CIF Stock Recommendation Report (Spring 2013)

Date: March 4 th, 2013 Analyst Name: Tung Linh CIF Stock Recommendation Report (Spring 2013) Company Name and Ticker: Berkshire Hathaway Inc. (BRK.B) Section (A) Summary Recommendation Buy: Yes Target Price: $112 (+10%) Sector: Financials Industry: Insurance - Diversified Market Cap (in Billions): $246.22 Stop-Loss Price: $91 (-10%) # of Shrs. O/S (in Millions): 1.65 Current Price: $102.05 52 WK Hi: $101.84 52 WK Low: $78.18 EBO Valuation: $96.61 Morningstar (MS) Fair Value Est.: $117.00 MS FV Uncertainty: Medium MS Consider Buying: $81.90 MS Consider Selling: $157.95 EPS (TTM): $5.38 EPS (FY1): $5.66 EPS (FY2): $6.19 MS Star Rating: Next Fiscal Yr. End 2013 December Last Fiscal Qtr. End: Less Than 8 WK: Yes If Less Than 8 WK, next Earnings Ann. Date: March 1 st, 2013 Analyst Consensus Recommendation: Outperform Forward P/E: 10.34 Mean LT Growth: 9.5% PEG: 1.09 Beta: 0.53 % Inst. Ownership: 18.51% Inst. Ownership- Net Buy: No Short Interest Ratio: 2.20 Short as % of Float: 1.10% Ratio Analysis Company Industry Sector P/E (TTM) 18.58 15.26 35.90 P/S (TTM) 1.58 0.62 5.93 P/B (MRQ) 1.34 1.11 1.44 P/CF (TTM) 13.01 10.64 18.44 Dividend Yield -- 2.28 1.69 Total Debt/Equity (MRQ) 33.86 16.76 163.24 Net Profit Margin (TTM) 8.89 4.05 16.48 ROA (TTM) 3.42 1.15 0.90 ROE (TTM) 7.73 7.45 6.34

Investment Thesis Pros o Strong historical earnings and good analysts estimates o Low beta, high long term growth estimate o Warren Buffett Chairman and CEO has made a lot good investments o Morningstar Direct suggests the stock is currently undervalued Cons o Due to the company complexity and unrelated businesses, it s very hard to estimate the performance of the company o There are too few analysts estimating Berkshire Hathaway o Warren Buffett (age 82) is responsible for all major investments Summary Company Profile: an investment firm includes many different and unrelated businesses. Fundamental Valuation: a bit overprice with 2 years above normal growth period. With a complex and unrelated businesses, it s very hard to estimate the earnings and growth rate. Relative Valuation: in line with the current stock price. Not reliable since they are not direct competitors. Due to their size and complexity, some data are not available. Revenue and Earnings Estimates: analysts are bullish about Berkshire s future performance. Can be bias and inaccurate since there are too few analysts involve. Analyst Recommendations: mean rating is outperform. The current recommendation includes only three analysts, therefore it s not reliable. Institutional Ownership: small but include well-known investment firms. Short Interest: not available. Short ratio and short percentage of float are low. Stock Price Chart: outperforms both the sector and market. RSI suggests that the stock is at its fair value.

Section (B) Company Profile Significant acquisition successor portfolio investment Company Summary Berkshire Hathaway is an investment firm that operates business in many different industries through its subsidiaries including property and casualty insurance and reinsurance, freight transportation, utilities and energy, manufacturing, service and retailing. Berkshire Hathaway has two common share classes A and B. Class B receive dividend and distribution rights equal to one-fifteen-hundredth of class A. Class B has voting rights equal to one-tenthousandth of voting rights of class A. The following pie charts show the revenue breakdown of Berkshire Hathaway based on business segment and specific subsidiaries. The data are from the 2012 10-K report of the company released on March 1 st, 2013. Revenue Insurance and Other Railroad, Utilites and Energy Finance and Financial Products Looking at the chart, more than 75% of 2012 revenue of the company comes from the insurance business. The big subsidiaries in this group are GEICO, General Re, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Primary Group. Berkshire Hathaway acquired Burlington Northern Santa Fe Corporation on 2010. The company owns 89.8% in MidAmerican Energy Holdings Company, an international energy company that generates, distributes and supplies energy.

