Is Berkshire Hathaway Now a Buy?

In the past 12 months, shares of Warren Buffett’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) have had a rare pummeling, down 15%, over double the decline of the S&P 500 (SPY, Financial). Since 2000, there have only been a handful of occasions where shares have experienced a trailing 12 month loss of this magnitude. Still, on every one of those occasions, Berkshire stock would have been a prudent buy.

Is this time any different?

Does Warren Buffett (Trades, Portfolio) even matter anymore?

The chief contributor to Berkshire’s success over the past two decades and beyond has been the investing prowess of its leader, Warren Buffett (Trades, Portfolio). While parts of the portfolio have been handed down to protégés like Ted Weschler and Todd Combs, Buffett is still largely in charge of its investment portfolio. The value of its portfolio now stands at roughly $125 billion, about one-third of Berkshire's total market cap.

While many have commented on Berkshire’s declining investment returns, it’s possible that the company is making a transition away from its historic reliance on Warren Buffett (Trades, Portfolio)’s investing skills. While the reallocation of cash is still important, it looks like Berkshire’s portfolio of fully-owned businesses are picking up the slack. Below is a clear example of the transition, where the investment portfolio is slowly ceding share to the success in its owned businesses.

Estimating intrinsic value

Whitney Tilson (Trades, Portfolio) has put together a simple but very helpful demonstration on how Berkshire Hathaway is likely undervalued. If you take Berkshire’s investments per share (a hard number) and apply a 10x multiple on its businesses earnings (a historically conservative approach), intrinsic value per share would be roughly $262,000 per share. This doesn’t even include an unrealized gain on its Heinz transaction, bringing the estimated value per share to $267,000.

With the ‘A’ shares currently trading for $193,000 and the ‘B’ shares similarly undervalued, investors are getting a pretty good margin of safety. Add in a share buyback at just below today’s levels, and the downside appears fairly limited. In a letter to investors last year, Buffett set the stage for much more-extensive buybacks. A decade or two in the future, he wrote, the company’s earnings will be so great that it won’t be possible to intelligently deploy all the funds back into the business. “If Berkshire shares are selling below intrinsic business value,” Buffett wrote, “massive repurchases will almost certainly be the best choice.”

For now, Berkshire shares look like an oddly cheap alternative to what many think is an overheated market.