Berkshire Hathaway

Though I am working on a few posts with some more substantial valuations and thoughts of my own, I haven’t managed to get them done yet so I’ve decided to give a quick recap of what I think is one of the most undervalued and safest large-cap opportunities out there at the moment, Berkshire Hathaway (BRK).

For those of you who don’t know, Berkshire Hathaway is the conglomerate controlled by the legendary investor Warren Buffett.  In the past, Berkshire traded with what was known as a ‘Buffett’ premium. This meant that Berkshire was generally valued by the market at a higher multiple than would be given to a similar business under different management to account for the asset allocation abilities of Buffett.  However, in recent years this Buffett premium has disappeared and currently the gap between Berkshire’s share price and intrinsic value is arguably as large as it has been any time in the last decade.

A nice (though slightly out-of-date) valuation of Berkshire has been written up by T2 Investment Funds and can be viewed here.  As outlined in Tilson’s presentation, even using very conservative estimates for Berkshire’s intrinsic value places the value of Berkshire’s ‘B-class’ shares at over $100 per share as of the end of the 2010 fiscal year.  As they’re trading at around $77 currently, just trading up to this conservative intrinsic value would result in a 33% gain from the current price.  Accounting for Berkshire’s 2011 earnings, it’s not hard to project an intrinsic value of almost 50% higher than the current share price (~$115).  Berkshire is also trading at a price to book ratio of approximately 1.1 which is at the very low end of its historical range (between 1.1 & 1.7).  Given the quality of Berkshire’s businesses, it’s hard to argue that Berkshire doesn’t deserve some premium above book value which can be thought of as providing downside protection for the investment.

A number of things have conspired to drive the share price down including the standard fears that Buffett may pass away (as he’s now into his 80’s), the catastrophic losses incurred by Berkshire’s insurance divisions due to the Japanese earthquake and other disasters, and the David Sokol scandal.  Berkshire’s insurance division will actually report its first combined loss in a decade this year due to losses incurred from the events in early 2011.  However, the flip side is that these losses will also cause insurance and reinsurance rates to rise in the future which bodes well for future returns.

In any case, I think it’s hard to argue that Berkshire is over-valued when compared to any of the major North American stock indicies and I personally think that it’s one of the best large-cap values out there.  Combined with the high quality business, initiating a long-term position at these levels should result in acceptable returns into the future.

Until next time,
Nathan @ EngineeringIncome.com

Disclaimer:

The data and opinions presented above are for educational purposes only and should not be construed as individualized investment advice or as a recommendation to buy or sell the securities in question.  The investing methodology outlined on this site assumes that a stock will perform in the future as it has in the past.  This is generally not true.  It is the responsibility of individuals to perform their own due diligence and/or consult their investment adviser to determine the suitability of any given investment product for their specific situation.  For more information, please see my disclaimer.

Full Disclosure:  Long BRK.B as of the time of this writing.

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