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Rupert Hargreaves
Rupert Hargreaves
Articles (687)  | Author's Website |

No Matter How You Look at the Company Berkshire Hathaway Is Cheap

The recent stumble has sent shares in Berkshire Hathaway down to one of the most attractive levels in years

December 14, 2018 | About:

How much is Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) really worth? This is a question that takes up a lot of space in the minds of investors and analysts across Wall Street and around the world.

We know roughly the company's book value, which we can calculate based on figures published each quarter. but from an intrinsic value perspective, it is difficult to tell. The situation has only been made more difficult by the introduction of the recent accounting standards, which means profits and losses on Berkshire's gigantic equity portfolio are included in the operating results.

Putting a price on Berkshire

Back in October, JPMorgan analyst Sarah DeWitt tried to calculate the company's intrinsic value based on the "look-through earnings" metric, a valuation technique used by Buffett. According to Investopedia:

“'Look-through earnings' take into account current period earnings that show up in financial statements, together with other sources of earnings expected in the long run. This method is used by Buffett as a way to appreciate that companies sometimes retain earnings after paying dividends and later invest them at a higher rate of return."

DeWitt calculated that distributed earnings from the conglomerate's portfolio stocks was around $12 billion at the time, equivalent to $5.19 per Berkshire -share. Adding in the operating earnings from the rest of the business, the analyst calculated that 2019 earnings per share on a look-through basis could be $15.44.

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If we assume 10% earnings growth for 2020 (based on the S&P 500 average), this indicates that the company will earn $16.94 in 2020, putting the stock on a 2020 price-earnings ratio of just 12 at the time of writing. This forecast is just for fun because forecasting earnings is always an unpredictable sport. Still, I think it's interesting to consider how much value shares in Berkshire offer today.

But what about book value? At the end of September, book value per A-share was around $229,000 or roughly $152 per B-share. At the current prices of $303,750 and $202.42, the stock is trading for approximately 1.33 times book.

This is fascinating and shows just how cheap the conglomerate is. Before changing the policy for buying back stock earlier this year, Warren Buffett (Trades, Portfolio) had told the market that he was willing to pay anything up to 1.2 times book value to buy back shares. As a result, the market set this level as a sort of floor, commonly referred to as the "Buffett put." When he removed it earlier this year, the change in the policy opened the door to more buybacks and the re-distribution of Berkshire's $100 billion cash pile.

Buffett's buybacks

As I have speculated before, after starting to buy back a few shares in the third quarter of 2018, Buffett is almost certainly spending his money on buybacks right now considering the valuation of the stock and the levels he was buying at previously.

When you combine the two metrics above, look-through earnings per share and book value per share, it is pretty clear that this stock is on special offer today. According to data compiled by GuruFocus, over the past 13 years, Berkshire's median price-book ratio was 1.35, so based on the numbers at the time of writing, it is trading just below this level. The lowest is 1, and the highest is 1.9.

The stock could fall further, but this would be good news for holders who are willing to wait as Buffett would likely ramp up his buying back of stock. These figures do exclude the recent changes in the value of Berkshire's equity holdings. I have decided not to try to calculate a new marked-to-market book value because at this point it is impossible to know how the rest of the business is fairing.

The bottom line

Put quite simply, right now shares in Berkshire Hathaway, managed by the world's greatest investor, look cheap on whichever metric you want to use. It might be a good idea to make the most of this opportunity while it lasts.

Disclosure: The author owns shares in Berkshire Hathaway.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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