In 2008, Berkshire acquired 64% of Marmon Holdings Inc, a private company that operates in three different segments: supplying custom metal components for construction, industrial, aerospace; leasing mobile cranes, supplying electrical and electronic wire and cable; and providing transportation services. McLane Company is a wholesale distributor that operates in all 50 states and internationally in Brazil. Before being acquired in 2003 by Berkshire, McLane was part the distribution network of Wal-Mart. The companies in the following list are the biggest holdings in Berkshire Hathaway s investment portfolio. Company Stake Wells Fargo 8.35% Coca-Cola 8.95% IBM 6.03% American Express 13.55% Procter & Gamble 1.93% Wal-Mart Stores 1.42% U.S. Bancorp 3.28% DIRECTV 5.63% Moody's Corp 12.73% Business Model, Competition, Environment and Strategy

The most important decisions are made by Warren Buffett Berkshire s Chairman and CEO. His business strategy is acquiring firms with strong brand name in an industry that he understands. Operating in many different industries has many problems: aggressive competition, regulation. The most recent deal that Buffett made is an joint acquisition of H.J. Heinz Co. with 3G Capital, a Brazilian private equity firm. Of the $12.4 billion, Berkshire will control $4.4 billion common stock and $8 billion preferred stock. The preferred pays 9% dividend, which means the company will receive $720 million per year. In this particular deal, Berkshire gets a security with high rate and a senior position relative to other common stock holders and a security that pays out when Heinz performs well in the future. According to their 10-K report, one of the biggest risks of Berkshire Hathaway is the company relies heavily on a few key people. Major investment decisions are made by Warren Buffet Chairman of the Board of Directors and CEO age 82 and Charles Munger Vice Chairman of the Board of Directors age 89. In case Buffett were to become unavailable, Berkshire will be severe damaged. Todd Combs and Ted Wescher, each manage about $5 billion portfolio, are highly praised by Buffett. He said that they both outperform the S&P 500 by double-digit margin. Berkshire has increased their stake in two of the Big Four investment: IBM (6.0% versus 5.5% in 2011), and Wells Fargo (8.7% versus 7.6% in 2011). For the other two - American Express and Coca-Cola, their stake also increase due to stock repurchase. The company announced that they are buying Tulsa World. This will increased the total daily newspaper small and medium size companies to 28. Berkshire also owns 40 other newspaper companies that publish less frequently. Buffett believes that newspapers are local sources of information and will have decent returns. Revenue and Earnings History Revenue Periods 2011 2012 March 33720.0 38147.0 June 38274.0 38546.0 September 33739.0 41050.0 December 37955.0

Note: Units in Millions of U.S. Dollars Earnings per Share Periods 2011 2012 March 916.64 1965.54 June 2072.1 1881.91 September 1379.53 2372.62 December 1846.37 Note: Units in U.S. Dollars Berkshire Hathaway s 2011 revenue is $143,688 million and earnings is $6,214.64. According to their recently announced 2012 10-K report, the consolidated revenue for 2012 is $162,463 million and earnings is $8,977. Both the revenue and earnings are trending upward except the unusual high in the second quarter of 2011.

