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Berkshire Hathaway Is Now Traded at the Lowest Valuation in Decades

gurufocus

gurufocus

370 followers
With today’s price drop of more than 1%, Berkshire Hathaway is now traded at its lowest valuation level in decades. This includes the bottom price of $73,195 on March 6 of 2009 relative to its book value. Now the stock is traded at just about the book value.

Here are the numbers:

Date Shareholder's Equity ($Mil) Total shares outstanding (A Equivalent) Per ShareBook Value ($) Stock Price P/B
9/22/2011 163,007 1,649,052 98,849 $100,118 1.01
3/6/2009 109,267 1,549,000 70,540 $73,195 1.04


The numbers for shareholders’ equity and total shares outstanding are from the quarter ended on Dec. 31, 2008 and June 30, 2011, respectively. As of today, Berkshire Hathaway is traded at just 1% over its book value. It was traded at 4% over the book value on March 6, 2009.

Berkshire’s book value increased from $70,540 to $98,850 per A share from December 2008 to June 2011. The stock price recovery of Berkshire’s largest equity holdings such as CocaCola (KO), AmericanExpress (AXP), Wells Fargo (WFC) and Procter & Gamble (PG) since March 2009 certainly helped to increase the book value of Berkshire. In addition, the earning power of Berkshire’s insurance and non-insurance grew tremendously, especially with the acquisition of Burlington Northern railway. The returns from the investments at the market bottom in companies like GE (GE) and Goodman Sachs (GS) contributed to the growth, too.

The 10-year valuation page gives us a very clear picture of why Berkshire is at its cheapest level in more than a decade. Here is a screen shot of its stock price relative its price/sales (P/S) and price/book (P/B) valuation bands. We can clearly see from these charts that at the beginning of 2008, when Berkshire was traded at more than $140,000, P/B was close to twice today’s level.

1422391757.jpg

Below is the historical P/B of Berkshire Hathaway. It is also a feature in the 10-year valuation page.

567721403.jpg

Warren Buffett never disclosed his estimate of the intrinsic value of Berkshire Hathaway. But he did hint that it is higher than the book value. With investments in stocks, bonds and cash that represent most of the book value, and a collection of high quality business operations that grows earnings year over year, the intrinsic value of the business should be far higher than the book value.

With the recent market downturn, many high quality, predictable companies are now traded at historical low P/S and P/B ratios. Check out the list of these companies with GuruFocus historical low P/S and historical low P/B screeners.

About the author:

gurufocus
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.9/5 (40 votes)

Comments

Jonathan Poland
Jonathan Poland - 3 years ago
Question I have is how long will it take Berkshire to double it's book value from this point? In the past 10 years, they've tripled the book value, but in 2001 investors were willing to pay 2x that book value. Going forward, we can't bank on the fact they'll pay 2x ever again. If they can still double the book value every 5 years, even at 1% I think that'll beat the market's performance for sure.
mcwillia
Mcwillia - 3 years ago
As I mentioned in another post, I don't get it...(using prices from three days ago...)

In very rough numbers, Berkshire's cash is 19.5/sh. Its stock portfolio of positions over 300million is worth about $19.80/sh. Call that $40, meaning that all of Berkshire's other businesses and investments must be selling for, by simple deduction from its present quotation of $68, $28/sh.

But Berkshire made nearly 11bn on only these businesses in 2010, not counting the underwriting profits from insurance or any investment income on the stock portfolio. This works out to about $4.7 of EPS from the subsidiaries. So they are trading at a p/e of 5.5 or so?

I have missed something? You can have Berkshire's stocks for their present quotation price, get its cash for cash, and then make 19% earnings yield on the price of the remainder? What?

How can it possibly be so cheap?
Arpan
Arpan - 3 years ago
How can it possibly be so cheap?

You have to realize that a good amount of the cash and portfolio is not Berkshire's, but is insurance float. You can't simply subtract the cash and portfolio from the stock price.
jonmonsea
Jonmonsea premium member - 3 years ago
Still, risk/reward, what else out there offers such a no-brainer proposition, with the option thrown in that Buffett will work for another five years? The stock has to be selling at 66% of current fair value, nevermind growth or opportunistic investing if the economy tanks in any part of the world with reasonable accounting standards.
Topwine
Topwine - 3 years ago
Whitney Tilson in his latest presentation calculates the intrinsic value of BRK @ $167,500 with a 10x multiple given to operating earnings. He has followed the company pretty closely for many years and I think he is pretty accurate.

