Valuing Berkshire Hathaway
Opinions, Warren BuffettAugust 23rd, 2006Berkshire Hathaway is my biggest stock holding Its “The Security I Like Best”. A lot of people ask me what Berkshire is worth in my opinion. I say the class B shares that are trading at $3100 are easily worth $4000+ (A shares would be $120,000+). How did I come up with the number? Berkshires cash and cash equivalents holdings are valued at cash value. Berkshires equity holdings are valued at market value. Then i value individual business units based on P/E multiples given to comparable companies by the stock market.
Market Cap of Berkshire Hathaway = 145 Billion
Value of Individual Berkshire Parts = 196 Billion (Based on the Interim 2nd quarter report. Numbers used are 6 Months Net Profits *2 for full year estimate values)
- Cash and Cash Equivalents - 42 Billion
- Equity Holdings - 52 Billion
- Subsidiary Insurance companies - 4.372B * 12PE = 52.464B
- Subsidiary Utilities and Energy - .782B * 14PE = 10.948B (Pacificorp excluded)*
- Subsidiary Manufacturing , Services and Retailing - 1.864B * 16PE = 29.824B (Iscar/Russel Atheletic excluded)*
- Subsidiary Finance and Financial Products = 0.744B * 12PE = 8.928B
- Investment and Derivatives gains = 0.8B (Excluded)**
The company has a 35% discount to its actual value (I think it should have a 10% Warren Buffet premium).
Based on this valuation class B shares of Berkshire should sell for $4200 and class A shares for $126,000.
* Berkshire has just acquired PacificCorp, Iscar Metalworking and Russel Atheletic but the earnings of these companies is not part of berkshire earnings yet.
** Investment gains or losses are recognized upon the sales of investments or as otherwise required under GAAP. The timing of realized gains or losses from sales can have a material effect on periodic earnings. However, such gains or losses usually have little, if any, impact on total shareholders’ equity because most equity and fixed maturity investments are carried at fair value, with the unrealized gain or loss included as a component of accumulated other comprehensive income. - From the Report
Conflicts: I own Shares of Berkshire Hathaway
August 24th, 2006 at 4:58 pm
I totally agree with you !
August 24th, 2006 at 6:13 pm
[…] Valuing Berkshire Hathaway […]
September 1st, 2006 at 8:57 pm
youre wrong
September 2nd, 2006 at 7:42 am
Would you elaborate on why you think Im wrong?
September 5th, 2006 at 9:13 pm
I generally agree with your method of sum of parts to derive BRK value since it is essentially a conglomerate with diverse businesses.
However, I think valuation is not as simple as P/E x EPS… some of its biz require high and recurring capex… have u considered looking at it from the DCF perspective?
September 11th, 2006 at 6:46 pm
Is there an easy way to see in graph form the historical spread between the A and B shares? Do these usually trade in perfect order…or are there times of price misalignments between the two?
Thanks,
Rob
September 12th, 2006 at 4:45 am
The B shares generally trade very close to 1/30th the value of A shares. Sometimes there is a minor difference. If the B shares go up 2-3% higher than 1/30th of A shares there will be arbitrage with people buying A shares and getting them split into 30 B shares, this usually brings the price back into equilibrium. For a comparison of the 2 here is a chart http://finance.yahoo.com/q/bc?s=BRK-A&t=5y&l=on&z=l&q=l&c=BRK-B
September 13th, 2006 at 6:41 pm
Is the whole reason BRK has these B shares is so that smaller investors can buy in?
October 4th, 2006 at 4:11 pm
There are two factors that I think account for the stock being undervalued.
1. The stocks have reached a point where many long term holders are liquidating for reasons beyond market and accepting high price elasticity on the stock where buyers are short.
2. There should be a reduction in value to account for higher risk. Despite being managed by great investors, the diverse nature of Bershire holdings leave it with a greater exposure to risk over many industries. An example is its performance in 1999.
Despite this, the future of the stock remains positive and I believe that its being undervalued in the context you put it acts as a form of security.
October 20th, 2006 at 9:55 pm
I don’t agree on undervalued 20%-25% comment on BRKA. Here is Why:
1. At Current price, it is fairly valued with S&P if you compare based on earnings. P.E. multiples of 15
2. Book Value is about 63,000 Which Leaves Difference between Market price and Current Value.
3. Warren Buffet is famous for asking Owners/Management of the Companies he held shares to buy back when they are undervalued. As far as I know, With 45B in Cash, He didn’t indicate any buy back of shares in last 2 years. This leaves me to say, Warren him self thinks BRKA is not undervalued at current price levels.
I like Warren Buffet and his investment principles.
Siva.
January 11th, 2007 at 1:37 am
very nice blog!mary
January 22nd, 2007 at 12:51 pm
100% agree
March 1st, 2007 at 7:52 pm
Don’t know if you have read this:
http://www.berkshirehathaway.com/compab.html