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Berkshire Hathaway Inc  (NYSE:BRK.B) Intrinsic Value: DCF (FCF Based): $229.24 (As of Today)

As of today, Berkshire Hathaway Inc's intrinsic value calculated from the Discounted Cash Flow model is $229.24.

Note: Discounted Cash Flow model is only suitable for predictable companies (Business Predictability Rank higher than 1-Star). Result may not be accurate due to the low predictability of business.

Margin of Safety (FCF Based) using Discounted Cash Flow model for Berkshire Hathaway Inc is 20.77%.


Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

* Premium members only.

Berkshire Hathaway Inc Annual Data

Dec07 Dec08 Dec09 Dec10 Dec11 Dec12 Dec13 Dec14 Dec15 Dec16
Intrinsic Value: DCF (FCF Based) Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only 48.45 87.32 107.08 97.92 136.29

Berkshire Hathaway Inc Quarterly Data

Dec12 Mar13 Jun13 Sep13 Dec13 Mar14 Jun14 Sep14 Dec14 Mar15 Jun15 Sep15 Dec15 Mar16 Jun16 Sep16 Dec16 Mar17 Jun17 Sep17
Intrinsic Value: DCF (FCF Based) Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only 119.06 136.29 215.02 221.37 229.44

Calculation

This is the intrinsic value calculated from the Discounted Cash Flow model with default parameters. In a discounted cash flow model, the future cash flow is estimated based on a cash flow growth rate and a discount rate. The cash flow of the future is discounted to its current value at the discount rate. All of the discounted future cash flow is added together to get the current intrinsic value of the company.

Usually a two-stage model is used when calculating a stock's intrinsic value using a discounted cash flow model. The first stage is called the growth stage; the second is called the terminal stage. In the growth stage the company grows at a faster rate. Because it cannot grow at that rate forever, a lower rate is used for the terminal stage.

GuruFocus DCF calculator is a two-stage model. The default values are defined as:

1. Discount Rate: d=12%

2. Growth Rate in the growth stage: g1=12.30%
Growth Rate in the growth stage = average free cash flow growth rate in the past 10 years. If it is higher than 20%, we use 20%. If it is less than 5%, we use 5% instead. => Average Free Cash Flow Growth Rate in the past 10 years was 12.30% which is less than 20% and higher than 5% => Growth Rate: 12.30%

3. Years of Growth Stage: y1=10

4. Terminal Growth Rate: g2=4%

5. Years of Terminal Growth: y2=10

6. Free Cash Flow per Share: fcf=$13.377.
However, GuruFocus DCF calculator is actually a Discounted Earnings calculator, the Earnings Per Share without NRI is used as the default. The reason we are doing this is we found that historically stock prices are more correlated with earnings than free cash flow.

All of the default settings can be changed and the results are calculated automatically.

Berkshire Hathaway Inc's Intrinsic Value: DCF (FCF Based) for today is calculated as

DCF (FCF Based)=Free Cash Flow per Share*{[(1+g1)/(1+d)+(1+g1)^2/(1+d)^2+...+(1+g1)^10/(1+d)^10]
+(1+g1)^10/(1+d)^10*[(1+g2)/(1+d)+(1+g2)^2/(1+d)^2+...+(1+g2)^10/(1+d)^10]}

set x = (1+g1)/(1+d) = (1+{g1})/(1+0.12) = 1.00267857143
and y = (1+g2)/(1+d) = (1+0.04)/(1+0.12) = 0.928571428571

DCF (FCF Based)=Free Cash Flow per Share*{[x+x^2+...+x^10]+x^10*[y+y^2+...+y^10]}
=Free Cash Flow per Share*[x*(1-x^10)/(1-x)+x^10*y*(1-y^10)/(1-y)]
=13.377*17.1372
=229.24

Margin of Safety (FCF Based)=(DCF (FCF Based)-Current Price)/DCF (FCF Based)
=(229.2443244-181.63)/229.2443244
=20.77 %

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.


Explanation

Unlike valuation methods such as Net Current Asset Value, Tangible Book Value per Share, Graham Number, Median Ratio etc, discounted Cash Flow model evaluates the companies based on their future earnings power instead of their assets.


Be Aware

What you need to know about the DCF model:

1. The DCF model evaluates a company based on its future earnings power
2. Growth is taken into account; therefore a faster growth company is worth more if everything else is the same.
3. Since we are projecting future growth, it is assumed that the company will grow at the same rate as it did during the past 10 years. Therefore this model works better for the companies that have relatively consistent performance.
4. The DCF model works poorly for inconsistent performers such as cyclicals.
5. What discount rate should you use? Your expected return from the investment is a good discount rate assumption.
6. A larger margin of safety should be required for companies with less predictable businesses.

You can screen for stocks that trade below their Intrinsic Value: DCF (FCF Based) and Intrinsic Value: DCF (Earnings Based) with the GuruFocus All-in-One Screener. Companies with a high Predictability Rank that trade at a discount to their Intrinsic Value: DCF (FCF Based) and Intrinsic Value: DCF (Earnings Based) can be found in the screen of Undervalued Predictable Companies.


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