вторник, Март 12, 2013

Posted by Vanessa

Warren Buffett published his 2012 Letter to Shareholders late last month.

In it he announced Berkshires intention to increase its ownership of American Express (AXP), Coca-Cola (KO), IBM (IBM) and Wells Fargo (WFC).

Skaffold has rated American Express B4 since 2010, Wells Fargo & Co (WFC) A2 since 2011 and IBM A3 for the past two years. Coca Cola (KO) recently fell from B2 to B4 based on its latest financial results.

Whilst there are no A1s in this crowd, collectively the historical performance of these businesses and their future prospects are impressive.

Last year IBM generated a return on its equity of more than 90%. Why isnt IBM rated A1, we hear you ask? Take a look at the companys level of debt. Its balance sheet is currently geared at more than 115%. The return on equity is inflated, in part, by the enormous amount of debt in the business. Despite the high debt levels, IBM consistently generates high levels of cash from operations and is comfortably able to service that debt.

As an aside, it is worth noting that equity as quoted on the balance sheets of US-listed companies is often lower than it would be in other jurisdictions. Most countries use International Financial Reporting Standards (IFRS) which allows for assets to be re-valued up whereas in the US Generally Accepted Accounting Practice (GAAP) prohibits assets to be re-valued up. If IBM bought a building 100 years ago it will still be on the balance sheet at that purchase price. The reality is its market value is probably substantially higher.

Looking forward, over the next couple of years Skaffold forecasts the intrinsic value of American Express could rise 15% per annum. This makes for an impressive-looking Skaffold Line chart (check out the gold line in the forecast area).

Skaffold Line chart interprets AXPs forecast future intrinsic value growth

Whilst AXPs share price is above todays intrinsic value, its more than 15% lower than Skaffolds 2015 valuation of around $78. Buffett looks for business that are able to consistently increase their intrinsic value. AXP has done this historically and is likely to continue doing so.

Skaffold forecasts KOs intrinsic value could rise more than 11% per annum, and Wells Fargos around 4% per annum over the next two years. Earnings per share have grown every year since 2005 and is forecast to continue doing so at least until 2015.

Wells Fargos share price is close to 30% lower than Skaffolds current intrinsic value estimate of $49.20.

Skaffold Line chart interprets WFCs forecast future intrinsic value growth

Have you read Berkshires 2012 letter? What new insights have you gleamed from Warren and Charlies scribes? Join the conversation at our Facebook page .

Berkshire Hathaways 2012 Letter to Shareholders is available here .

Data accurate as at 7 March 2013 close of trade.