Section (C) Fundamental Valuation (EBO) BRK.B PARAMETERS FY1 FY2 Ltg EPS Forecasts 5.66 6.19 9.50% Book value /share (last fye ) 66.61 Discount Rate 6.31% Divide nd Payout Ratio (POR 0.00% Ne xt Fsc Ye ar e nd 2013 Curre nt Fsc Mth (1 to 12) 3 Targe t ROE (industry avg.) 2.35% Ye ar 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Long-term EPS Growth Rate (Ltg) 0.0950 0.0950 0.0950 0.0950 0.0950 Forecasted EPS 5.66 6.19 6.78 7.43 8.13 8.90 9.75 Beg. of year BV/Shr 66.606 72.261 78.454 85.235 92.660 100.790 109.693 Implied ROE 0.086 0.086 0.087 0.088 0.088 0.089 ROE (Beg. ROE, from EPS forecasts) 0.085 0.086 0.086 0.087 0.088 0.088 0.089 0.076 0.063 0.050 0.037 0.024 Abnormal ROE (ROE-k) 0.022 0.023 0.023 0.024 0.025 0.025 0.026 0.013 0.000-0.013-0.027-0.040 growth rate for B (1-POR)*(ROEt-1) 0.000 0.085 0.086 0.086 0.087 0.088 0.088 0.089 0.076 0.063 0.050 0.037 Compounded growth 1.000 1.085 1.178 1.280 1.391 1.513 1.647 1.793 1.929 2.050 2.152 2.231 growth*aroe 0.022 0.025 0.027 0.031 0.034 0.038 0.042 0.023-0.001-0.028-0.057-0.088 required rate (k) 0.063 0.063 0.063 0.063 0.063 0.063 0.063 0.063 0.063 0.063 0.063 0.063 0.063 Compound discount rate 1.063 1.130 1.201 1.277 1.358 1.443 1.535 1.631 1.734 1.844 1.960 2.084 div. payout rate (k) 0.000 Add to P/B PV(growth*AROE) 0.02 0.02 0.02 0.02 0.03 0.03 0.03 0.01 0.00-0.01-0.03-0.04 Cum P/B 1.02 1.04 1.07 1.09 1.11 1.14 1.17 1.18 1.18 1.17 1.14 1.10 Add: Perpetuity beyond current yr (Assume this yr's AROE forever) 0.33 0.34 0.36 0.38 0.40 0.42 0.44 0.22-0.01-0.24-0.46-0.67 Total P/B (P/B if we stop est. this period) 1.35 1.39 1.43 1.47 1.51 1.56 1.61 1.40 1.18 0.93 0.68 0.42 Implied price 91.06 93.79 96.61 99.51 102.49 105.57 108.74 94.99 79.55 62.94 45.78 28.68 Che ck: Beg. BV/Shr 66.61 72.26 78.45 85.23 92.66 100.79 109.69 119.44 128.50 136.55 143.33 148.58 Implied EPS 5.66 6.19 6.78 7.43 8.13 8.90 9.75 9.05 8.06 6.78 5.24 3.49 Implied EPS growth 0.095 0.095 0.095 0.095 0.095 0.095-0.071-0.110-0.159-0.227-0.334 Inputs EPS forecasts (FY1 & FY2): $5.66 & $6.19 Long-term growth rate: 9.50% Book value /share: Book value: $164,850 million # of shares outstanding: 1.65 million Book value / share: $66.61 Dividend payout ratio: 0.00% Next fiscal year end: 2013 Current fiscal month: 3 Target ROE: 2.35% Output Above normal growth period chosen: 2 years EBO valuation: $96.61 Sensitivity Analysis EBO valuation would be:

$102.49 if changing above normal growth period to 5 years $99.27 if changing growth rate from mean (consensus) to the highest estimate 11.00% $90.53 if changing growth rate from mean (consensus) to the lowest estimate 6.00% $74.12 if changing discount rate to 8.00% $96.61 if changing target ROE to 8% I can t find information about EPS forecast on Reuteurs.com, so I use Morningstar Direct and Yahoo Finance data for EPS forecast for FY1 and long-term growth rate. There is no EPS forecast for FY2, so I calculated it by multiplying the EPS forecast for FY1 and the long-term growth rate. All of the data is not very accurate in my opinion because there are too few analysts who provided estimates. The company is very complicated; therefore I think it s very hard to come up with a good estimate. All the big decisions are made by Warren Buffett and he usually makes big investments. If one occurs, the long term growth rate of the whole company will change significantly. That s why I chose a two years abnormal growth. Data for calculating discount rate: risk free rate is 2.71%, beta is 0.53, and market risk premium is 9.5%. When I change the abnormal growth rate to five years, the implied stock price is higher and closer to the current price. There is no high or low range of the long term growth rate, so I chose the numbers myself. Even with a significant change in long term growth rate, the stock price doesn t change much. The stock price is not sensitive to the industry target ROE. The stock price is very sensitive to the discount rate. In conclusion, the stock price is sensitive to only the discount rate.

