Warren Buffett (Trades, Portfolio) has built his business empire and reputation on buying off stocks when they are on offer, going into the market and buying equities when other investors are jumping ship.
This time around, the situation is no different. But rather than buying other stocks, the market has given Buffett the fantastic opportunity to repurchase shares of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) at an attractive valuation.
Buybacks on the cards
Only a few months ago, Buffett and the rest of the team at Berkshire Hathaway decided to change the conglomerate's rules governing share buybacks.
Previously, the company was only allowed to buy back stock when it was trading at 1.2 times book value or less, which became a virtual floor for the stock (at the end the second quarter, book value per B share was up 3% to $145.12 while book value per A share was $217,677) . Knowing that Buffett's put option was in place, the market never let the stock trade below this level long enough for the company to buy back substantial amounts of its stock.
Now, however, Berkshire Hathaway is allowed to repurchase its stock if the shares trade below what Buffett interprets as intrinsic value.
Under this new regime, there is no set value under which the shares have to trade before the company can start deploying some of its $100 billion cash pile.
As a result, while the "Buffett put" still exists, with no set value, the market is much more likely to offer the "Oracle of Omaha" the chance to deploy his cash at a favorable price.
Deploying cash
We know that he has already repurchased some stock since changing the buyback policy. In a CNBC interview at the end of August regarding the new policy, Buffett said he had bought "a little" of the stock before going on to add some more detail about the procedure:
"We tie it now to intrinsic business value, which we should have done all along but for a while book value was a good proxy...It didn't fully describe intrinsic value, but it tracked it, and it was a reasonable proxy. What really counts is what are the businesses worth, along with the securities we own, and if it's at a discount to that figure, Charlie and I will buy."
Of course, we don't know the exact per-share intrinsic value he believes is right for Berkshire Hathaway, but we do know the range in which the stock traded when Buffett was supposedly buying. Between the beginning of August and end of the month, when Buffett's interview with CNBC took place, Berkshire A shares traded in a range of around $300,000 to $318,000. With the stock trading below $300,000 at the time of writing, there's a genuine possibility that Buffett is currently buying back stock once again.
Placing a value on Berkshire
We don't know the exact price Buffett has in his mind when thinking about Berkshire's intrinsic value, though Wall Street analysts have done their best to try and come up with a concrete figure.
Over the summer, analysts at JPMorgan proposed a value of $236 per B share (approximately $354,000 per A share). Other figures suggest intrinsic value could be as high as $251 per B share ($376,500) depending on how you look at the business. Value investor Whitney Tilson (Trades, Portfolio), who publishes regular updates to his Berkshire intrinsic value calculation, believes the figure sits at $365,000 (according to his latest update).
All of these figures differ, but they point to the same range. Most analysts seem to believe Berkshire's intrinsic value is at least $350,000 per A share. As Buffett has already demonstrated his willingness to buy back shares trading below this level, I think it is highly likely that, with the stock changing hands for less than $300,000 today, Berkshire Hathaway is repurchasing shares.
Disclosure: The author owns shares of Berkshire Hathaway.
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