BRK Initiation Nomura 4-30-13

5/24/2018 BRK Initiation Nomura 4-30-13

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Berkshire Hathaway Inc. BRKa.N BRK/A US .AMERICAS INSURANCE

EQUITY RESEARCH

S

Initiating on BRK/A with a Buy, $184,000 TPGreat Years Ahead forBerkshire Hathaway

April 30, 2013

Relative r ating

Starts at Buy

Target price

Starts atUSD

184,000.00Closing price

April 26, 2013USD

160,618.00

Potential upside +14.6%

Double-Digit Earnings Growth to Drive Value Creation Berkshire Hathaway (BRK/A) should reach record-high operating EPS

over the next two years, reaching nearly $16bn by 2014 (12.7% CAGR),with continued growth thereafter. In particular, GEICO, BNSF and thecollection of Manufacturing, Service and Retail businesses (roughly70% of 2013E earnings) should see record-high earnings.

Our Berkshire model assumes modest U.S. GDP growth near 3%, butwith over 85% of the companys revenues in the U.S., anything betterfor the U.S. would mean even greater Berkshire earnings.

Berkshire has a collection of best-in-class companies, which positions itwell in nearly any environment. From strong brands to low-costdistribution models to dominating market shares or limited competition,all of the major Berkshire businesses have sustainable competitive

advantages, in our opinion.Accretive Cash Deployment Is Just a Bonus Our EPS and book value projections give no credit for the deployment

of $35bn of cash in the hands of Mr. Warren Buffett. Given Berkshiresreputation and financial strength, we believe there is potential for morehigh-profile deals with lucrative terms, such those struck with GoldmanSachs, Bank of America, or most recently, Heinz.

The Berkshire board has pledged to repurchase BRK/A shares at 1.2xbook, which we believe provides a solid floor for investors.

Valuation Does Not Reflect the Fundamental Outlook BRK/A is trading at 1.3-1.4x book value, below its historical mean of

near 1.5x and below our sum-of-the-parts valuation of $184,000.

We expect that the discounted valuation reflects concerns of whether Mr.

Research analysts

Amer icas Insu rance

Clifford Gallant, CFA - NSI

[email protected]+1 415 445 3865

Matthew Rohrmann - [email protected]+1 212 298 4234


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Nomura | Berkshire Hathaway Inc. April 30, 2013

Key data on Berkshire Hathaway Inc.Rating

Stock Buy

Sector Not rated

Relative performance chart

Source: Thomson Reuters, Nomura research

Performance

(%) 1M 3M 12M

Absolute 3.2 9.0 33.1

Relative to S&P 500 Index 1.9 3.6 19.8

Market data

Current stock price (USD) 160,618.00

Market cap (USD - mn) 143,431.9

52-week low (USD) 118,000.00

52-week high (USD) 161,959.00

Shares outstanding (mn) 0.89

Source: Thomson Reuters, Nomura research


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Investment Summary

We Init iate Coverage wi th a Buy Rating, $184,000 Target Price

Strengthening U.S. Consumer and Business

Given that Berkshires companies are generally best of breed and leveraged to the U.S.

economy, we expect that as American businesses and consumers regain strength, the

company will generate impressive operating earnings, including double-digit earnings

growth through 2014. The transition to operating company earnings should drive book

value growth, and Berkshires reputation and financial strength should enable it to strike

deals on favorable terms. Our multiple-based, sum-of-the-parts valuation results in our

$184,000 target price and supports our Buy rating.

Growing Earnings Power

We expect Berkshires earnings to ramp up quickly and to approach $16bn by 2014

(12.7% CAGR). Our model assumes modest U.S. GDP growth of near 3%, but with over

85% of the companys revenues in the U.S. and serving American consumers and

businesses, better growth for the U.S. would further enhance Berkshires earnings

power.

In the Underwriting businesses, roughly 24% of revenues, GEICO continues to be a

share gainer and should produce double-digit earnings growth, while unit count growth,driven by a growing economy, should help power GenRe. BHRG is aggressively

entering the Lloyds market, which should further propel its growth rate over the next few

years.

In the non-underwriting businesses, we expect combined earnings growth of roughly

11-14% from the various business segments. The railways are benefiting from the U.S.

energy boom, economies of scale and the growth in online consumer spending as more

consumers take advantage of low-cost shipping. The Manufacturing, Service and Retail

(MSR) businesses are also well positioned for growth as both the American consumerand small businesses increase spending.

The Bonus of Cash Deployment

We are emphasizing the transition to operating company earnings as the driver of value.

That said, we believe our EPS and book value estimates are conservative, as they give

no credit to the deployment of $35bn of cash currently on hand. Given Berkshire's

reputation and financial strength, we believe there is a likelihood for additional deals with

lucrative terms similar to those high-profile ones struck with Goldman Sachs, Bank of

America, or most recently, Heinz.

Additionally, we note the board has pledged to repurchase shares at 1.2x book value,

essentially creating a downside floor to the share price given its current valuation of

roughly 1.4x book value.

Undervalued Shares


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To Investors of Berkshire Hathaway Inc.

Berkshire Hathaway is an enormous and complicated company, in a way that is often

underappreciated. Perhaps its the chairmans silver-tongued ability to describe an

esoteric business such as loss portfolio transfer in a folksy, business-for-dummies

manner. Perhaps its the companys scant disclosure. Perhaps its the belief that too

much attention to the details would leave one too focused on the trees and completely

lost in the woods.

Nonetheless, we attempt to analyze some sections of the proverbial elephant and make

our best estimation of Berkshire Hathaway as a whole. To give context to our work, we

stress that Berkshire is huge. Look at some of the companys highlight bragging points:

GEICO is the No. 3 auto writer in the U.S., ranked by 2012 net written premiums. With

over 11 million policyholders, it has been growing premiums in the high single digits,

with low 90s combined ratios. Combined to be the worlds No. 3 reinsurer, GenRe wrote nearly $6bn of premiums in

2012, while Berkshire Hathaway Reinsurance Group more than doubled that volume.

