Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor - July 2015. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how Berkshire Hathaway Inc. (BRK.A, Financial) (BRK.B, Financial) fares in the ModernGraham valuation model.
Downloadable PDF version of this valuation:
ModernGraham Valuation of BRK - August 2015
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
| Defensive Investor; must pass all 6 of the following tests. | Â | ||
| Â | 1. Adequate Size of the Enterprise | Market Cap > $2Bil | Pass |
| Â | 2. Earnings Stability | Positive EPS for 10 years prior | Pass |
| Â | 3. Dividend Record | Dividend Payments for 10 years prior | Fail |
| Â | 4. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | Pass |
| Â | 5. Moderate PEmg Ratio | PEmg < 20 | Pass |
| Â | 6. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | Pass |
| Â | Â | Â | Â |
| Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor. | Â | ||
| Â | 1. Earnings Stability | Positive EPS for 5 years prior | Pass |
| Â | 2. Dividend Record | Currently Pays Dividend | Fail |
| Â | 3. Earnings Growth | EPSmg greater than 5 years ago | Pass |
Stage 2: Determination of Intrinsic Value
| EPSmg | 7.22 |
| MG Growth Estimate | 11.09% |
| MG Value | $221.44 |
| Opinion | Undervalued |
| MG Value based on 3% Growth | $104.65 |
| MG Value based on 0% Growth | $61.35 |
| Market Implied Growth Rate | 5.52% |
| Current Price | $140.97 |
| % of Intrinsic Value | 63.66% |
Berkshire Hathaway Inc. is not suitable for the more conservative Defensive Investor or the Enterprising Investor. Both investor types are turned off by the lack of dividends. As a result, all value investors following the ModernGraham approach based on Benjamin Graham's methods should proceed only with a cautious and speculative attitude.
As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $4.15 in 2011 to an estimated $7.22 for 2015. This level of demonstrated earnings growth outpaces the market's implied estimate of 5.52% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham's formula, returns an estimate of intrinsic value above the price.
The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Berkshire Hathaway Inc.? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Stage 3: Information for Further Research
| PEmg | 19.55 |
| PB Ratio | 1.41 |
| Dividend Yield | 0.00% |
| Number of Consecutive Years of Dividend Growth | 0 |
Most Recent Balance Sheet Figures
| Long-Term Debt | $84,578,000,000 |
| Total Assets | $540,774,000,000 |
| Intangible Assets | $62,799,000,000 |
| Total Liabilities | $294,731,000,000 |
| Shares Outstanding (Diluted Average) | 2,464,628,000 |
Earnings Per Share - ModernGraham History
| Next Fiscal Year Estimate | $7.22 |
| Dec14 | $6.90 |
| Dec13 | $5.99 |
| Dec12 | $4.76 |
| Dec11 | $4.15 |
| Dec10 | $4.19 |
| Dec09 | $3.75 |
| Dec08 | $3.89 |
| Dec07 | $4.57 |
| Dec06 | $3.80 |
| Dec05 | $3.06 |
| Dec04 | $2.52 |
| Dec03 | $1.99 |
| Dec02 | $1.20 |
| Dec01 | $0.91 |
| Dec00 | $1.20 |
| Dec99 | $1.05 |
Disclaimer:
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.
