Berkshire Hathaway's (NYSE:BRK.A) annual report lists the annual change in its book value per share from 1965 to 2009. It shows an averaged annual growth of 20.3% over 45 years. Detractors point to the fact that it's only hit the 20% level twice since 1998. Warren Buffett suggests the reason for the decline in its annual growth rate is an understatement in the value of its private businesses, which can't be priced daily like its stock holdings and represents a far greater percentage of total assets than a decade or two ago. Buffett now believes the annual change in book value per share is really just an approximation of the annual growth of the company's intrinsic value.
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Since 1999, Berkshire Hathaway's annual growth in book value per share has risen by 8.8% while its stock's grown by just 6.1%. This tells me that its current stock price doesn't accurately reflect the true value of the company. To illustrate the importance of book value growth, I'll discuss four companies that have increased shareholder equity each year for the past 10 and what that's done for their stock price. I think you'll find growth in book value matters.
Micro Cap - Medical Action Industries (Nasdaq:MDCI)
To save time, I'm using Morningstar's 10-year growth in shareholder equity and its 10-year average annual total return. The shareholder equity growth is actually nine year-over-year comparisons.When doing this at home, you should do the per-share calculation because the growth number is affected by the number of shares issued or repurchased in any given year. My figures are close enough but not exact. In the case of Medical Action Industries, its book value grew 20.9% annually while its stock grew 15.8%. This tells me, as it did with Berkshire Hathaway, that MDCI's stock is undervalued. Fiscal 2010 was a very good year for the manufacturer of disposable medical supplies. Although the company's sales declined 2% to $290 million, its net income of $16.8 million, up 240%, set a company record. MDCI's stock price is currently 58% off its 5-year high of $25.61. I see it revisiting that number within the next one to two years.
Small Cap - J&J Snack Foods (Nasdaq:JJSF)
I don't currently own this stock, but I used to. This company's brands include SuperPretzels, ICEE and Slush Puppie. CEO and founder Gerald Schreiber takes down-and-out products and brings them to life. In the process, JJSF grows revenues at an unspectacular rate while keeping a close eye on expenses, thus maximizing profits. In the second quarter, the company grew sales by 5% to $157.4 million and operating income by 25% to $14.9 million. In the past decade it's grown book value by 11.7% annually while its stock gained 20.1% annually. The stock is only 9% off its five-year high, so I'd only buy if I were planning to hold for three to five years. It's a great company, but the stock is trading at full value.
Mid Cap -Urban Outfitters (Nasdaq:URBN)
What's not to like about this company. Same-store sales in its first quarter were up 11%, online and catalog sales up 42% and operating income up 78% to $82.2 million. Just three of its 142 Anthropologie locations are in Canada. I could see 20 or more in Canada given the uniqueness of its stores. The future for the company appears extremely bright indeed. I rank it right up there with Buckle (NYSE:BKE), my favorite retailer. Since 2001, URBN's grown book value by 29.2% a year while its stock has grown 41.5% annually. Its stock is also fully valued. Once again, like J&J Snack Foods, I'd be buying if I were planning to hold long-term.
Large Cap - Nike (NYSE:NKE)
Nike continues to do well despite the Tiger Woods debacle. The company's golf division never really progressed beyond niche category to major player despite the world's greatest golfer being in the fold. Nike Golf's revenues have dropped 20% since the Masters. With or without Tiger, Nike will do just fine. The company plans to grow sales to $27 billion by 2015 with Cole Haan, Converse, Hurley and Umbro leading the charge. I see Nike reaching its goal. Since 2000, NKE's grown book value 12% annually while its total annual return is 13.8%. Its stock is the most expensive of the four and would probably be a buy if it returned to the low $60s. Having said that, I do see Nike as a safe buy for the long-term.
Book value growth is an excellent way to tell if a company is doing a good job or not. For those interested in the subject, a good exercise is to look at a company's last five years in terms of average annual book value growth compared to the five before that; if it's higher, you can be fairly confident the stock price should experience a similar rise in value.
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