The last time I tried to value shares in Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) was in the middle of March. At the time, the Class B shares were changing hands for around $250. I concluded that the stock could be worth anywhere between $230 and $384 using a range of different valuation methodologies.
I like to use several different valuation methods to arrive at a range of values for a company. This is the approach that the "Dean of Value Investing" Benjamin Graham used when he was trying to analyze the intrinsic value of a stock.
Graham believed there was no point in trying to pinpoint the precise value of a business down to the last cent. He was well aware that one may never have all the information required to compute such a calculation, so it wasn't worth trying.
A valuation update
Since my last attempt at valuing Warren Buffett (Trades, Portfolio)'s conglomerate, a lot has happened. The company's earnings have jumped and so have equity markets, increasing the value of its giant equity portfolio. The stock has also increased in value. It is currently changing hands at $280 per share.
The first method I will use to compute a rough estimate of Berkshire's worth is a discount cash flow calculation. This is a variaton of the method Buffett has said he uses to calculate intrinsic value, so it might be the most appropriate, though keep in mind that the assumptions of this model are all my own assumptions, as we do not know which assumptions Buffett uses for Berkshire's DCF model.
During the first six months of 2021, Berkshire's cash flows from operating activities totaled $19.6 billion. Capital spending on capital equipment amounted to $5.7 billion. This gives a rough free cash flow figure of $13.9 billion (the figure for the same period in 2020 was $11.3 billion).
Berkshire generated free cash flow of around $26.8 billion in full-year 2020. Based on the figures for the first half of the year, the company is set to achieve free cash flow of approximately $27.8 billion for 2021. This is just a rough estimate as it does not consider the timing of working capital adjustments.
Assuming the company's free cash flow does not grow at all, and using a 3% discount rate, a DCF projection throws out a fair value of $413 for the Class B shares based on the above numbers. Using an even more conservative 6% discount rate, the valuation drops to $319. Once again, this assumes no growth.
Another method I can use the estimate the company's intrinsic worth is book value. Until he changed the rules a few years ago, Buffett had a rule in place where Berkshire would not buy back its stock unless it was trading at below 1.2 times book value. This implies that he considered the business cheap at this level.
While this is no longer as relevant in Buffett's eyes, as the Oracle of Omaha has mostly left it behind, it does provide a valuable yardstick. According to the company's latest results, book value per B share stood at $208 at the end of the second quarter. This gives an intrinsic value estimate of just under $250 per share (at 1.2 times book).
On top of all of the above, we know that Buffett was instructing Berkshire's brokers to buy back shares at a price that could have been as high as $286.10 in the second quarter. Based on the principle that he wants to buy back stock when it is trading at a discount, one can reasonably assume that this is 10% to 20% below his estimate of intrinsic value.
The bottom line
All of the above gives me an estimated valuation range of between $250 and $350 for Berkshire's Class B shares. Anything below $250 would be cheap, and above $350 would be overvalued. With the stock trading at $280, it is at the low end of this range.