Section (D) Relative Valuation BRK.B Mean FY2 Earnings Estimate Forward Mean LT PEG P/B ROE Value P/S P/CF Ticker Name Mkt Cap Current Price (next fiscal year) P/E Growth Rate (MRQ) 5 yr ave Ratio TTM TTM 1 BX The Blackstone Group L $ 21,006.24 $ 18.74 $ 2.67 7.02 13.60% 0.52 -- -- #VALUE! 5.23 21.21 2 GE General Electric Co $ 241,709.20 $ 23.27 $ 1.84 12.65 11.00% 1.15 1.97 11.88% 0.17 1.64 -- 3 LOW Lowe's Companies Inc $ 41,151.94 $ 37.39 $ 2.53 14.78 16.17% 0.91 2.89 12.09% 0.24 0.81 11.81 4 CG Carlyle Group LP $ 9,696.00 $ 32.35 $ 3.41 9.49 28.70% 0.33 0.13 -- #VALUE! 3.26 -- BRK.B Berkshire Hathaway Inc $ 244,921.80 $ 100.80 $ 9.75 10.34 9.50% 1.09 1.33 7.55% 0.18 1.57 12.94 Implied Price based on: P/E PEG P/B Value P/S P/CF 1 BX The Blackstone Group LP $68.43 $47.80 #VALUE! #VALUE! $335.79 $165.22 2 GE General Electric Co $123.31 $106.49 $149.31 $94.89 $105.29 #VALUE! 3 LOW Lowe's Companies Inc $144.09 $84.66 $219.03 $136.78 $52.01 $92.00 4 CG Carlyle Group LP $92.50 $30.62 $9.85 #VALUE! $209.30 #VALUE! High $144.09 $106.49 #VALUE! #VALUE! $335.79 #VALUE! Low $68.43 $30.62 #VALUE! #VALUE! $52.01 #VALUE! Median $107.90 $66.23 #VALUE! #VALUE! $157.30 #VALUE! Some data are not available on Reuteurs.com. I either use Morningstar Direct or my own judgment for those missing data of Berkshire Hathaway. For calculation of mean FY2 Earnings estimate and mean long-term growth rate, please refer back to section C. As discussing in Section B, Berkshire Hathaway is a conglomerate with a lot of unrelated business. Therefore, it s very hard to find competitors. The four companies I chose are all conglomerate that have insurance as part of their business. The Blackstone Group operates globally in five segments: private equity, real estate, hedge fund solutions, credit businesses, and financial advisory. General Electric Company operates as a technology and financial services company worldwide GE has five different business segments: energy infrastructure, healthcare, transportation, home and business solutions, and GE capital. Lowes Companies is a home improvement retailer and installation/repair services. The Carlyle Group specializes in investment such as equity investment, defense, aerospace, healthcare, technology, real estate, transportation. Berkshire Hathaway has a very high FY2 earnings compare to other companies. As I mentioned earlier, all of these companies are not direct competitors because they all have business in many different areas. This also makes it very hard to estimate these companies; therefore I don t think the exceptional high estimate earnings of Berkshire is relevant. Some of the competitors data are not available, so there are less implied prices provided. The price estimates from forward P/E is much closed to the current stock price, and the other two derived from PEG and P/S give a wide range. Since the estimate long-term growth rate is not reliable, I think the implied price for forward P/E would be the most relevant as a valuation for Berkshire.