BNSF Railway is a leading freight transporter with nearly 400 different railway lines,

covering 32,500 route miles in the U.S. and Canada and growing revenue in the high-

single digits.

MidAmerican Holdings has 7 million energy customers throughout the Midwest and the

western U.S. and stable margins in the high teens.

Berkshire owns hundreds of manufacturing and service businesses, such as buildingproducts (ACME, MiTek), leisure vehicles (Forest River), and chemicals (Lubrizol); it is

a leading wholesale distributor for Wal-Mart and 7-Eleven.

Major brands include Dairy Queen, Sees Candies, Brooks Sports, Fruit of the Loom,

and Benjamin Moore.

Berkshire also is a major participant in businesses such as real estate, furniture,

jewelry, and newspaper publishing and has material positions in companies, such as

Coke, Wells Fargo, IBM, and soon, Heinz.

Most of these companies were at one time stand-alone public companies with teams ofanalysts pouring over detailed quarterly reports and SEC filings. Berkshire also owns

dozens and dozens of other businesses, nearly all of material size within their

competitive marketplaces. Considering the companys scope its no wonder that the

details are often underappreciated.

As Mr. Buffett once said when discussing the problem of diversification back in

Berkshires early days, The problem with having a harem of women, is that you dont get

to know any of them very well (Berkshire Hathaway annual report, 1984).

Given the immense scale and complex nature of this company, we focus on the keyhighlights and drivers of each business segment in this report. For a more detailed view

into the company, please see our model.

The Berkshire Empire: an American Empire

A rising tide lifts all yachts (Berkshire Hathaway annual report 1995)


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Fig. 1: BRK/A ROE vs. U.S. GDP

Source: Company data, BEA, Nomura estimates

In addition, more than simply producing American brands or being U.S.-based,

Berkshires businesses are typically in industries that serve other American industries.

From insurance to manufacturing to transportation, Berkshires businesses are often the

oil in the machine that powers much of the American economy. As the American

economy improves (we assume ~3% GDP growth), Berkshires fortunes will rise as well,

we believe.

Fig. 2: Berkshire Hathaway Business Segments2012 revenue contributions, %

Source: Company data, Nomura research

0.0%

0.5%

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2010 2011 2012 2013E 2014E

BRK.A ROE U.S. GDP

Burlington NorthernSanta Fe, 12.8%

Utilities & Energy(MidAmerican), 7.2%

Marmon, 4.4%

McLane Company, 23.0%

Other Manufacturing,16.5%

Other,5.0%

Retail, 2.3%

Financial Products, 2.5%

GEICO, 10.3%

General Re, 3.6%

BHRG, 6.0%

BHPG, 1.4%

Ins. Inv. Inc., 2.8%

Insuranc e Group, 24.0%


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GEICO, the Ubiquitous Auto Insurer

The success of GEICO is impressive. The U.S. personal auto insurance industry is a

fully mature market. With nearly every driver legally bound to buy insurance, the only

industry growth comes with population growth (a little less than 1% a year). Yet GEICO

has managed to report mid-to-high single-digit premium growth year after year.

The companys low-cost distribution model has emerged as the winning model of the

industry. GEICO is a 100% direct-to-consumer auto insurer. No agent commissions are

paid and much of that savings is passed on to the customer (not coincidently, 15% or

more). The model is simple but also difficult to replicate due to the importance of scale,

brand, and issues around channel conflict for other insurers. Travelers, for instance, an

industry powerhouse, has struggled for several years to build a direct auto business and

remains below critical mass. Allstates attempt was also a disappointment, angering

their agents, and eventually resulting in the high-priced acquisition of Esurance, the No.

3 and last remaining stand-alone direct auto insurer.

Fig. 3: Top 10 U.S. Personal Auto Insurance Market ShareBased on 2012 direct written premium

Source: SNL, Nomura research

We would caution that GEICO is not without a direct rival. Progressive, just behindGEICO in the rankings, has at times surpassed GEICOs growth rates. Progressive is

famed for an innovative and aggressive culture that first developed credit-scoring as an

underwriting tool and even led the development of widespread direct distribution models,

including Internet sales, which power GEICO today. Currently, Progressive is

threatening to shake up the industry with the development of telematics, a tool that will

monitor policyholder driving habits and price accordingly. GEICO management has

publicly declared little interest in such underwriting tools, but, in our view, telematics has

the potential to create a major sea change in the auto insurance industry.

We expect GEICO to grow premiums in the high-single-digit range through 2014 and by

leveraging a largely fixed expense structure to increase margin through double-digit

earnings growth. The bigger GEICO gets, growing faster than the industry naturally

becomes more challenging; but as consumers become more comfortable buying

insurance online and with few direct competitors and GEICOs low-cost advantages, we

expect better than industry growth rates through at least 2018

Rank Company 2012 2011 2010

1 State Farm Mutl Automobile Ins 1 8.39 18.61 18.65

2 Allstate Corp. 10.01 10.31 10.67

3 Berk shi re Hathaway Inc. (GEICO) 9.59 9.07 8.50

4 Progressive Corp. 8.27 7.93 7.70

5 Farmers Insurance Group of Cos. 5.89 5.89 5.96

6 USAA Insuran ce Group 4.84 4.60 4.36

7 Liberty Mutual 4.73 4.54 4.49

8 Nationwi de Mutual Group 4.09 4.13 4.29

9 Travelers Companies Inc. 1.94 2.08 2.10

10 American Famil y Mutual 1.89 1.96 2.10

Market Share (%)


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disclosure regarding some of its operations such as the Life/Health business, which

produces $3bn of premiums, is limited.

As prices in the reinsurance markets wane, we expect a flat top line for GenRe, with

margins holding steady.