The market is always a discounting mechanism, sometimes doing a good job, other times maybe not. It is the job of a value investor to determine if the market is right or wrong. I think in this case the market is discounting future earnings and maybe book value to be down in a recession and maybe also the equity index PUT's Berkshire is exposed to, which is a big unknown.

My thinking is just that if I short long term Treasuries at current yields, I am effectively borrowing long term at a very low cost. If I buy Berkshire stock with that money, I am sure to do well in the long term as Berkshire would grow its intrinsic value at far better rates than 2.8 % per year?

Anyone else agree?

marsaglia
Marsaglia - 3 years ago


Berkshire is an interesting case of company that is hard to classify. Is it an insurance company with an odd investment policy? Is it a conglomerate with good capital allocation? Is it a (mostly) long only hedge fund with low fees?

In any case Berkshire earns about 10% real (adjusting for inflation and look through earnings) on its equity in the current low yield environment. It earns this with a very conservative balance sheet with most of its borrowing in the form of no cost float and deferred income taxes and about 20% in cash. This structure should be worth a considerable premium to book without any consideration for quality of the chief investor.

I have wondered which will happen first; Warren Buffett turns 100, Berkshires book value reaches 1 trillion or share price for a class A share reaches 1 million.

If WEB makes it to 100, I would bet on the book value by about 1year.
tkervin
Tkervin - 3 years ago
I agree, very useful. Thank you.

Clearly the market is looking at a post Buffett Berkshire. If Warren were 60, the stock price would be higher. The market is, in my opinion, thinking that upon Warren's death or illness that the price of Berkshire will take an immediate, if short term, hit. The David Sokol affair did not help at all. He was considered the possible heir on the management side and to have that blow up so quickly and completely leaves questions about succession on the boil.

All this being said, I would be a buyer sub-60. If the market continues to drop I think we will see that price for BKRB. If not.......well there are lots of stocks I don't own.....:-)
TheBourqueReport
TheBourqueReport - 3 years ago


"

Berkshire is an interesting case of company that is hard to classify. Is it an insurance company with an odd investment policy? Is it a conglomerate with good capital allocation? Is it a (mostly) long only hedge fund with low fees?

In any case Berkshire earns about 10% real (adjusting for inflation and look through earnings) on its equity in the current low yield environment. It earns this with a very conservative balance sheet with most of its borrowing in the form of no cost float and deferred income taxes and about 20% in cash. This structure should be worth a considerable premium to book without any consideration for quality of the chief investor.

I have wondered which will happen first; Warren Buffett turns 100, Berkshires book value reaches 1 trillion or share price for a class A share reaches 1 million.

If WEB makes it to 100, I would bet on the book value by about 1year.

"

Berkshire is, very simply, a major reinsurer. When you write reinsurance business you expect to make a lumpy 12-15% return on equity per year if you were to invest the proceeds in US treasuries (the standard benchmark). Berkshire expects to earn that, plus they have the ability to invest at much higher rates of return than that.

Berkshire had a brilliant idea - own other businesses with strong diverse earning streams to grow longterm much quicker than owning bonds all while maintaining their capital ratings. This is an extremely powerful competitive advantage on the investing side of the business. Other companies do not get the chance to invest this much float into equities and businesses without being downgraded by the insurance ratings agencies and therefore losing business as well as having higher costs of capital.

The other advantage (albeit smaller than the first) Berkshire has is the ability to hold any investment they see opportunity in, and for any amount of time. If it takes 10 years for a stock they purchase to reach intrinsic value, it affects them less compared to other reinsurers. Other reinsurers often delegate their stock investing to mutual funds and hedge funds. Hedge funds have the disadvantage versus Berkshire of massive fees, and mutual funds have the disadvantage of forced diversification and investing size restrictions. Berkshire has neither.