Section (E) Revenue and Earnings Estimates Historical Surprises Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) Estimates vs Actual Estimate Actual Difference Surprise % SALES (in millions) Quarter Ending Sep-12 39,044.40 41,050.00 2,005.65 5.14 Quarter Ending Jun-12 36,807.00 38,546.00 1,739.00 4.72 Quarter Ending Mar-12 39,154.00 38,147.00 1,007.00-2.57 Quarter Ending Dec-11 37,306.00 37,955.00 649.00 1.74 Quarter Ending Sep-11 36,560.00 33,739.00 2,821.00-7.72 Earnings (per share) Quarter Ending Dec-12 1,755.12 1,704.00 51.12-2.91 Quarter Ending Sep-12 2,062.56 2,057.00 5.56-0.27 Quarter Ending Jun-12 1,776.64 2,252.00 475.36 26.76 Quarter Ending Mar-12 1,779.89 1,615.00 164.89-9.26 Quarter Ending Dec-11 1,850.67 1,615.00 235.67-12.73 The company doesn t have any clear pattern of surprising the market. There is a mixture of both positive and negative surprises. The earnings surprises are more notable. The stock price shot up after the positive surprise of second quarter of 2012. Consensus Estimates Analysis Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) SALES (in millions) # of Estimates Mean High Low 1 Year Ago Quarter Ending Mar-13 1 40,591.00 40,591.00 40,591.00 38,573.00 Quarter Ending Jun-13 1 40,931.00 40,931.00 40,931.00 40,362.00 Year Ending Dec-13 1 165,344.00 165,344.00 165,344.00 162,680.00 Year Ending Dec-14 1 171,553.00 171,553.00 171,553.00 -- Earnings (per share)

Quarter Ending Mar-13 1 1,946.00 1,946.00 1,946.00 1,868.00 Quarter Ending Jun-13 1 2,134.00 2,134.00 2,134.00 2,036.00 Year Ending Dec-13 3 8,593.58 8,675.00 8,483.18 8,194.33 Year Ending Dec-14 2 9,161.00 9,229.00 9,093.00 -- Sales Difference from High Difference from Low Quarter Ending Mar-13 0.00% 0.00% Quarter Ending Jun-13 0.00% 0.00% Year Ending Dec-13 0.00% 0.00% Year Ending Dec-14 0.00% 0.00% Earnings Difference from High Difference from Low Quarter Ending Mar-13 0.00% 0.00% Quarter Ending Jun-13 0.00% 0.00% Year Ending Dec-13 0.95% 1.28% Year Ending Dec-14 0.74% 0.74% Compare to one year ago, both sales and earnings estimates are trending upward. There is only a few analysts who provide these estimates. That s why there is almost no difference from the consensus. There is no long-term growth estimate on Reuteurs.com and I only found one estimate on Morningstar Direct. I think the company s complex business structure is the cause of the lack of estimates. Consensus Estimates Trend Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) SALES (in millions) Current 1 Week Ago 1 Month Ago 2 Month Ago 1 Year Ago Quarter Ending Mar-13 40,591.00 40,591.00 38,375.00 38,369.00 38,573.00 Quarter Ending Jun-13 40,931.00 40,931.00 40,712.00 40,704.00 40,362.00 Year Ending Dec-13 165,344.00 165,344.00 162,885.00 162,898.00 162,680.00 Year Ending Dec-14 171,553.00 171,553.00 170,670.00 170,657.00 -- Earnings (per share) Quarter Ending Mar-13 1,946.00 1,946.00 1,941.00 1,952.00 1,868.00 Quarter Ending Jun-13 2,134.00 2,134.00 2,055.00 2,072.00 2,036.00

Quarter Ending Dec-13 8,593.58 8,593.58 8,372.39 8,406.77 8,194.33 Quarter Ending Dec-14 9,161.00 9,161.00 9,000.50 9,092.50 -- Both the sales and earnings consensus estimates are continuously trending up from one year ago. The trend is notable for all the first quarter, second quarter and the whole year 2013. This shows that the analysts are getting more confident about Berkshire s short-term performance. This is bullish sign for the company stock. Since the estimates for 2014 are provided recently, therefore there is no major change. Estimates Revisions Summary Last Week Last 4 Weeks Number Of Revisions: Up Down Up Down Revenue Quarter Ending Mar-13 0 0 0 0 Quarter Ending Jun-13 0 0 0 0 Year Ending Dec-13 0 0 0 0 Year Ending Dec-14 0 0 0 0 Earnings Quarter Ending Mar-13 0 0 0 0 Quarter Ending Jun-13 0 0 0 0 Year Ending Dec-13 0 0 0 0 Year Ending Dec-14 0 0 0 0 In the last four weeks, there was no change in analysts estimates.