Fig. 4: General Re Net Written Premium and Combined Ratios$ in millions

Source: Company data, Nomura estimates

BHRG, led by Mr. Buffetts favored manager, Ajit Jain (to whom shareholders have been

urged to bow deeply), has been a spectacular success for Berkshire and is unique

among the major businesses as the only significant home-grown operation. Unlike a

typical reinsurer, BHRG is focused on one-off or special situation transactions. A BHRG

contract is usually costly, but as the head of Lloyds once quipped after buying a major

cover, Our owners wanted to sleep at night, so we bought the worlds best mattress,

referring to BHRGs financial strength and reputation. When an insurer wants regulatorsand investors to not worry about an issue, they call Mr. Ajit, as AIG did when it

purchased asbestos protection. In addition to attractive underwriting terms, BHRG has

significantly added to Berkshires float.

With revenues that are large and often lumpyBHRG could report several billions of

dollars of premiums written one quarter and zero the nextforecasting results is a

challenge: 2013 likely will be weighed down by the expiration of the Swiss Re quota

share contract, but we know the company was active during the April renewals in Japan

and has made recent headlines with its entry into Lloyds with a major quota sharewritten through Aon.

Float

When discussing the underwriting operations, the concept of float is important to

understanding Berkshire. Most insurers and reinsurers attempt to position their

80.0%

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110.0%

$0

$1,000

$2,000

$3,000

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

GenRe NWP($mm) GenRe CR (%)


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Railroad Business

Make Way for Railways: BNSF Railwaythe FormerBurlington Northern Santa Fe

While railroads may have the reputation of being a business of yesteryear, the railwayindustry currently is experiencing a boom. Growth in U.S. energy demand has been one

major driver, but the technological advances of things like fleets of hot trains that

deliver consumer products for FedEx or Amazon have also contributed to the growth.

Capital spending by the freight railway companies is at new highs (see chart below), as

the industry expects increasingly long-term demand.

Fig. 5: Capital Expenditures by the U.S. Railroad Industry and Revenue Peer Comparison

$ in billions

Source: Association of American Railroads, Wall Street Journal, Nomura estimates

While the ups and downs of BNSFs business are affected by the demand levels for its

major products shipped, such as coal, agricultural products and industrial products, there

has been relatively consistent growth in recent years despite the fluctuations of the U.S.

economy. (Revenue and EBT CAGRs have been around 13-15% and we expect that to

continue through 2014.) This has been driven by the rise in price of gasoline, making rail

more efficient versus trucking, as well as the large amounts of capital improvements in

the rail lines themselves. To illustrate efficiency, we note that in 2012 the rail industry

could move 1 ton of freight 476 miles on one gallon of fuel on average, with the

economies of scale favoring the largest players; this is a 100% improvement over 1980.

Of the major class 1 railroad companies, BNSF is really only challenged by Union Pacific

(UNP) in terms of scale and performance. BSNF and UNP rank first or second in justabout every comparable operating metric, including total cars on line, average speed,

tonnage moved, etc., as well as financial metrics including total revenues and margins.

Fig. 6: BNSF Revenue and Margin History$ in millions

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E2013E

BNSF Revenue BNSF EBT Margin (%)


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The scale advantages are obvious, and with bigger meaning better, the large amounts of

capex being deployed will likely only further the gap between BNSF and UNP versus the

other competitors, translating into even better revenues and margins. BNSF was

estimated to be worth approximately $34bn when it was taken out. Given that UNP

trades at approximately ~17x earnings currently, we have used our similar multiple for

BNSF, equating to a value of north of $60bn, which is in our sum-of-the-parts valuationanalysis.

Utilities and Energy Businesses

Turn on the Lights: MidAmerican Holdings Company

Berkshire owns 89.8% of MidAmerican, a major global utility and energy company.

Businesses include regulated utilities (PacifiCorp and MidAmerican), natural gas

pipelines and a UK electric company (Northern Powergrid). MidAmerican also includes a

real estate brokerage business. While growth rates slowed and margins tightened

during the recent recession, the energy businesses proved to be remarkably stable in

face of the downturn due in part to the regulated aspect of the business.

Fig. 7: Utilities and Energy Revenue History$ in millions


Coming off a slow-growth period during the prolonged economic weakness, the companyshould see a double-digit rebound in growth in 2013, slowing to a mid-single-digit rate

thereafter, we believe.

Manufacturing, Service and Retail

Th M f t i S i d R t il (MSR) t f B k hi ti f

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

$10,500

$11,000

$11,500

$12,000

$12,500

$13,000

2010 2011 2012 2013E 2014E

Utilities Total Revenue Utilities EBT margin (%)


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Fig. 8: MSR Segment Revenue and Margin History$ in millions

Source: BRK/A company reports, Nomura estimates

The businesses in MSR enjoy advantages that include size and brand. McLane, for

example, is the largest distributor to Wal-Mart. Brooks running shoes are known as

costly but geared for the running geeks. Nebraska Furniture Mart is the largest home

furnishing store in North America. As the U.S. consumer slowly recovers, we expect

mid-teen earnings growth through 2014 at MSR.

Finance and Financial Products

The Weapons of Financial Destruct ion

The smallest of the major segments, FFP includes rental companies (XTRA and CORT),

the leading producer and financer of manufactured homes (Clayton), Berkadia (a

commercial mortgage 50% joint venture with Leucadia) and Berkshires position in thederivatives market. While the derivatives portfolio had received negative press due to

Mr. Buffetts prophetic weapons of mass financial destruction comments in regard to

derivatives, Berkshires portfolios are longterm, plain vanilla credit default and equity

index put options. While the portfolios value has shown the expected volatility over the

past several years, there has been little cash collateral payments required, much as Mr.

Buffett claimed when he first wrote the contracts. Given the difficulty in modeling the

returns of the equity-market linked derivatives, we have modeled for flat earnings in this

segment.

Heinz

Berkshire recently announced its intension to purchase 50% of H.J. Heinz (of ketchup

fame). Berkshire will invest $4bn for common equity in the holding company and $8bn in

preferred shares (which will pay a 9% dividend to Berkshire) with warrants to buy an

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$20,000

$40,000

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$80,000

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2010 2011 2012 2013E 2014E

Manufacturing, Service & Retailing (MSR) Revenue MSR EBT Margin (%)


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America, included attractive cash dividends and warrants. For Berkshire, the deals were

relatively low risk and high return.