A 3rd small advantage on the investing side is that, any time an investment produces a realized loss for tax purposes, they can immediately offset it with a realized gain so they aren't waiting years to gain the tax advantage of a loss.

There are two distinct Buffett advantages too that will diminish but not vanquish when Buffett is no longer involved with Berkshire. One is the opportunistic "Buffett Seal" that companies will give him extraordinary opportunities in order for his investment so they can hopefully raise equity capital at higher prices. A good recent example is his investment in Bank of America where if he resold his invested $5 billion, the very next day, he would have made between $6 and $6.5 billion. This is unlikely to be still there after Buffett dies, but it is possible that Berkshire investment managers will have enough clout to still earn some of this return.

The other Buffett advantage on the investing side is that family run businesses are often bought by Berkshire as a permanent home. Buffett buys them cheaper than they would be sold at auction, often because the owners want to be reassured that there business will not be changed and that it will continue on forever. It is expected that this will continue, but on a lesser scale, once Buffett isn't at Berkshire.

Another strong competitive advantage for Berkshire is that Berkshire gives its managers latitude to act in their own way. He charges them a cost of capital and rewards them appropriately for strong results. They are also rewarded because it's common for the managers to retain an interest in the companies they manage and they invest for the long term. This allows them to, on average, and by a large margin, earn better returns on capital than companies they compete against. This also plays into an investment competitive advantage, because despite the average acquisition being overpriced for most publicly traded companies, managers at Berkshire who have proven they can make great bolt-on acquisitions will be given the ability to continue to do so.

The last competitive advantage is Berkshire has an extremely low cost of capital. So, as well as earning higher longterm returns on investment, they also pay a lower cost on any liabilities they incur, and can also afford to not incur any at all if the investing environment is unsuitable. The August capital raise at 2.20% till 2016, 3.75% till 2021, and LIBOR + 0.70% due 2014 are much cheaper than other recent debt issued.

These are all very strong competitive advantages on the investing side. They play right into the ability to allow Berkshire to make rational decisions on the underwriting side. Their earnings stream is highly diversified and strong in any economic conditions to allow them to retain this competitive position even in the most adverse environment. It has been set up to persist, and even if it is replicated it will not materially harm the prospects of Berkshire Hathaway.
ranjitsudan
Ranjitsudan - 3 years ago
I am long berkshire- buying under $70. I think historically/stastically its very cheap. ITs even par with 2009 low in terms of Price-to-Book ratio.

Berkshire has Net liquid (incld cash, invst proftfolio less debt) of $42./share. Buffet give around 20B of cash as buffer/reserve for unexpected losses in insurance business etc. After cash reserve of 20B, it has net liquid position of $34/share. Berkshire generates around $11B FCF every year i.e 7.94/share. Stock is trading at $67, so you effectively paying $32 for a business which is generating 7.94/share of FCF, i.e 4X of FCF. Its cheap!!! At these multiples, takes into account any major turnaround in economy.

sampalmer22
Sampalmer22 - 3 years ago


I disagree w/ valuing this as a insurance company with equity float. This is a conglomerate holding company and WB is the capital allocator (with a phenomenal track record) who happens to also invest a good portion of the insurance companies' float for them in equity. The only reason this is viewed as an "advantage" and not an actual disadvantage compared to other insurance companies, is because investors believe that WB's track record can be extrapolated into the future, which it clearly cannot as he has himself declared every time he writes anything.

Unpopular as it may be, I would feel better about the long-term prospects of owning the stock if there were a plan in place to mitigate the value inevitably lost once WB is gone. One option would be to separate the company into an insurance group run by Ajit, an asset management company (I would prefer this company to basically be mandated to run-off the portfolio) and spin-off the other unrelated companies over time. I see no reason to pay a WB premium (or hope for one) for Combs/Wechsler/whoever else gets put in place.

sdash
Sdash - 3 years ago
www.investutils.com has the intrinsic value calculator based on Ben Graham's formula.
Sivaram
Sivaram - 3 years ago
SAMPALMER22: " One option would be to separate the company..."

What makes you think that the break-up value is higher than as a conglomerate?

