Berkshire Beyond Buffett(9)

22 Gen Re 600–700s Dairy Queen, NetJets

10 Lubrizol 400–500s Dexter, Justin, MiTek, Scott Fetzer, XTRA

5–9 ISCAR/IMC, Marmon Group, MidAmerican (Berkshire Hathaway) Energy 300s Business Wire, CORT

2–4 GEICO, Shaw 200s Applied Underwriters, Ben Bridge, Garan, Jordan’s, Larson-Juhl

1.5–1.9 Clayton, FlightSafety, Johns Manville, McLane 100s CTB, Helzberg, H.H. Brown, RC Willey, Star

1–1.4 Benjamin Moore, Forest River, Medical Protective <100 Borsheim, Buffalo News, Central States Indemnity, Fechheimer, Kansas Bankers Surety, Nebraska Furniture Mart, NICO, Richline, See’s, Wesco

Note: Aggregate amount for acquisitions made in stages.


Berkshire acquisition prices have implied different valuation benchmarks in terms of price-to-earnings ratios or price-to-book value. Berkshire’s various subsidiaries were acquired at price-to-earnings ratios ranging from 8-to-1 to more than 30-to-1, and price-to-book ratios from less than 1-to-1 to more than 5-to-1 (see table 2.2). The range of multiples reflects subsidiary diversity as well as the wide array of valuation techniques that apply at different times to varying business types (e.g., insurance, utilities, finance, manufacturing, retailing, and services). For example, asset-intensive manufacturing operations may be valued at lower multiples of book value compared to service or retailing concerns.


Table 2.2

Price Ratios

Price-to-Earnings Ratios Price-to-Book Value Ratios

< 8 Fruit of the Loom < 1.00 Fruit of the Loom

8–10 Garan 1.00–1.99 Clayton, CTB, Garan, Justin, XTRA

11–13 Johns Manville, Lubrizol, XTRA 2.00–2.99 Benjamin Moore, Dairy Queen, FlightSafety, Gen Re, Johns Manville

14–17 Benjamin Moore, Clayton, Dairy Queen 3.00–3.99 BNSF, See’s, Shaw

18–22 FlightSafety, Gen Re, Justin, Shaw 4.00–4.99 Lubrizol

23–30 BNSF, CTB > 5 MidAmerican (Berkshire Hathaway) Energy

> 30 MidAmerican (Berkshire Hathaway) Energy

Note: Most of the data are sourced from Bloomberg. The ratios are the announced total value of the deal divided by the target’s trailing twelve-month net income for price to earnings (PE) and book value for price to book (PB). For Fruit of the Loom, acquired in bankruptcy with negative earnings and book value, PE is based on trailing earnings before interest, taxes, depreciation, and amortization (EBITDA) and PB is based on enterprise value. Data for FlightSafety and See’s are sourced from Berkshire Hathaway annual reports.


Berkshire’s subsidiaries make varied contributions to corporate results. Berkshire’s total 2013 revenues were $182 billion: $130 billion from non-insurance businesses, $37 billion from insurance operations, and $15 billion from investments and other sources.5 Some subsidiaries generate less than $250 million of that, many up to $1 billion, others more than $10 billion, and one (McLane) nearly $46 billion. If Berkshire’s subsidiaries were stand-alone corporations, eight would be in the Fortune 500, using the revenue cutoff of $5 billion for 2013 (see table 2.3). Berkshire subsidiaries employ different numbers of people, several fewer than one hundred and several with more than twenty, thirty, or forty thousand (see table 2.4).


Berkshire subsidiaries have unique financial characteristics. Profit margins (earnings divided by revenues) range from 1 to 25 percent, and returns on capital span a narrower but still wide range. Subsidiaries generally enjoy strong economics, measured by proxies like return on assets (after-tax earnings on unleveraged net tangible assets). For many Berkshire companies, this runs anywhere from 25 percent to more than 100 percent; for most subsidiaries, the range is a respectable 12 to 20 percent. But some fail to approach even the low end of this range, reflecting occasional mistakes in Berkshire’s acquisition decisions.6


Table 2.3

Revenue and Pre-tax Earnings of Berkshire’s Subsidiaries

Revenue ($ billions) Pre-tax Earnings ($ millions)

McLane 45.9 BNSF 5,900

BNSF 22.0 Berkshire Hathaway Energy 1,800

GEICO 18.5 NICO 1,700

Berkshire Hathaway Energy 12.7 Marmon Group 1,200

NICO 12.0 Lubrizol 1,200

Marmon Group 7.0 GEICO 1,100

Lubrizol 6.1 McLane 500

Gen Re 5.9 Gen Re 300

Note: The amounts for Lubrizol are estimates. The amounts for NICO combine the operations of the Berkshire Hathaway Reinsurance Group and the Berkshire Hathaway Primary Group.

Source: Berkshire Hathaway Annual Report (2013), p. 64.


Table 2.4

Employment Numbers for Berkshire’s Subsidiaries

Employees

> 40,000 BNSF

> 30,000 Fruit of the Loom

> 25,000 GEICO

> 20,000 McLane, Shaw

> 15,000 Berkshire Hathaway Energy, Marmon Group

> 10,000 Clayton Homes, ISCAR/IMC

> 7,500 Forest River, Lubrizol

> 5,000 Johns Manville, NetJets, Scott Fetzer