After Berkshires purchase of Heinz, we estimate that the company will hold $35bn of

cash, well above the $20bn cash cushion that Mr. Buffett has pledged to hold. Guessing

whats next is exceedingly difficult, although we can narrow down the possibilities. Mr.

Buffett does not go looking for something that Berkshire needs. Add-on deals are doneregularly, but typically by the operating subsidiaries themselves. Last year, for example,

Marmon made several low-profile acquisitions. Mr. Buffett has also declared that there is

no tax or accounting need for more underwriting operations, although it remains a

business he clearly likes. He also prefers U.S. businesses and likes businesses in which

it is easy to see value add for the customer. We would expect deals of significance, at

least $10bn, to be a threshold. In addition, while Mr. Buffett has a reputation for value

investing, he is not known for buying broken companies in need of restructuring.


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Balance Sheet

Unparalleled Financial Strength

In God we trust, all others pay cash (Berkshire Hathaways annual report, 2008).

In terms of financial strength, Berkshire has few peers. Total cash on the balance sheet

was $47bn at year-end 2012, $12bn of which was recently put into Heinz (an investment

expected to pay a $720m annual cash dividend). Total notes payable was $62.7bn,

$36.2bn of which was operating debt for the railway business. Shareholders equity is

$191.6bn, making any calculation of debt ratios look good. Total interest expense in

2012 was $2.7bn versus EBITDA of over $30bn. With pretax income of $22bn in 2012

and depreciation expense of $5.1bn, free cash flow is strong. Berkshire earns its AA+

S&P rating.

Fig. 9: Consolidated Balance Sheet$ in millions, except BVPS


2008 2009 2010 2011 2012Assets - Insurance & Other

Cash & cash equivalents 24,302 28,223 34,767 33,513 42,358

Fixed maturities 27,115 35,729 33,803 31,222 31,449

Equity securities 49,073 56,562 59,819 76,063 86,467

Other Investments 18,419 29,440 19,333 13,111 16,057

Total Investments - Insurance & Other 118,909 149,954 147,722 153,909 176,331

Property, plant & equipment 16,703 15,720 15,741 18,177 19,188Goodwill 27,477 27,614 27,891 32,125 33,274

Total Insurance & Other Assets 198,771 227,297 232,901 250,319 278,096

Total Rai lr oad, Uti li ti es & Ener gy Assets 41,570 44,771 113,605 117,377 123,908

Total Fi nance & Financial Products Assets 27,058 25,051 25,723 24,951 25,448

Total Consolidated Assets 267,399 297,119 372,229 392,647 427,452

Liabili ties - Insurance & Other

Losses & LAE 56,620 59,416 60,075 63,819 64,160

Unearned premiums 7,861 7,925 7,997 8,910 10,237

Life & Health insurance benefits 3,619 5,228 8,565 9,924 10,943

Accounts payable 14,987 15,530 15,826 18,466 21,149

Notes payable and other borrowings 4,349 4,561 12,471 13,768 13,535

Total Insurance & Other Liabil ities 87,436 92,660 104,934 114,887 120,024

Total Uti li ties & Energy Liabil i ties 25,320 25,474 43,993 45,596 49,269

Total Fi na nce & Fi nan ci al Pr oducts Li abi lti es 30,656 23,975 24,016 25,399 22,077

Income taxes, principally deferred 10,280 19,225 36,352 37,804 44,494

Total Consolidated Liabil i ties 153,692 161,334 209,295 223,686 235,864

Minority Shareholders Interest 4,440 4,683 5,616 4,111 3,941

Be rksh ire Ha th aw ay Sh areh ol de rs' Eq ui ty 109, 267 131, 102 157, 318 164, 850 187, 647

Boo k Val ue Per Share $70,529.68 $84,486.63 $95,452.98 $99,860.31 $114,213.81


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RisksAn investor may be tempted to see Berkshire as a safe investment, given its

aforementioned financial strength, track record and the strength of its franchises. Overall,

we would agree, certainly on a relative basis. Nonetheless, no investment is without risk

and Berkshire may have some risks unique to itself. We highlight our major concerns.A Weak U.S. Economy Is a Greater Risk than Weak Equi ty Markets

With countless books written on the subject, we need not recount Warren Buffetts

investment achievements. Suffice to say that he is legendary, the Babe Ruth of

investing. However, as the company has grown, Berkshires major buys are no longer

percentages of public companies, but 100% of entire companies. Going forward, we

expect that the operating earnings of Berkshire will outweigh the changes in the equity

portfolio. Over the past five years, operating company earnings, rather than the equities

securities book, was the key driver of value creation. (We do not account for new cash

into the equity portfolio or make adjustments for acquisitions.)

Fig. 10: Shareholders Equity, Equity Investments and Investment Income$ in millions


Berkshires long-term fate is tied to that of the U.S. economy. Should the future of the

U.S. be anemic growth and weak industrial output, Berkshire will be hard pressed to

show strong operating performance and we would expect subpar value creation.

Significant Disruption in a Core Operating Business

At this time, the outlook for each of Berkshires major businesses appears sanguine;however, the implosion of any one of the major businesss could have the potential to

drag on the long-term performance of the group. Unfortunately, the causes of such

implosions are difficult to forecast. In reinsurance for example, a major liability crisis

(such as another asbestos disaster) or a series of major catastrophes could significantly

impact the overall companys financial position or at least be a distraction to

management and investors alike As Mr Buffett once quipped A small leak can sink a

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2008 2009 2010 2011 2012

BRK Shareho lders' Equity ($mm) Equity Secu riti es ($mm) Inv Inc PT/ EBT Ea rn ings (% )

|


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Weak Centralized Risk Management

Berkshire has no centralized risk management function aside from Warren Buffett,

Charles Munger (vice chairman) and Marc Hamberg (CFO). Their approach is hands

off, allowing risk management be conducted within each operating subsidiary. As a

result, there is no one who looks to see if BHRG and GenRe are accepting similar large-

property risks. In addition, there is no senior manager who dictates an interest rateforecast. As a result, an underwriter at GenRe, an underwriter at BHRG, and the

management at MidAmerican or BNSF could be making financial decisions or setting

reserves or underwriting terms and conditions based upon very different macro

expectations. In fact, in the life reinsurance business in 2011 and 2010, GenRe was

reporting favorable reserve development from better-than-expected mortality trends,

whereas at the very same time, BHRG reported reserve additions for worse-than-

expected trends. In the eyes of senior management, Berkshires businesses are diverse

and run by excellent managers such that a systemic flaw could not easily arise. While

that may appear to be true, the reason modern companies often have a centralized riskmanagement team is because blind-spot risks are hard to identify.

