Berkshire Hathaway Is Now a Deep Value Stock

Warren Buffett's conglomerate appears to be deeply undervalued

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Jun 25, 2020
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Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) is one of the many S&P 500 constituents that have missed out on the recent stock market rally.

This has led to an exciting situation for value investors. As the broader market has rallied, it now looks as if Warren Buffett (Trades, Portfolio)'s investment vehicle has fallen into deep value territory, in my view. The stock is certainly cheaper than it has been at any other point in recent history.

Berkshire Hathaway on offer

According to the company's first-quarter earnings report, Berkshire ended the first quarter of 2020 with equity investments of $181 billion and $137 billion of cash. That's excluding any other assets, such as the book value of BNSF and Berkshire Hathaway Energy.

Since these figures were reported, the picture has changed somewhat. Berkshire's stake in consumer electronics giant Apple (AAPL, Financial) is now worth nearly $90 billion compared to $64 billion at the end of the first quarter. This is equivalent to 20% of Berkshire's current market value. This growth alone puts the value of the equity portfolio back above $200 billion.

Further, Berkshire has been generating around $5 billion per quarter in free cash flow. On that basis, the group's cash balance may be closer to $142 billion at the end of the second quarter, although that's assuming Buffett made no share repurchases.

On top of these assets, Berkshire also had $256 billion of assets at the holding company level at the end of the first quarter. That gives us an estimated total of $598 billion of assets at the end of the second quarter of 2020.

At the end of March, Berkshire reported total liabilities of $385 billion across the group. This suggests the company's book value sits at $213 billion, excluding the Railroad, Utilities and Energy divisions. Including the assets of these businesses, the book value moves up to somewhere around $400 billion. In comparison, Berkshire's current market cap is only $431 billion.

However, I would argue that even this estimate deeply undervalues Berkshire's operating businesses.

Take BNSF, for example. Last year the company produced net earnings of $5.5 billion. The company's closest listed competitor, Union Pacific (UNP, Financial), is currently selling in the market for a multiple of 19 times net earnings. Place this value on BNSF, and the value of the business rises to $104.5 billion.

Meanwhile, the closest competitor for Berkshire Energy and Utiltiies, NextEra Energy (NEE) is selling at 30 times earnings. This multiple on the Utilities and Energy business gives a value of $93 billion. NextEra is dealing at a price-book ratio of three.

All of the above implies that Berkshire's energy and railroad business should be worth at least $200 billion, and possibly more, according to my analysis.

What's more, none of the above figures really reflect the value of the group's insurance business. Put all of the above together, and even with the most conservative figures, it looks as if Berkshire is trading below the group's book value.

With this being the case, I would be very surprised if we did not see a large increase in share repurchase activity by Buffett in the group's second-quarter earnings release. The stock is cheaper than it has been for many years, and this could be the opportunity he's been waiting for to spend a lot of cash on a deeply undervalued opportunity.

Even if Buffett hasn't been buying, I think that this is an excellent opportunity for investors to buy a great business at a low price.

Disclosure: The author owns shares in Berkshire Hathaway. Estimates are those of the author and should not be mistaken for facts.

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