This is the fourth installment of a multi-part series covering the Berkshire Hathaway 2008 Annual Report and Warren Buffett’s letter to shareholders.  In this post, I will examine the valuation of Berkshire’s Non-Insurance subsidiaries.  As I noted in my earlier post, Berkshire’s overall valuation must be examined by looking at the insurance and non-insurance subsidiaries as separate entities.  Berkshire has numerous non-insurance operating companies that we will examine in detail within this post.

Regulated Utility Business

Berkshire’s regulated utility operations fall under the umbrella of Mid American Energy.  Berkshire holds a 87.4% interest in Mid American.  The details of Mid American’s operation may be found within the annual report in the management discussion on pages 70 and 71 so I will not repeat the specifics here other than to note that net earnings attributable to Berkshire’s ownership interest were $1,850 million in 2008, $1,189 million in 2007, and $916 million in 2006.

While clearly Mid American had a great year in 2008, it must be noted that $1,092 in pre-tax income was due to a one time gain on the Constellation Energy investment, including the break up fee associated with this aborted acquisition.  Accounting for minority interests and income taxes, it appears that approximately $613 million of the $1,850 in 2008 net income was “one time” in nature.  Therefore, I will consider approximately $1,237 million to be Mid American’s “normalized” 2008 earnings for valuation purposes.

If one uses the Dow Jones Utility index price/earnings ratio of 10x as a proxy, it seems reasonable to assign Mid American a valuation of approximately $12.4 Billion based on normalized 2008 net earnings.  This does not assign any special value to the superior nature of this business and the strong track record demonstrated by management in recent years, so it seems like a conservative figure to use.

Operating Companies

Berkshire owns operating companies providing goods and services in a wide variety of industries.  Berkshire’s management provides much detail on the operating companies on pages 72 to 74 and I will not repeat this information here. 

From a valuation perspective, it should be noted that the diversity of the operating subsidiaries would make it ideal to look at each individual reporting unit and come up with valuations based on the economics of each business.  This is something I have not done but plan to look at in more depth at a future time.  Instead, I have taken a relatively simple and conservative approach and used a multiple of 10 times net income. 

The operating companies had net income of $2,283 million in 2008, $2,353 million in 2007, and $2,131 million in 2006.  It should be noted that many of the subsidiaries are posting recession level earnings given the cyclical nature of many of the business units.  Applying a 10x multiple to recession level earnings seems highly conservative, particularly given that many of the operating units would command multiples far in excess of 10 times earnings.  See’s Candies is a perfect example of a business that would enjoy a much higher valuation.  Based on a 10x multiple, we will value the operating companies at $22.8 Billion based on 2008 net income.

Finance and Financial Products

Berkshire management outlines the finance and financial products businesses on pages 74 and 75 of the annual report.  This business consists primarily of the manufactured housing and finance activities of Clayton Homes along with the operations of other subsidiaries engaged in truck and furniture leasing.  This business posted net income of $479 million in 2008, $632 million in 2007, and $732 million in 2006.  Clayton homes in particular was severely impacted by the housing crash in the United Stated in recent years.   Lower rental income from over-the-road trailer and storage units also contributed to the declines.  I will use the same 10x multiple to value this business unit which will result in a valuation of approximately $4.8 Billion.   Again, this seems conservative given the low multiple used along with recession level net earnings.

Non-Insurance Subsidiaries Valuation

Based on the valuation models discussed above, we have the following estimate for the value of Berkshire’s non-insurance subsidiaries:

	Valuation (Billions)
Regulated Utilities	12.4
Operating Companies	22.8
Finance/Financial Products	4.8
Total	40.0

Our valuation for the Non-Insurance subsidiaries comes to $40 Billion, or approximately $25,819 per A Share.