runs private investment firm Max Capital Corp. in Salt Lake City and has owned Berkshire shares since 2005. Also in recent years, Mr. Buffett, his 88-year-old business partner Charlie Munger and other aging Berkshire shareholders have been donating some of their shares to charitable causes. Nonprofits and charities, such as the Bill & Melinda Gates Foundation, regularly sell shares they receive, possibly pressuring prices at the margins. "The old broker's joke, more sellers than buyers, may be true here," says Thomas Story, a longtime Berkshire shareholder who runs Thomas Story & Sons LLC in Oak Brook, Ill. Not everyone thinks Berkshire's stock is a bargain. The S&P 500 index also trades near historically low price-to-book multiples, notes Meyer Shields, an analyst at Stifel Nicolaus in Baltimore. By that measure, Berkshire is "not a lot cheaper than the rest of the market right now," he says. Analysts don't value the stock using price/earnings ratios because a large component of Berkshire's earnings comes from insurance, whose true economics aren't known until events have played out over many years. Mr. Buffett, who declined to comment for this article, has long urged shareholders to focus on the company's long-term prospects rather than near-term share moves. "The market may ignore business success for a while, but eventually will confirm it," he has previously said about why patience is needed in stock investing. But even he has been nettled by the stock's recent weakness: The company last fall announced its first- ever share buyback program, reflecting Mr. Buffett's view that the market was deeply discounting Berkshire's true value. Since the announcement, the shares have risen 19%, through midday Thursday, and now hover slightly above where Berkshire will step in to purchase them. The company said at the time that its businesses "are worth considerably more" than what the buyback program will pay for the shares, but any estimate of Berkshire's true value would be "imprecise." For most of the past four-plus decades since Mr. Buffett took control of the former textile company, both Berkshire's book value and share price have appreciated substantially more than the broader stock market. Two years ago, Berkshire became a component of the S&P 500 index after splitting its shares and using them to help finance its acquisition of railroad operator Burlington Northern Santa Fe. That gave millions of Americans a piece of Mr. Buffett's company, whose shares surged in the weeks leading up to its inclusion in the index as many funds that track the S&P 500 acquired Berkshire shares. But in the two years since, the index has risen 27% through midday Thursday, versus the stock's 4.2% increase over the same period. Still, since Mr. Buffett began running Berkshire in 1965, there has never been a five-year period in which the company underperformed the S&P 500 index, a fact he made a point of highlighting in last year's shareholders letter, which included a page with returns over rolling five-year periods.
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1. How did Berkshire Hathaway's book and market values change over the past year? How
does its Market-to-book ratio today compare to its average over the past 20 years? The Berkshire Hathaway's...

This question was asked on Jan 02, 2013 and answered on Jan 04, 2013.

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