I don't follow Berkshire Hathaway closely but my wild guess is that the break-up value is much lower than the conglomerate's value. I honestly can't see, say, the asset management or "other companies" worth more than what the market is pricing right now.
d_taco
D_taco - 3 years ago


It is quit simple.

No dividend no value.

Buffet is the greatest investor of all times and BRK.A stock buyers are his (most easy) counter parties.

Think about it.
adnanem
Adnanem - 3 years ago
As i mentioned in another post before the summer : @ 100 k a share i m buying BIG time

Great Business diversification, Great FCF, Great management at companies level, lowest valuation in several years

Only question is what he gonna do with the Cash at BRK?

Better to invest it in AAA companies with strong FCF and low PE rather than T bills (AA)

AlbertaSunwapta
AlbertaSunwapta - 3 years ago
Only twice in 14 or 15 yrs with my current brokerage have I ever been put on a long hold. So it's a funny coincidence here: On a Friday in March of 1999 at the very height of the internet bubble when people were dumping quality companies to buy crap, I went to buy BRK.B shares and for the first time was put on hold - a long hold. It was those pesky speculators taking up time. I gave up waiting and decided to call back on the next Monday. That weekend Buffett announced that he'd consider buying back shares. I missed by a day, getting BRK at that great low point.

Well, today, I again went to buy BRK.B shares and for the first time in since 1999, I was again put on hold. :-) I hope Buffett is on vacation. I have a limit order in for Monday.
AlbertaSunwapta
AlbertaSunwapta - 3 years ago
Doesn't Buffett personally have about a billion dollars in treasuries?

Wouldn't be neat if Buffett, who only took a $100,000/yr in salary and then donated all his Berkshire Hathaway stock - came back and bought a good chunk of his company back - and then donated those too. Double-dipping for the benefit of all mankind. :-)
sampalmer22
Sampalmer22 - 3 years ago


"What makes you think that the break-up value is higher than as a conglomerate?

I don't follow Berkshire Hathaway closely but my wild guess is that the break-up value is much lower than the conglomerate's value. I honestly can't see, say, the asset management or "other companies" worth more than what the market is pricing right now."


It's called a "conglomerate discount" for a reason. Here's another hint: BRK is trading at book right now, please find me an asset manager, furniture/jewelry/candy store/etc. that's trading anywhere close to book value right now.
batbeer2
Batbeer2 premium member - 3 years ago
>> please find me an asset manager, furniture/jewelry/candy store/etc. that's trading anywhere close to book value right now.

Leucadia
luishernadez
Luishernadez premium member - 3 years ago
I seriously think that Buffett is repurchasing Berkshire stock right now.
vassile
Vassile - 3 years ago
That's hilarious :) I hope it works out for you this time; and to wit, BRK is now selling at half price relative to Y2K!!
joliveras33
Joliveras33 premium member - 3 years ago
The book value is dramatically understated. If you add to BVE the deferred tax liability that BRK will never pay, the P/B<<<<1.

Stop writing post here and buy the stock before the morons that are paying 587x for Saleforce.com figure it all out.
manxman
Manxman - 3 years ago
Think of Buffett as an intangible asset to the company, hence, the Buffett premium is being amortized by the market based on its estimate of his "remaining useful life".

The Sokol affair reminded the market of the difficulty of replacing the Buffett intangible asset and the risk around the succession issue.

jonmonsea
Jonmonsea premium member - 3 years ago


"Still, risk/reward, what else out there offers such a no-brainer proposition, with the option thrown in that Buffett will work for another five years? The stock has to be selling at 66% of current fair value, nevermind growth or opportunistic investing if the economy tanks in any part of the world with reasonable accounting standards."

Looks like Buffett agrees... ;)
boutch2fr
Boutch2fr - 3 years ago
Dear Alberta (15), it seems Buffett was not on vacation this weekend...
AlbertaSunwapta
AlbertaSunwapta - 3 years ago
Ughh!

AlbertaSunwapta
AlbertaSunwapta - 3 years ago
Up 6%! Oh, well, there's a lot of volume trading today so I imagine this buyback euphoria / mania will be short lived. i.e. A lot of owners are seeing fit to dump their shares on this news.
dak2123
Dak2123 - 3 years ago
Alberta,

You have to get your hunches a day sooner, or get a more attentive broker!