We point to the unfortunate case Mr. David Sokol, who was forced to resign from the

company in 2011 over insider trading allegations. A central risk management team that

included a compliance officer could have been useful in preventing the activity, which led

to Mr. Sokols departure.

Losing the Oracle of Omaha

This concern is the subject of much speculation and debate. We objectively view (we

are not members of any fan clubs) that while Mr. Buffett will one day naturally bereplaced, his departure will be a great loss to the company.

First, his investment track record speaks for itself and there is a chance his genius as an

investor may never again be replicated. Second, his stature in the public eye and in both the

business and political world is so high that he now enjoys a favored perch from which to

make investments. Third, there has been surprisingly little criticism of Berkshire practices

such as the lack of disclosure, which may change when the beloved leader moves on.

In addition, we would highlight that one often overlooked aspect of Mr. Buffett is that he

is a great leader. He publicly positions himself as a simple portfolio manager, able tomake astute big picture assessments, while the real work is done by what he credits to

be a magnificent management team. However, when we had the opportunity to grill Mr.

Buffett about detailed aspects of his businesses, we were surprised at his quick ability to

respond with specifics and not defer to his managers. We expect his eye can see the

stitches on the ball more than he concedes. Furthermore, we have had the opportunity

to interview many Berkshire managers and each and every one expressed adoration of

Mr. Buffett. He is perceived as a sincerely good man who does give them plenty of

operating room and a significant level of trust. Their response is devotion. More than

one CEO has told us that they would walk through fire for their boss.

Despite Mr. Buffett record and strengths, we acknowledge that he turns 83 this year. As

Mr. Buffett himself once said You dont judge the future prospects of a 42-year-old

baseball player by his lifetime stats (Berkshire Hathaways annual report, 1988).

Replacing Him

Nomura | Berkshire Hathaway Inc April 30 2013


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Valuation and RatingWe recommend BRK/A Shares Based on Strengthening U.S.Consumer and Business

Given that Berkshires companies are generally best of breed and leveraged to the U.S.economy, we expect that as American businesses and consumers regain strength,

Berkshire will show impressive operating earnings growth.

Core Earnings Power

We expect Berkshires earnings to ramp up quickly and to approach $16bn by 2014 (see

model). In the Underwriting businesses, GEICO should produce double-digit earnings

growth, while unit count growth, driven by a growing economy, should help power

GenRe. BHRG is aggressively entering the Lloyds market. In the non-underwritingbusinesses, we expect 11-14% earnings growth. The railways are benefiting from the

U.S. energy boom, economies of scale and the growth in online consumer spending.

The manufacturing, service and retail businesses are also well positioned for growth as

both the American consumer and small businesses spend more. In the Utility and

Energy businesses, we expect steady single-digit growth.

Valuation, Near Historical Norm

No matter how simply the chairman likes to paint the picture, valuation of BRK/A sharesis a challenge. Giving credit to Mr. Buffetts characterization of Mr. Market (as taught by

Benjamin Graham) as a bit irrational in the short term, we find attempting to find a

consistently rational means of valuing the shares which would explain the stocks

movement is a circular maze. Below, we show historical P/E and P/B of the shares. We

would highlight that despite the recent strength in the shares, the valuation is only

approaching the historical mean.

Fig. 11: Historical Price to LTM EPS and Price to Book Value

Source: FactSet, Nomura research

M B ff tt h i d th i t f fl t i l i BRK h b t d

6.0x

11.0x

16.0x

21.0x

26.0x

Pri ce /LTM EPS Av erag e Mi ni mu m Max im um

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

Pri ce to Bo ok Me di an Min im um Maxim um

Nomura | Berkshire Hathaway Inc April 30 2013


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Our Valuation Model Says Buy

In our valuation model, we use the same P/B valuation method that we apply to other

insurers and reinsurers and then a P/E model on the various other businesses. We use

average peer multiples for most of the operating companies, but we have assigned

premium valuations to reflect the strength of the franchises, where warranted. For

Underwriting, we use a blended 1.7x book multiple. Progressive, GEICOs closest publicpeer, has a slower growth rate and trades at 2.3x book. Were GEICO to be stand-alone,

we view it could potentially trade at 2.5-2.7x. Reinsurers are trading at 1.0-1.2x book

value, but considering Berkshires advantages, we view a premium in the range of

1.3-1.4x as fair.

We admit the measure is still crude. The equity portfolio sits inside the insurance

business and it doesnt make a lot of sense to give a premium value to a security held at

BRK that an investor can buy on their own. That said, the ROE of the BRKs insurancebusinesses excluding those equities would be skew so high as to demand a high

multiple. The opposite holds true for the insurance operations huge cash position.

Fig. 12: Sum-of-the-Parts Valuation$ in millions

* Book Value estimated by subtracting MSR balance sheet from insurance balance sheet, less deferred taxes. Note thatBRK/A statutory statement includes BNSF, but GAAP does not.

