Berkshire Hathaway Inc. (BRK.A, Financial) (BRK.B, Financial), the conglomerate led by renowned value investors Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio), recently released its third-quarter earnings report.
Long-term shareholders may have noticed that Berkshire often publishes its quarterly reports on weekends. This strategic timing aims to give shareholders more time to digest the information before markets open the following Monday. As Buffett explained in his 2017 letter to shareholders, "We will continue our practice of publishing financial reports late on Friday, well after markets close, or early Saturday morning. This allows you ample time for analysis and gives investment professionals a chance to offer thoughtful commentary before markets open again on Monday."
For Buffett, releasing earnings over the weekend helps reduce the volatility in Berkshire's stock price.
Robust growth amid volatile investment returns
In the third quarter, Berkshire Hathaway recorded strong growth in operating performance. The total revenue increased from $76.9 billion in the prior-year quarter to over $93.21 billion as a result of strong growth in insurance premiums earned and higher revenues from utilities and energy operations. Meanwhile, operating earnings surged from $7.65 billion a year ago to more than $10.76 billion.
Some investors may be concerned about the wider net losses attributable to Berkshire shareholders, which expanded from nearly $2.8 billion in last year to $12.78 billion this year. However, this loss expansion resulted primarily from increased losses on investments and derivative contracts, mainly due to changes in unrealized investment gains and losses on securities held during the quarter. These changes tend to be volatile in nature. While quarter-over-quarter comparisons show greater net losses, the year-to-date comparison has shown an improvement in net earnings attributable to shareholders.
Source: Berkshire Hathaway's 10Q filing
Strong cash position with huge float
As of September, Berkshire Hathaway has significantly strengthened its financial position, amassing a staggering $452.11 billion of cash and investments held in its insurance businesses, which includes $117 billion in cash, cash equivalents and U.S. Treasury bills. The company's insurance float—the money available to Buffett for investments and acquisitions before claims are paid out—has reached an impressive $167 billion. This float has been instrumental in Berkshire Hathaway's success, a fact Buffett has frequently highlighted to shareholders, explaining in his 2012 letter: "Insurers receive premiums upfront and pay claims later... This model generates 'floats,' or large sums of money that are in our hands for the time being but will eventually be paid out to others. However, until then, we can invest this money to benefit Berkshire." The growth of Berkshire Hathaway's float has been exponential, increasing almost 8,790-fold since 1967, when it was a mere $19 million, illustrating the monumental scale of the company's growth and financial prowess.
Berkshire Hathaway is 17% undervalued
According to Buffett, the two most important criteria to value Berkshire Hathaway are the investment per share and the pre-tax earnings per share, excluding all income from investments. He stated clearly in his 1997 letter to shareholders:
“In our last two annual reports, we furnished you a table that Charlie and I believe is central to estimating Berkshire's intrinsic value. In the updated version of that table, which follows, we trace our two key components of value. The first column lists our per-share ownership of investments (including cash and equivalents) and the second column shows our per-share earnings from Berkshire's operating businesses before taxes and purchase-accounting adjustments…,but after all interest and corporate expenses. The second column excludes all dividends, interest and capital gains that we realized from the investments presented in the first column. In effect, the columns show what Berkshire would look like were it split into two parts, with one entity holding our investments and the other operating all of our businesses and bearing all corporate costs.”
The investment value per share of Berkshire Hathaway for the third quarter of 2023 can be determined as follows:
Source: Author's table
The pre-tax operating earnings per share can be computed by taking the total pre-tax operating earnings of Berkshire Hathaway and deducting all investment income, including dividends and realized capital gains.
Source: Author's table
The calculated pre-tax operating earnings per share for Berkshire Hathaway have hit $21,381. By using a multiple of 12.5, equivalent to an 8% earnings yield, the value of Berkshire Hathaway's operating businesses can be approximated at $267,262.5 per share. When we add the investment value per share of $359,551, the intrinsic value of a Berkshire Hathaway share would be about $626,813.50. This indicates the shares are trading at a discount of approximately 17.4% from the calculated intrinsic value when compared to the current market price of $534,132.
Buffett's share buybacks signal belief in Berkshire's undervaluation
In line with the perspective that Berkshire Hathaway's stock is undervalued, Buffett and Munger have continued to buy back shares in the open market. During the first nine months of the year, the conglomerate repurchased $7 billion worth of its Class A and Class B shares. Throughout the third quarter, from July to September 2023, the average price paid for these shares ranged between $521,430 and $550,814 each.
Source: Berkshire Hathaway's 10-Q filing
The share repurchase program does not specify the maximum number of shares to be repurchased, but it does maintain a threshold: share buybacks will stop if they would cause the company's consolidated holdings in cash, cash equivalents and Treasury bills to fall below $30 billion. Given that the current cash positions amount to $117 billion and the shares are trading below the estimated intrinsic value—even less than the average share price repurchased in September—it is anticipated that Berkshire Hathaway will continue to repurchase shares for the foreseeable future.
Key takeaway
With Berkshire Hathaway's shares trading at a significant 17% discount to their intrinsic value, there is a clear opportunity for investors to buy in at a price below their true worth. Further confirming its appeal is the company's ongoing commitment to share repurchases, a strategy that underscores management's belief in its undervaluation while also enhancing shareholder value. Along with Berkshire's huge cash reserves and growing insurance float—a critical component of its investment strategy—Berkshire Hathaway offers both stability and growth potential.
