Shares in Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) have rallied strongly over the past couple of weeks. Since the beginning of December, the stock has returned 13%, outperforming the S&P 500, which has moved sideways. Following this performance, Berkshire has returned 35% over the past year compared to a return of 24% for the S&P 500 index.
The stock has broken out to new highs this year. After treading water for much of last year, it looks as if the market's opinion of Berkshire has changed for the better.
Revisiting the valuation
Considering the stock's recent performance and the performance of the holdings in its equity portfolio, I have revisited my valuation model.
It is quite challenging to estimate Berkshire's intrinsic value because there are so many component parts. However, in the past couple of years, whenever I have looked at the business, it has been immediately clear that the company looked cheap on a sum-of-the-parts basis when one included the value of its equity portfolio and other significant businesses.
It seems that Warren Buffett (Trades, Portfolio) himself agreed with this view. Over the past two years, Berkshire has been spending around $25 billion a year purchasing its own shares; this is far more than it has spent on any individual stock position or business acquisition.
The easiest way to start analyzing the company is to look at the value of its public equity portfolio. The U.S. equity holdings in the portfolio are reported every quarter on the group's 13F filing, and from this, we can use market prices to update the overall value.
Based on the latest market prices, the value of the U.S. equity portfolio stands at around $340 billion. On top of this value, Berkshire has a cash balance of $149 billion.
It is a little challenging to work out international equity positions. Funds do not have to report international equity positions to the SEC if they are not listed on the major U.S. exchanges. Still, according to my estimates, Berkshire owns $7 billion worth of BYD Auto (BYDDF, Financial)(HKSE:01211, Financial) shares and around $10 billion in shares of Japanese companies. These are just estimates from the news, as the exact holding details are not revealed on 13F reports. Based on these rough numbers, I can estimate that Berkshire has $506 billion of equities and cash.
At the time of writing, the conglomerate's market capitalization is $700 billion. Equities and cash account for 72% of the market capitalization at current levels based on these numbers. That does not leave much room for the rest of the businesses that make up the group's footprint.
Based on my very rough numbers, GEICO produced an annual net profit of $2.4 billion in 2020 (Berkshire does not disclose after-tax earnings figures). The company's closest listed peer, Progressive (PGR, Financial), is currently valued at approximately 29 times forward earnings. This implies GEICO could be worth as much as $69 billion as an individual company.
The other major company that makes up Berkshire's main operating businesses is BNSF. Last year this group reported net earnings of $5.2 billion. Its closest peer, Union Pacific (UNP, Financial), is selling at just under 26 times forward earnings. Placing a similar multiple on the BNSF business suggests the company could command a valuation of as much as $135 billion.
Together, GEICO and BNSF could be worth $204 billion based on comparable peer valuations. When added to the investment portfolio valuation, this suggests Berkshire is worth at least $710 billion.
These divisions only accounted for less than half of the group's overall net income from operating businesses in 2020. The energy, utilities and manufacturing divisions produced net earnings of $11 billion for 2020. A modest multiple of 12 times these earnings suggests a valuation of $132 billion for these enterprises.
These are only very rough estimates of Berkshire's worth. They do not consider intrinsic factors or the value of the income from the company's investment portfolio. Nevertheless, they appear to show that Berkshire remains undervalued by around 20% on a sum-of-the-parts basis.