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In our article we argued that Berkshire is traded at the lowest price-to-book ratio in decades. A reader recently pointed out that it makes more sense to look at the price-to-tangible-book instead of price-to-book. If we look more carefully at the balance sheet of Berkshire Hathaway, the company’s book value is $163 billion as of June 30, 2011. However, there is $28 billion of goodwill in Berkshire’s “Insurance and Other” operations, $20 billion of goodwill in “Railroad, Utilities and Energy” operations, and about $1 billion in “Financial and Financial Products” operations. The $49 billion of goodwill was added to the balance sheet when Berkshire paid higher prices than the book values of the companies during acquisitions.
In the most recent acquisition of Burlington Northern, Berkshire bought all of the outstanding shares of Burlington Northern Santa Fe Railway Co. (BNSF) that it has not already owned for the total price of $26.5 billion. Berkshire paid for the acquisition with 80,931 Class A shares and 20,976,621 Class B shares, plus cash of $15.9 billion. The book value of Burlington was about $12.8 billion. Berkshire thus added about $13.7 billion of goodwill to its balance sheet.
Strictly speaking, price-to-tangible book is a better indicator of the valuation of the company, because it disregards any additional amount the company paid during acquisitions. Considering this: We have added price-to-tangible book into our 10-year valuation page. For instance, 10-year valuation page of Berkshire Hathaway is now here. The page now features the historical valuation band of the stock, historical price-to-sales (P/S), price-to-book (P/B), price-to-earnings (P/E), price-to-free-cash-flow (P/FCF), yield, and the new price-to-tangible-book ratios.
The price-to-book ratio and price-to-tangible-book ratios of Berkshire Hathaway are displayed below:
If we look at the price-to-book, Berkshire was traded lower on Sept. 22 than it was at the market bottom of March 6, 2009. But if we look at price-to-tangible-book, Berkshire was traded slightly higher. Either way, the valuation before Berkshire announced a buyback was very close to the lowest valuation.
We quickly added a 10-year price-to-tangible-book chart into our 10-year valuation page after a member suggested it. This is just one of the many features we provide to premium members. If you are not a premium member, we invite you for a 7-day Free Trial.
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When Buffett buys shares he usually don't buy below book value but the value of the portfolio doesn't reflect the net assets value of these companies but the market price indeed that is a multiple of the book value,why should it be different when a company is taken private?!Goodwills are likely to grow overtime...if not he wouldn't have bought those companies