Ever since Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) announced that its board of directors had voted to change the company's share repurchase policy in the first half of last year, I have been keeping a close eye on the group's share buyback activity.
As a shareholder of Berkshire, I am interested not only in what the company is paying to acquire its shares, but also the level at which Warren Buffett (Trades, Portfolio) considers the stock to be undervalued.
Under the terms of the new repurchase authorization, the company is allowed to repurchase shares when they are trading below Buffett and Charlie Munger (Trades, Portfolio)'s conservative estimate of intrinsic value.
Buffett has never publicly announced the number he has in his mind for Berkshire's intrinsic value estimate, but by watching the company's share repurchases, we can get some idea of his mindset.
Too little too late?
I will admit that considering the information we have now, I am a little disappointed in the number of shares the conglomerate has acquired so far.
As I have reported several times already, in the third quarter of 2018, its results revealed that it had acquired $928 million in shares at an average price of $312,806.74 a piece, to repurchase 225 Class-A shares in the third quarter.
As I noted in December last year, based on this activity, it is reasonable to assume that in the second half of 2018, Buffett believed that Berkshire's intrinsic value was above this level. What is disappointing is that even though the value of the A-shares dropped as low as $280,000 in December 2018, Berkshire spent only around $420 million buying back stock during the period, which, as I noted at the time was "a nominal sum compared to the conglomerate's $112 billion cash pile and $498 billion market capitalization." I also covered a report in financial publication Barrons, which declared:
"The bulk of Berkshire’s stock buybacks in the fourth quarter occurred between Dec. 13 and Dec. 24, when the company repurchased 790 class A shares at average price of around $296,000 per share for a total of $233 million."
According to Berkshire's first-quarter 2019 10-Q report, the company ramped up its share repurchasing program during February and March of this year. It acquired 293 A shares in February, at an average price of $302,622 per share and 595,412 B shares at an average price of $201.73. In March, the repurchase activity increased. The group acquired 965 A shares at an average price of $304,175 and 592,4418 B shares at an average price of $200.62. Analysts estimate the company spent $1.7 billion buying its own shares in the first quarter of 2019.
An estimate of intrinsic value
These figures give us further data on Buffett's estimate of intrinsic value for his conglomerate. So far, buybacks have taken place in a range of around $312,000 to $292,000 per A-share (there may have been purchases outside of his range, but for simplicity, I'm going to use average numbers).
This seems to suggest that he believes the conglomerate's intrinsic value is above $312,000 per A-share. I say above because I think that Buffett will only want to do repurchases when the stock is trading at a discount to intrinsic value. How much of a discount, it is difficult to tell, but if we give a rough figure of, say 10%, this implies that the Oracle of Omaha believes Berkshire's intrinsic value is somewhere in the region of $340,000 to $350,000 per A-share.
These are all rough, back-of-the-envelope type figures, but they give shareholders a rough guide of Berkshire's intrinsic value. And with this being the case, it is unlikely that the company is repurchasing shares at current levels, as it is currently dealing around $320,000 each. A drop back to approximately $300,000, however, would likely see a significant increase in repurchases, and a fall below this level may present Buffett with an opportunity even he might find too hard to pass up.
Disclosure: The author owns shares in Berkshire Hathaway.