**Deferred taxes of $44.494m, less the approx 1/3 pushed down into our book value calc for Insurance.


The public peers of the non-underwriting businesses are not obvious. For the Utility and

Energy businesses, which includes several major companies, we use a 17x earnings

multiple. Companies such as American Electric Power trades at 16x, Exelon Corp at 15x

and Duke at 17x. BNSF railways (16x) is really only comparable to UNP (17x) in terms

of operating scale and revenues. Berkshires Manufacturing, Service and Retail (17x)

businesses are so diverse and large that a peer is not available, although a candy

company such as Hersheys trades at 25x, a furniture retailer such as Haverty is at 23x,

and Hertz rental cars at 13-14x, DOW Chemical at 14x and the S&P retail index (XTR) is

at 17x.

We have not given any premium valuation for the potential of acquisitions. Mr. Buffett

has pledged to be elephant hunting in looking for major deals, but has been slow to pull

the trigger. As he said in the companys 1992 annual report, Looking for investments is

like looking for a wife: It pays to be active, interested and open-minded, but not to be in a

Book 2013 After-tax P/BV P/E Value

Busines s Segment Value Ear nings Multiple Multiple $ Value Per Share

Insurance* $94,597 1.70x $160,814 $97,882Utilities & Energy $1,211 17.0x $20,583 $12,528

Railroad $3,840 16.0x $61,435 $37,393

MSR + Lubrizol $4,788 17.0x $81,397 $49,543

FFP Operating Businesses $528 15.0x $7,919 $4,820

Other** ($29,676) ($18,062)

Total $184,104



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Fig. 13: Berkshire Hathaway Earning Model

$ in millions, except per share

2011 2012 1Q13E 2Q13E 3Q13E 4Q13E 2013E 2014E

Insurance Group earned prem iums

GEICO 15,363.0 16,740.0 4,377.4 4,503.9 4,621.6 4,743.7 18,246.6 19,523.9

General Re 5,816.0 5,870.0 1,500.4 1,440.5 1,444.8 1,543.8 5,929.5 5,901.7

BHRG 9,147.0 9,672.0 1,657.4 2,120.0 2,138.3 2,410.9 8,326.5 8,666.1

BHPG 1,749.0 2,263.0 583.1 616.4 676.2 726.8 2,602.5 2,992.8

Total earned pr em ium 32,075.0 34,545.0 8,118.3 8,680.7 8,880.9 9,425.2 35,105.0 37,084.4

Total Los s, LAE & underw r iting ex pens es 31,827.0 32,920.0 7,606.7 8,131.0 8,283.6 8,813.2 32,834.5 34,426.6

Combined Rati os

GEICO 96.3% 95.9% 92.0% 92.0% 91.0% 91.0% 91.5% 91.0%

General Re 97.5% 93.6% 95.3% 95.4% 95.3% 95.4% 95.3% 94.8% BHRG 107.8% 96.9% 98.6% 97.6% 98.3% 98.8% 98.3% 97.5%

BHPG 86.2% 87.4% 88.0% 88.0% 88.0% 88.0% 88.0% 87.0%

Total Insurance Group 99.2% 95.3% 93.7% 93.7% 93.3% 93.5% 93.5% 92.8%

Co ns olid ate d Reve nue 143,688.0 162,463.0 40,518.8 42,800.5 43,862.2 45,187.6 172,369.0 186,839.8

Co ns olid ate d Ear nings BTaxMI 15,301.0 22,236.0 5,053.3 5,349.0 5,676.1 5,636.3 21,714.8 23,905.4

NET INCOME 10,241.0 14,824.0 3,361.8 3,565.8 3,791.5 3,764.1 14,483.2 15,994.7

10,254.0Realized gains (losses) after tax (521.0) 2,227.0 130.0 0.0 0.0 0.0 130.0 0.0

OPERATING INCOME 10,762.0 12,597.0 3,231.8 3,565.8 3,791.5 3,764.1 14,353.2 15,994.7

Weighted Avg. Shares (ac tual) 1,649,891 1,651,294 1,650,537 1,650,537 1,650,537 1,650,537 1,650,537 1,650,537

Class A shares outstanding (actual) 938,244 904,528 904,528 904,528 904,528 904,528 904,528 904,528

Class B shares outstanding (actual) 1,068,843,376 1,123,393,956 1,123,393,956 1,123,393,956 1,123,393,956 1,123,393,956 1,123,393,956 1,123,393,956

Blended shares outstanding (calculated) 1,650,806 1,642,945 1,642,945 1,642,945 1,642,945 1,642,945 1,642,945 1,642,945

Per Share:

Net Incom e $6,207.08 $8,977.20 $2,036.79 $2,160.40 $2,297.12 $2,280.52 $8,774.83 $9,690.60Realiz ed gains (los ses ) on inv es tments /der iv ative ($315.78) $1,348.64 $78.76 $0.00 $0.00 $0.00 $78.76 $0.00

Op er at in g In co m e $6,522.86 $7,628.56 $1,958.03 $2,160.40 $ 2,297.12 $2,280.52 $ 8,696.07 $9,690.60

% Change -3.6% 17.0% 14.0% 11.4%

Book Valu e Per Shar e $99,860.31 $114,214 $116,260 $118,430 $120,738 $123,029 $123,029 $132,765

% Change 4.6% 14.4% 7.7% 7.9%

ROE 6.7% 7.1% 7.3% 7.6%

Conso lidated Balance Sheet

Total As set s 392,647.0 427,452.0 436,518.9 446,373.6 456,556.5 467,105.4 467,105.4 509,567.6

Tot al L iab ilit ies 223,686.0 235,864.0 241,569.1 247,857.9 254,249.4 261,034.2 261,034.2 287,501.8

Berkshire Hathaway Shareholders' Equity 164,850.0 187,647.0 191,008.8 194,574.6 198,366.1 202,130.2 202,130.2 218,124.9

To tal Shareho lder s ' Equi ty 168,961.0 191,588.0 194,949.8 198,515.6 202,307.1 206,071.2 206,071.2 222,065.9



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| y p

Appendix A-1

Analyst Cert ificat ion

I, Clifford Gallant, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views aboutany or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be

directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my

compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,

Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures

The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more

Nomura Group companies.