Section (F) Analysts Recommendations 1-5 Linear Scale Current 1 Month Ago 2 Month Ago 3 Month Ago (1) BUY 1 1 1 1 (2) OUTPERFORM 1 2 2 3 (3) HOLD 1 1 1 1 (4) UNDERPERFORM 0 0 0 0 (5) SELL 0 0 0 0 No Opinion 0 0 0 0 Mean Rating 2.00 2.00 2.00 2.00 From the last three months, there is no big change of analyst recommendation except one analyst dropped out two months ago and another analyst one month ago. Besides that, the mean rating stays 2.0 the whole period. Since there are too few analyst recommendations and they are spread out, I don t think this is a good source of estimation. Revision Date The most recent revision date Upgrade or Downgrade Current Recommendation Previous Recommendation Firm Last Revision The earliest revision date in the last two months In the recent two months, there was no analyst upgrade or downgrade.

Section (G) Institutional Ownership BRK.B Ownership Activity # of Holders % Beg. Holders Shares % Shares Shares Outstanding 919,071 100.00% # of Holders/Tot Shares Held 701 103.09% 170,120 18.51% # New Positions 51 7.50% # Closed Positions 30 4.41% # Increased Positions 144 21.18% # Decreased Positions 179 26.32% Beg. Total Inst. Positions 680 100.00% 166,221 18.09% # Net Buyers/3 Mo. Net Chg -35 44.58% 3,899 0.42% Ownership Information % Outstanding Top 10 Institutions % Ownership 31.90% Mutual Fund % Ownership 0.63% Float % 0.00% > 5% Ownership Holder Name % Outstanding Report Date Bill & Melinda Gates Foundation 7.90% 12/31/2012 State Street Global Advisor (US) 6.90% 12/31/2012 BlackRock Institutional Trust Company, N.A. 5.50% 12/31/2012 The Vanguard Group, Inc. 5.00% 12/31/2012 Net institutions has been decreasing ownership but not significant. The percentage of institutional ownership is pretty low. I think the reason for this is because a large portion of shares belong to Warren Buffett Berkshire Hathaway s Chairman and CEO. The list of more than five percent ownership on the other hand is a bullish indication. Aside from Bill Gates charity organization, the other three are all well-known investment firms. I think the presence of these companies show their faith in Berkshire s future growth.

Section (H) Short Interest Settlement Date Short Interest Average Daily Shares Volume # of Days to cover There is no information about Berkshire Hathaway s short interest on Nasdaq.com and I couldn t find it anywhere else. Share statistics Avg Vol Avg Vol Shares (3 month) (10 day) Outstanding Float 4,590,950 4,922,330 1.66M 1.28M Shares Short Short Ratio Short % of Float Shares Short (as of Jan 31, 2013) (as of Jan 31, 2013) (as of Jan 31, 2013) (prior month) 10.42M 2.20 1.10% 12.62M Both the short ratio and short percentage of float are low. Based on these data, the market is bullish about Berkshire Hathaway.

Section (I) Stock Charts A three months price chart Looking at the price chart, Blackstone stock is doing very well and outperforms both the sector and the market. The company s 2012 result is very solid; I think that s why the stock price has been increasing since January. Both Berkshire and General Electric also outperform both sector and the market. A one year price chart In the one year period, Berkshire has the highest return while Blackstone doesn t look as good as in the three month period chart.

A five year price chart All stocks have a deep drop back in the 2008 financial crisis. Since then, they all come back up. General Electric hasn t fully recovered and has a negative return. Berkshire s stock price has been consistently increased and less volatile than both Blackstone and the financial sector. 10 and 50-day moving average

There were a death cross back in November 2012and a golden cross in January 2013. From then on, the short term moving average has been trending above the long term moving average. The Relative Strength Index is currently about 65 which indicates the stock is almost on the overvalue level. 50 and 200-day moving average There was a death cross back in late 2011 and a golden cross in January 2012. The cause of the death cross was probably the financial crisis and the company has been recovered from the beginning of 2012. The RSI is currently about 60 which indicates the stock is at its fair value. References http://finance.yahoo.com/ http://www.reuters.com/ http://www.nasdaq.com/ www.berkshirehathaway.com Morningstar Direct

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