According to Pershing Square's latest 13-F filing, Bill Ackman (Trades, Portfolio) has decided to build a substantial stake in Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial).
In some ways, this is a very unusual move for the activist investor. Ackman has made a name for himself building positions in troubled companies and then pushing for change, unlocking value for shareholders along the way.
Because Berkshire is still majority-owned by Buffett, he's never going to push the Oracle of Omaha to make any substantial changes.
However, on the other hand, investing in Berkshire makes a lot of sense for Ackman. He has praised Buffett repeatedly in the past, called him is "idol" and has attended Berkshire's annual meeting. At a conference in April, Ackman said he modeled his own fund after Berkshire.
"This is a business in that you learn from mentors in a way, and some of them are virtual mentors," he told a money manager conference in New York on April 16. "My mentor in this business has been Warren Buffett (Trades, Portfolio). I've been fortunate to get to know him in the past five or six years, but before that, I could only read what he wrote and watch what he said."
Ackman on Berkshire
According to Pershing's 13-F filing, at the end of the second quarter, the group owned $688 million worth of shares in the conglomerate, making it an 11.2% portfolio weight.
Commenting on the position of his second-quarter letter to investors, Ackman wrote, "We believe that Berkshire's share price is likely to increase substantially over the coming years." He went on to say that the structural advantages of the company's insurance business give it an unrivaled competitive advantage and will likely further expand even without Buffett at the helm of the business.
In the letter, Ackman said he believes that Berkshire is currently trading at one of the widest discounts to its intrinsic value in history because the market doesn't understand the business. He argued that investors review Berkshire as an index fund with a lot of cash, which is the wrong way of looking at Buffett's conglomerate.
Ackman opined, "While Mr. Buffett has long been one of the most high-profile and closely followed investors in the world, we believe that Berkshire Hathaway's undervaluation is partially explained by the fact that it is one of the least followed and misunderstood mega-cap companies."
Ackman also said the market is overlooking Buffett's skill in creating value at the insurance business:
"While Mr. Buffett is best known as a great investor, he should perhaps also be considered the world's greatest insurance company architect and CEO because the returns Berkshire has achieved on investment would not be nearly as good without the material benefits it has realized by financing these investments with low-cost insurance float."
The letter concluded with Ackman summarizing that he believes Berkshire's earnings per share should grow at a mid-teens compounded annual rate over the intermediate term, if it can improve its "operations and intelligently deploy a substantial portion of its excess capital."
Buffett's buybacks
Ackman isn't the only one who thinks that Berkshire is undervalued at current levels. The Oracle of Omaha also appears to believe that his stock does not accurately reflect the intrinsic value of the business. Berkshire has been repurchasing its own shares this year, at levels substantially above the current stock price.
As I have written before, I estimate that Buffett believes the intrinsic value of the business lies around the $240 per B-Share. This implies that at the time of writing, the stock is trading at a discount of more than 20% to intrinsic value.
With $120 billion of cash on the balance sheet ready to be deployed in the next market downturn, Berkshire is primed and ready for the next stage of its growth.
Disclosure: The author owns shares in Berkshire Hathaway.
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