AlbertaSunwapta
AlbertaSunwapta - 3 years ago
Well, I suddenly got euphoric too, raised my limit price and bought some this morning. Shortly though, I expect someone will raise the derivatives issue again and drive the share price down. (With Buffett buying back... at least we can hope they do.)
botbgrt
Botbgrt - 3 years ago


Only twice in 14 or 15 yrs with my current brokerage have I ever been put on a long hold. So it's a funny coincidence here: On a Friday in March of 1999 at the very height of the internet bubble when people were dumping quality companies to buy crap, I went to buy BRK.B shares and for the first time was put on hold - a long hold. It was those pesky speculators taking up time. I gave up waiting and decided to call back on the next Monday. That weekend Buffett announced that he'd consider buying back shares. I missed by a day, getting BRK at that great low point.

Well, today, I again went to buy BRK.B shares and for the first time in since 1999, I was again put on hold. :-) I hope Buffett is on vacation. I have a limit order in for Monday.

--

Lol, I read this Friday and thought "Unlikely lightning hits you twice."

But there is always that chance... Bad luck! You still got in at a very decent price so no worries. ;)
Sivaram
Sivaram - 3 years ago


Buying back shares is the right thing and will increase shareholder value but...

This marks the end of the Warren Buffett era at Berkshire Hathaway. Warren Buffett has always found some attractive investments, or at least held on to cash until he finds one, but, for the first time in Berkshire Hathaway history (at least since the post-1960s), he appears to feel that he won't find anything highly attractive.
luishernadez
Luishernadez premium member - 3 years ago
This DOES NOT mark the end of the WB era !!! What are you talking about?

Repurchasing Berkshire shares (when they are selling at BV o close to it) is just another investment like buying Lubrizol or BNSF, or Wells Fargo, or any other company that is CHEAP. Actually Berkshire at BV is probably cheaper than Lubrizol at $135/sh.

Berkshire had never traded so cheaply (in March 2009 touched BV for like 2 days). And in 1999 it wasn´t thsi cheap (I mean $66). So he has never had the chance to repurchase Berkshire shares. Thats the end of it. If the share stay above $72,50 he won´t buy a single share. I hope he bought some last week, before anouncing it yesterday.

Luis
joliveras33
Joliveras33 premium member - 3 years ago
Buffett would never buy shares without pre announcing it. He is too honest to rip morons' (who sell at this price) faces off. The real motivation for such a move is that he does not like to see the price so far off a conservative estimate of intrinsic value.

Think for a minute. He is giving his shares away to Bill and Melinda who turn around and sell them in the market. Do you think it makes WEB happy to see these shares being sold at bargain prices? This is the work of his life, his opus magnum being sold for peanuts.

He does not want to buy them for BRK. He wants the price to have some resemblance of rationality.

In essence WEB is giving us shareholders a free put option at 1.1x a very understated BV. Enjoy it.

The price immediatelly went to where the strike is as it should.

luishernadez
Luishernadez premium member - 3 years ago
I guess you are right. I just wanted him to repurchase at least what he issued when he bought BNSF and Wesco, and I really believe that a repurchase of around $8,5B (5% of shares outs.) would add a great value to shareholders. Obviously they would have to be bought at or below $70/share.

But well, we will see what ends up happening.

I hope he has been buying Wells.

AlbertaSunwapta
AlbertaSunwapta - 3 years ago
Buffett has to expect that his buy back announcement will push up the price short term. He may be expecting market conditions my deteriorate significantly in the future providing him with an equal or better deal, though, its been said that he likes to see it trade within reasonable bounds of intrinsic value.

Since he has openly stated a concern that new shareholders not have to overpay for partnering with him (while those leaving take 'excess' profits), it's interesting that he didn't come out and say anything about overvaluation when BRK was priced significantly higher. I'd guess his margin of safety is quite high (and intrinsic value somewhat uncertain) and so the possible range is quite large. If so, that would indicate that BRK is not just undervalued but significantly undervalued. How's that for significant conjecture? :-)
joliveras33
Joliveras33 premium member - 3 years ago
BRK has 50-70% upside to intrinsic value. How about that for significantly undervalued?

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