With the 2011 Berkshire Hathaway Annual Letter out, one of the things I was looking forward to was how much its intrinsic value might have changed. While intrinsic value is not an exact figure, I thought this year's calculation would be interesting as some of Berkshire's recent acquisitions (Burlington Northern, Lubrizol, Iscar, and MidAmerican) delivered record operating earnings.
How to Calculate Berkshire Hathway's Intrinsic Value
To recap how to calculate Berkshire Hathaway's intrinsic value we can look at Berkshire Hathaway's 2010 Annual letter in which Warren Buffett reveals how one could arrive at a rough estimate. The discussion of "Intrinsic Value-Today and Tomorrow" could be found on pages 99-100 of this year's annual report. Basically, you need two components, (a) the value of Berkshire's investments which include its stocks, bonds and cash equivalents and (2) is earnings that come from sources other than investments and insurance underwriting. As Buffett states in the annual report, recently the focus has been on increasing the latter but if an opportunity such as the recent purchase of IBM (IBM) arise, they will take it. But, it is the record year from Burlington, Iscar, Mormon, and Lubrizol that will add to the former.
An Update On Berkshire Hathaway's Intrinsic Value
So with that in mind, in this year's annual report Buffett gave an update and provided the figures and so we can keep track at home. Here is what Buffett said in the annual report:
I also included two tables last year that set forth the key quantitative ingredients that will help you estimate our per-share intrinsic value. I won’t repeat the full discussion here; you can find it reproduced on pages 99-100. To update the tables shown there,our per-share investments in 2011 increased 4% to $98,366, and
our pre-tax earnings from businesses other than insurance and investments increased 18% to $6,990 per share.
Charlie and I like to see gains in both areas, but our primary focus is on building operating earnings. Over time, the businesses we currently own should increase their aggregate earnings, and we hope also to purchase some large operations that will give us a further boost. We now have eight subsidiaries that would each be included in the Fortune 500 were they stand-alone companies. That leaves only 492 to go. My task is clear, and I’m on the prowl.
So how does the Berkshire Hathaway table looks like now?
As you can see, Berkshire Hathway's intrinsic value increased roughly (it is an estimate) 7% to $165,266 per "A" share. At today's price of $120,000, Berkshire is slightly undervalued. A couple things to note, the Per-Share Pre Tax Earnings might continue to grow as Berkshire's housing related companies recover from what Buffett calls a "depression". At the same time, the managers running Burlington, Lubrizol, Iscar, etc.. might continue to post record earnings as they no longer face the pressure of reporting to Wall Street.