Materially mentioned issuers

Issuer Ticker Price Price date Stock rating Sector rating Disclosures

Berkshire Hathaway Inc. BRK/A USUSD160,618.00 26-Apr-2013 Buy Not rated A1,A2,B30

A1 Nomura Securities International, Inc has received compensation for non-investment banking products or services from the issuer in thepast 12 months.

A2 Nomura Securities International, Inc had a non-investment banking securities related services client relationship with the issuer during thepast 12 months.

B30 Clifford Gallant has a long position in Berkshire Hathaway Inc. (BRK-B). Firm policy prohibits him from trading in these shares while hemaintains coverage of the company or any of its affilitates.

Berkshire Hathaway Inc. (BRK/A US) USD 160,618.00 (26-Apr-2013) Buy (Sector rating: Not rated)Chart Not Available

Valuation Methodology Our price target of $184,000 for Berkshire Hathaway A shares is based a sum-of-parts calculation thatincludes all the major business segments of the company. The benchmark for this stock is the S&P 500 index.

Risks that may impede the achievement of the target priceRisks to Berkshire Hathaway reaching our price target includechanges in the insurance pricing cycle, large natural catastrophes, changes in underlying loss trends, fluctuations in interestrates as well as economic conditions in the United States and abroad.



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Equity Research

Great Years Ahead for Berkshire Hathaway

Cliff Gallant, CFA NSI+1 415 445 [email protected]

Matt Rohrmann, CAIA NSI -certification, important disclosures,and the status of non-U.S. analysts.

April 30, 2013

+1 212 298 [email protected]


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Great Years AheadInitiating with a Buy Rating

Double-Digit Earnings GrowthBerkshires Intrinsic Value Will Be Driven by Operating Earnings, Not Investing Acumen

ecor years a ea o , . represen s . grow o ; grow o .

Equates to 7.6% ROE in 2014E assuming there is not additional capital deployment We Expect GEICO, BNSF and MSR all to report record income (nearly 3/4th of total revenue)

Leveraged to U.S. economy (85% of revenues driven by U.S. operations; we assume ~3% GDP growth in U.S.)

Buffetts Investing Acumen Is Just a Bonus $35 billion of cash after Heinz (10% return on $15 billion adds ~70 bps to book value)

A privileged perch (competitive advantage via scale allows for high-profile and lucrative deals, i.e., GS, BofA, Heinz)

1.2x price-to-book floor (management buyback valuation target less than 15% below current market price)

Stock Is Cheap $184,000 sum-of-the-parts valuation, approximately 15% potential upside (does not include any further capital deployment)

a ua on re ec s u e concerns arren s years o

Ignores operating fundamentals (industry valuation multiples used for industry-leading companies)

1Source: Company data, Nomura estimates


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What Is Berkshire Hathaway?

Business Mix by 2012 Total Revenue

Other Manufacturing,16.5%

Other,5.0%

Retail, 2.3%

Financial Products,2.5%

McLane Company,23.0%

GEICO, 10.3%

General Re, 3.6%Insurance Group, 24.0%

BurlingtonNorthern

BHRG, 6.0%

BHPG, 1.4%

Ins. Inv. Inc., 2.8%Santa Fe, 12.8%

Utilities & Energy(MidAmerican), 7.2%

Marmon, 4.4%

2Source: Company data, Nomura research


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What Is Berkshire Hathaway?

Warren Buffett took over Berkshire Hathaway in 1965 and has grown book value at a CAGR of 19.7% through YE2012

The Berkshire Empire Is an American Empire

,

Despite controlling roughly $428 billion of assets, Berkshires disclosure is limited (10-Qs only average about 25 pages in length) Buffett & Munger focus on long-term returns in their quarterly commentary, as do most of BRK/As largest shareholders

At least 85% of total revenues can be sourced back to the United StatesIf America does well, Berkshire should do great

Correlation of ~0.80 to U.S. GDP; assume ~3% GDP growth

2.0%

2.5%

3.0%

3.5%

7.0%

7.5%

8.0%. . .

Top 10 Holders Shares Owned Shares Out %

Warren E. Buffett 350,000 39.2

Fidelity Management & Research Co. 29,676 3.3

David Sanford Gottesman 19,538 2.2

First Manhattan Co. 18,478 2.1

Capital World Investors 12,387 1.4

0.0%

0.5%

1.0%

1.5%

6.0%

6.5%

.Davis Selected Advisers LP 10,921 1.2

Ruane Cunniff & Goldfarb Inc. 10,845 1.2Norges Bank Investment Management 6,233 0.7

Charles T. Munger 6,224 0.7

Gardner Russo & Gardner 4,833 0.5

Top 10 Totals 3,619,135 52.6

3Source: Company data, BEA, Nomura research


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Underwriting (24% of 2012 Total Revenue)

#3 ranked U.S. auto insurer, ranked by total premiums#1 direct writer onl ure- la national

GEICO (10.3% of 2012 total revenue, excluding investment income)

Unique cost advantage that can be leveraged to save the customer 15% or more

Threat of Progressive and telematics (~50% of Progressives business done on a direct basis)

Rank Com pany 2012 2011 2010

1 State Farm Mutl Automobile Ins 18.39 18.61 18.65

2 Allstate Corp. 10.01 10.31 10.67

3 Ber ks hire Hathaway Inc. (GEICO) 9.59 9.07 8.50

Mark et Share (%)

4 Progressive Corp. 8.27 7.93 7.70

5 Farmers Insuranc e Group of Cos. 5.89 5.89 5.96

6 USAA Insurance Group 4.84 4.60 4.36

7 Liberty Mutual 4.73 4.54 4.49

8 Nationw ide Mutual Group 4.09 4.13 4.29

9 Travelers Companies Inc. 1.94 2.08 2.10

10 American Family Mutual 1.89 1.96 2.10

4Source: Company data, SNL, Nomura research


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Expect high-single-digit growth and strong underwriting profits with combined ratios near 90% Growth driven b stron advertisin of savin s otential to the customer as well as stron customer service

GEICO (10.3% of 2012 total revenue, excluding investment income)

Profitability driven by modestly improving loss trends and strong underwriting acumen

GEICO NWP($mm) GEICO CR (%)

90.0%

95.0%

.

