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Warren Buffett Has Plenty of Cash in His Pocket

Class A shares are undervalued and the company has plenty of cash to put to work

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Steve Gray Booyens
Aug 11, 2021

Summary

  • Berkshire has cash in abundance.
  • The class A shares are undervalued.
  • Sublime profit margins provides further encouragement.
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Many fussed about it when

Warren Buffett (Trades, Portfolio) didn't want to invest during the 2020 tech boom. Consequently, he's got plenty of cash in the bank, improved financial statements and his stock is holding deep value.

Performance
Berkshire Hathaway's (

BRK.A, Financial)(BRK.B, Financial) class A stock has done well over the past year with a 36% increase. Driving the price higher has also resulted in improvements in profit margins. The company's gross, continuing operations and net margins have experienced year-over-year growth of 214.61%, 372.66%, and 375.79%.

The company's earnings were primarily driven through gains in railroad, energy and utility investments.

Cash is king

Berkshire is the only traditional stock to hold the level of cash to the extent that tech stocks do.

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Source: Bloomberg.

The company's marketable securities aren't included in this equation as accounting principles state that 20% to 50% and 50% to100% ownership in companies must have their own line on the balance sheet.

However, we can conclude that Berkshire will probably spend the cash on further acquisitions and potentially prop up the company's fair value even further.

Valuation

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Source: Morningstar.

The price-earnings and price-sales ratios are both below historical averages and well below index values. This amid a period of superior stock returns is an indicator of relative value.

From an absolute valuation standpoint, weighing up all the assets, liabilities and shares outstanding, we can determine that Berkshire Hathaway holds deep value.

Taking all of this into account, ($629.51 billion enterprise value - $115.22 debt + $144.06 billion cash - $8.391 billion minority interest)/623.46K, equates to $1.043 million per share, worth an upside of a further 137%

Investors need to consider that cash will be used for further acquisitions, decreasing cash value and increasing minority interest, so that needs to be discounted. Nonetheless, I expect the stock to beat the index comprehensively.

Final word

Investors can expect Berkshire's class A stock to flourish as cash on hand allows the company to make further acquisitions while remaining liquid. Berkshire has traded well over the past year by gaining 36%. For a low beta stock to perform this well is extraordinary; it's a no-brainer to invest.

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Disclosures

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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