Berkshire 10-K Essay

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I wrote an article yesterday that covered a few noteworthy sections from Warren Buffett’s annual letter to shareholders. While that letter gets all the attention, it’s a summary by design; it does not make a deep dive into the results that an investor can make when examining a 10-K. As such, there are likely to be nuggets in the annual filing that don’t make their way into Warren’s letter; this article will take a closer look at the 10-K, in hopes of uncovering a few hidden gems.

Let’s start with something that a few readers have noticed – Warren made reference to the six-year trailing results in the opening of his shareholder letter (a period he considers representative of the stock market cycle), but didn’t address the five-year outcome. This remains the yardstick by which he judges Berkshire’s performance, as laid out in the Owner’s Manual (starting on page 103 of the annual report); however, he did not provide the updated five-year results for 2013.

Some quick math shows that Berkshire’s book value per share increased by 91% for the five years ending in 2013; the S&P, including dividends, returned 128% over that same period – marking the first time, after 43 consecutive five-year wins against the S&P 500, that Berkshire fell short of its goal. Of course, much of this is explained by Berkshire’s size and its stable of wholly owned businesses that do not fluctuate in value with the equity markets; just remember that when markets go down in a big way, Berkshire will all but certainly be on the right side of the divide – and in a big way (for the five year periods ending 2008 and 2009, Berkshire’s book value per share outpaced the S&P 500 by 9.1% per annum and 8.2% per annum, respectively).

At the end of 2013, book value per A share $134,973; dividing by 1500 provides us with the book value per B share of $90. Adding in our 20% premium for the buyback cap brings us to $162,000 per A share and $108 per B share; with the B shares under $116 at the close on Friday, the stock is within spitting distance of being under 1.2X book (here’s to hoping it gets there).

For the full year, Berkshire earned $19.5 billion – equal to $11,850 per A share and $7.90 per B share; this was about 30% higher from a year ago (though we’ll see shortly that these figures are not comparable).

The balance sheet continues to be awash with liquidity – cash balances exceeded $40 billion at year end, in addition to fixed income securities worth ~$30 billion; approximately 70% of these fixed income securities come due in the next five years, with $8.5 billion coming due in the next twelve months. Currently, Berkshire is making a pittance on those funds; if you’re a betting man (or gal), history suggests that Warren and Charlie will eventually put that cash
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