$20,000

,

80.0%

85.0%

$10,000

$15,000

70.0%

75.0%

$0

$5,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

5Source: Company data, SNL, Nomura research


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Berkshire Hathaway Reinsurance Group (BHRG)/General Re

Reinsurance (11% of 2012 total revenue including BHPG, excluding investment income)

Combined to be worlds #3 reinsurer

Historically, large one-off special situation transactions

The worlds best mattress

Financial strength and reputation are competitive advantages

BHRG recent moves indicate new strategy?



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Berkshire Hathaway Reinsurance Group (BHRG)/General Re

Reinsurance (11% of 2012 total revenue including BHPG, excluding investment income)

, - , - -

Profitability driven by more normal catastrophe experience

Growth driven by improving economy and potential for larger international deals

GenRe NWP($mm) GenRe CR (%)

105.0%

110.0%

$6,000

$7,000

$8,000

95.0%

100.0%

$3,000

$4,000

$5,000

80.0%

85.0%

.

$0

$1,000

$2,000


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E


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Key jargon among Buffett fan base, $75 billion at 12/31/12

Float and the Unfair Advantage

Hard to argue with managements track record since 1965

Underwriting liabilities as long-dated assetsMuch more aggressive investment style than any other public insurer/reinsurerWe expect less importancePast transactions include Bank of America, Goldman Sachs, GE CapitalHeinz: $4 billion for 50% equity; $8 billion of preferreds pay 9% and 5% additional in warrants

Largest current holdings include: Coca-Cola, IBM, Wells Fargo and American Express -

Buffett has pledged to hold $20 billion of cash as a cushion, leaving $15 billion to elephant hunt

A 10% return on $15 billion of excess capital adds ~70 bps to book value



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Non-Underwriting Businesses (76% of 2012 Total Revenue)

Burlington Northern Santa Fe

Railways and Utilities & Energy (Rail:12.8% & Energy 7.2% of 2012 Total Revenue)

, . . .

Industry experiencing strong growthExpecting 8-9% revenue growth and over $4 billion of 2014 pretax earningsUnion Pacific only peer, limited competition

MidAmerican

Several major energy and utility companies including Pacific Corp, Northern Power Grid and several natural gas pipelinesOften re ulated limited com etitionExpecting steady mid-single-digit growth of revenues and earnings



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Non-Underwriting Businesses (76% of 2012 Total Revenue)

The broad all other category with an eclectic mix of companies

Manufacturing, Service and Retail (51.2% of 2012 Total Revenue)

Includes: Marmon (itself includes 150 manufacturing and service companies including Union Tank Car)

McLane (Wal-Marts largest wholesale distributor)

Nebraska Furniture mart (Americas largest home furnishing store)

Acme Building, Benjamin Moore, Johns Mansville, MiTek, Shaw Industries, Lubrizol, Businesswire, TTI, Dairy Queen, Buffalo News,

Borsheims, Helzberg Jewelers, Pampered Chef, plus many more

Good example of where the details are lost on many of these businesses due to opaque disclosure

We expect low-digit revenue growth and over $8 billion of pretax earnings by 2014, driven improving U.S. economy & M&A opportunities



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Whats It Worth?

Core Earnings and Sum-of-the-Parts Valuation

Earnings estimates are $8,696.07 for 2013E and $9,690.60 for 2014E

2.5x

Price to Book Median Minimum Maximum

. ,

Stock currently trades at 1.4x current book value and just 1.3x 2013E book value, below historical average

0.5x

1.0x

1.5x

.

0.0x

.

Book 2013 After-tax P/BV P/E Value

Business Segm ent Value Earnings Multiple Multiple $ Value Per Share

Insurance* $94,597 1.70x $160,814 $97,882

Utilities & Energy $1,211 17.0x $20,583 $12,528

Railroad $3,840 16.0x $61,435 $37,393

MSR + Lubrizol $4,788 17.0x $81,397 $49,543

FFP Operating Businesses $528 15.0x $7,919 $4,820

11 *Book value estimated by subtracting MSR balance sheet from insurance balance sheet, less deferred taxes. Note that Berkshire Hathaway statutory statement includes BNSF, but GAAP does not. **Deferred taxes of $44.494m, less the approx 1/3 pushed down into our book value calc for Insurance.


Other** ($29,676) ($18,062)

Total $184,104


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Risks

Weak U.S. EconomyPoor Levels of DisclosureNo Centralized Risk Management

Blow Up at One Business Ruins the Total Buffett Wont Be Around Forever

12


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Appendix A-1

Analyst Certification

I, Clifford Gallant, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in

this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no

part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group

company.

Issuer Specific Regulatory Disclosures

The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers

Berkshire Hathaway Inc. BRK/A US USD 160,618.00 26-Apr-2013 Buy Not rated A1,A2,B30

A1 Nomura Securities International, Inc has received compensation for non-investment banking products or services from the issuer in the past 12 months.

A2 Nomura Securities International, Inc had a non-investment banking securities related services client relationship with the issuer during the past 12 months.

B30 Clifford Gallant has a long position in Berkshire Hathaway Inc. (BRK-B). Firm policy prohibits him from trading in these shares while he maintains coverage of the

company or any of its affiliates.

Berkshire Hathaway Inc. (BRK/A US) USD 160,618.00 (26-Apr-2013) Buy (Sector rating: Not rated)

Chart Not Available

Valuation Methodology Our price target of $184,000 for Berkshire Hathaway A shares is based a sum-of-parts calculation that includes all the major business segments of the company.

The benchmark for this stock is the S&P 500 index.

Risks that may impede the achievement of the target price Risks to Berkshire Hathaway reaching our price target include changes in the insurance pricing cycle, large natural

catastrophes, changes in underlying loss trends, fluctuations in interest rates as well as economic conditions in the United States and abroad.

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Documents

BRK Initiation Nomura 4-30-13