In late 2011, Whitney Tilson shared a presentation on his website in which he conducts an analysis of Berkshire Hathaway (BRK.A)(BRK.B) and arrives at an estimate of Berkshire Hathaway’s Intrinsic Value. Basically, Tilson went through several Berkshire Hathaway annual reports and highlighted several of Warren Buffett's comments where Buffett talks about the discrepancy in Berkshire's stock price and its intrinsic value. Tilson then focuses on a quote and chart that could be found by reading the1997 Berkshire Hathaway Chairman's Letter:
In our last two annual reports, we furnished you a table that Charlie and I believe is central to estimating Berkshire's intrinsic value. In the updated version of that table, which follows, we trace our two key components of value. The first column lists our per-share ownership of investments (including cash and equivalents) and the second column shows our per-share earnings from Berkshire's operating businesses before taxes and purchase-accounting adjustments (discussed on pages 69 and 70), but after all interest and corporate expenses. The second column excludes all dividends, interest and capital gains that we realized from the investments presented in the first column. In effect, the columns show what Berkshire would look like were it split into two parts, with one entity holding our investments and the other operating all of our businesses and bearing all corporate costs.What Tilson then does is take Berkshire's Investment's Per Share at book value and applies a multiple to Berkshire's pre-tax earnings per share that excludes all income from investments. Pretty straightforward right? It's definitely an alternative to some of the "sum of the parts" analysis I have seen from other individuals such as Tom Gayner's in the June 30, 2011 edition of Value Investor Insight.While the approach is straightforward and makes sense, Berkshire's new share repurchase plan may have changed things a bit.Pre-tax Earnings Per Share Investments/Share Excluding All Income from investments1967 $ 41 $ 1.09 1977 372 12.44 1987 3,910 108.14 1997 38,043 717.82
In apress releasedated September 26, 2011, Berkshire Hathaway's Board of Directors authorized a share repurchase program that would allow Buffett and Munger to repurchase shares of Berkshire Hathaway at prices no higher than a 10% premium of book value. In other words, if Berkshire's stock reaches 1.1 P/B, Buffett and Munger might think about repurchasing shares. So what does it mean to value investors who want to purchase shares of Berkshire Hathaway?Warren Buffett has basically taken the guess work out of calculating Berkshire's intrinsic value and has basically put a floor on Berkshire's stock.By purchasing shares of Berkshire Hathaway below 1.1 P/B, you are pretty much assured there is some kind of margin of safety. As a matter of fact, Berkshire Hathaway tell you that at 1.1 P/B or lower, the intrinsic value of Berkshire Hathaway is considerably much higher.
In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise. (source)So how could one take advantage of Berkshire Hathaway's share repurchase program? Simply wait until Berkshire Hathaway trades at or below 110% of book value. I am not saying to check it every day, but maybe make a mental note to check it once a month.
What is the easiest way to do so? Use the new interactive charts at GuruFocus and click on the Price to Book Value box. Simply scroll your mouse onto today's price and see whether the P/B is at or below 1.1.
As you can see from the interactive chart above, the last time Berkshire Hathaway traded below 110% book value was in September 2011 when the stock traded between a range of $100,000- $109,000. Berkshire now trades at $120,000 so you would be up between 10-20%.
Disclosure: No position
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