See your car's value Information shown for entry-level Sedan. 's car classifieds to view the new and used Subaru Impreza vehicles for sale near you. First Pics: 2017 Models Unveiled 10 Best SUVs Under $25,000 Kelley Blue Book Best Buy Awards New Car Buyer's Guide 16 Best Family Cars of 2016So Markel's (MKL) 2013 annual report is out. MKL grew book value per share by +18.2%, the same as Berkshire Hathaway (BRK). BPS is now $477.16 versus the recent price of $591, so it is trading at 1.24x BPS. 18% growth in BPS is pretty good, but they also grew BPS at a +16.5%/year clip over five years, +13.0%/year over ten years and +15.3%/year over 20 years. Those are some pretty impressive figures. Out of curiousity, I put all of this into the table below. The first three columns come right out of the BRK annual report. I added the five columns to the right from MKL's annual reports. MKL has done better than BRK in terms of BPS growth in five, ten and twenty year time periods.
Sometimes questions come up about MKL's equity portfolio; is it really that good? So I added the last two columns which shows the return of MKL's equity portfolio over time. This shows some serious outperformance against the total return of the S&P 500 index over five, ten and twenty year periods. What is interesting is that not only did they outperform in the longer time periods, but they outperformed in each of 2010, 2011, 2012 and 2013; years that were very strong in the stock market which might cause more conservative portfolios to underperform. BRK, MKL and MKL's Equity Portfolio versus the S&P 500 Index Using Buffett's five year test, which is actually no longer Buffett's five year test, MKL has failed to outdo the S&P 500 index over the past five years, just like BRK. So let's look at Buffett's "through the cycle" test. Performance from 2007 peak through 2013 (and 1999-2013) Buffett said in the BRK 2013 annual report that: Over the stock market cycle between yearends 2007 and 2013, we outperformed the S&P 500 index.
Through full cycles in future years, we expect to do that again. If we fail to do so, we will not have earned our pay. After all, you could always own an index fund an be assured of S&P results. But why stop there? Since I'm doing the work, I might as well toss in the annualized returns for all of this since the 1999 peak so we get two whole cycles. Here is what the above figures look like from December 2007 - December 2013 and December 1999 through December 2013: S&P 500 Index +6.3%/year +3.6%/year MKL Equity portfolio + 8.8%/year +10.8%/year MKL's BPS grew 9.6%/year versus the S&P's +6.3%/year through this cycle; The equity portfolio also outperformed since the 2007 peak. The comparison is even better if you look at it since 1999; MKL's BPS outperformed the S&P 500 index by 11.3%/year! That's better than Buffett's goals during his partnership years (10% better than the index).
The equity portfolio also outperformed the index by 7.2%/year. OK, so Markel had a really good year. They closed the Alterra acquisition, their combined ratios look good, businesses are growing etc. I won't get into all of that here so I'll just paste a short summary from the report: So here's a metric that MKL usually shows. Portfolio per share grew to $1,259/share in 2013, versus the current stock price of $591/share. Why is this important? Check out what MKL has to say about this: One common way to value BRK is the two column method. That is to calculate the investments per share of BRK and add it to some multiple of the profits earned by the wholly owned businesses (businesses not in the investment porfolio). This method treats insurance "float" as equity as they don't have to be paid back and BRK typically, over time, earns a profit on insurance underwriting (cost of float is negative). MKL too has a pretty good underwriting record and has earned a profit over time.
Is their "float", then, not equity? If it is, then MKL's intrinsic value, using the same approach as BRK's two column method, would be portfolio per share (less debt). But I don't raise this issue to debate the two column method or whether float is equity. It's just a thought. Here's a new, interesting thing in the annual report. From now on, they want us to focus on BPS CAGR (compound annual growth rate) instead of BPS itself. Here is their explanation: BPS-CAGR to Earnings and then to P/E So obviously, a company that is growing book at a faster pace than others should be more valuable. But how much higher should the valuation be? There are many ways to do this, of course. One thing people would do when looking at financials is to use a 10% hurdle; if a company grows book at 8%, it's worth 0.8x book. If it grows at 12%/year, it's worth 1.2x book. Never mind if that makes any sense or not, but that's a quick rule of thumb thing that people sometimes look at.
Since MKL wants us to focus on the earnings/flow aspect of MKL instead of the stock (BPS), why not convert this BPS-CAGR into a sort of earnings figure? Change in BPS, simplified, is basically comprehensive income per share; kind of like an all inclusive EPS. So if CAGR of BPS over time is 15%, then MKL comprehensive EPS is like $72/share. At 10x this figure, MKL is worth $720/share. But if BPS CAGR is 15%/year, so is comprehensive EPS growth. If the $72/share EPS is going to grow 15%/year, what multiple would you put on it? At a very conservative 15x, MKL would be worth $1,080/share. If MKL can really grow 15%/year, then maybe it's worth 20x p/e. That would put MKL at $1,440/share. Remember, MKL has grown BPS at 16.5%/year over five years, +13.0%/year over ten years and +15.3%/year over twenty years. So let's use 13%, then. Comprehensive EPS would be $62, and this would grow 13%/year. Put a 13x multiple on it (don't ask me, but growth investors like to pay the same p/e as the growth rate.
Even Julian Robertson did that in an interview a while back). That would put MKL's value at $806/share. This sort of makes no sense since a 13% growth rate is way better than the S&P 500 index, right? So let's say p/e of 15-20x is more reasonable. That's $930 - $1,240/share in value for MKL. OK, so I am not going to tell you that MKL is worth $1,440/share, or any of the above values. I'm just playing around with things to see what would happen. I think the market would still view MKL as primarily a financial company (so will keep emphasizing BPS for a while, maybe until MKL Ventures gets much bigger); much of their book is still marked-to-market, and that will anchor valuations to BPS somewhat. But maybe less and less over time. Oh, and I almost forgot to mention this. MKL said that after the Alterra acquisition, their equity portfolio as a percentage of shareholders' equity went below 50%, but after building up their equity portfolio throughout 2013, it is back up to 49%.