Berkshire Hathaway is 4.4% overvalued; Dinner tonight with Porter Stansberry and me
1) If you've followed my work for long, you'll know that at various points over the years I've called Berkshire Hathaway (BRK-B) "America's No. 1 Legacy Stock" or "America's No. 1 Retirement Stock." I say this because Berkshire offers a unique combination of safety, growth, and, at most times, undervaluation.
Last Tuesday, I analyzed the company's fourth-quarter earnings report. Today, I'll update my estimate of the company's intrinsic value...
When I last updated my estimate in my November 5 e-mail, I calculated that the A-shares (BRK-A) were worth $718,500 ($479 per B-share). The stock closed the previous day at $664,750, meaning that the stock was trading at a roughly 7.5% discount to my intrinsic-value estimate.
Since then, as I'll detail in a moment, Berkshire's intrinsic value has grown 3.3% – not bad for a single quarter (that's 14% compounded annually).
But the stock is up 16% since then, closing at an all-time high on Friday at $775,000, meaning it's now 4.4% overvalued – which doesn't happen very often.
Allow me to walk you through my calculations, and then I'll share my conclusion...
As longtime readers know, I've used a consistent method to estimate Berkshire's intrinsic value for the past two decades. I believe it's similar to the one CEO Warren Buffett uses: Take the cash and investments per share and add the value of the operating businesses.
At the end of the fourth quarter, cash and investments were about $454,000 per A-share. Since then, Berkshire's stock portfolio has increased by about $2,000 per share, so that's about $456,000 today.
Berkshire's 2024 pretax operating earnings were about $26,000 per share. (I adjust for volatile insurance and investment income by subtracting it and then adding back half of the average over the past two years, which is $11.7 billion of pretax earnings. I think this is conservative, given that Berkshire's total insurance and investment income has averaged $9.7 billion annually over the past 10 years, and the company is much larger now.)
The chart below shows how the two drivers of Berkshire's value – investments and earnings per share ("EPS") – have done since 2002. As you can see, there are occasional dips... But overall, these show an extraordinary record of consistent growth:
I apply a conservative below-market multiple of 11 times to Berkshire's pretax operating EPS of about $26,000, to arrive at a value of around $286,000 per share.
Thus, my estimate of Berkshire's intrinsic value is about $456,000 (cash and investments) plus roughly $286,000 (operating businesses), for a total of around $742,000 per A-share, or $495 per B-share.
This table shows this calculation for each year-end starting in 2002:
The A-shares closed Friday at $775,000, meaning that the stock is trading at roughly 4.4% above my estimate of its intrinsic value.
When my team and I recommended buying Berkshire's B-shares in our flagship Stansberry's Investment Advisory newsletter back in December 2023, we calculated that the stock was trading at a 14% discount to intrinsic value.
(Investment Advisory subscribers can read that full issue right here. And if you aren't a subscriber, you can find out how to become one – plus gain access to our entire portfolio of open recommendations – by clicking here.)
Since our recommendation, the stock has risen 44% – surpassing the strong 30% performance of the S&P 500 Index.
But now that it's trading at a 4.4% premium to its intrinsic value, is it time to dump Berkshire?
Not at all...
It simply means you should have modest expectations right now – namely, that Berkshire will likely perform in line with the S&P 500.
It's not a "buy" or "add to" right now, but if you've held it for a while and have nice gains, then hang on (especially if you'd pay capital-gains taxes if you sold it). It remains a good foundation for the portfolio of those practicing "stay rich" investing rather than "get rich" investing.
2) A final reminder: My old friend Porter Stansberry is hosting an intimate fundraiser dinner in New York City tonight at 6 p.m. to support my campaign for mayor. As he says:
I've learned a lot about Berkshire Hathaway from Whitney Tilson, who is probably the most famous "Buffett-watcher" on Wall Street. Tilson has been to every Berkshire annual meeting for the last 25 years and, you should know, he doesn't agree with my [Berkshire] analysis...
But we do agree that major changes are needed in New York City, where I am a part-time resident (Hudson Yards) and where Tilson is running for mayor. If you are a resident of New York City, I'd like to invite you to sit down with me and Tilson on March 3. I'll pay for dinner – but we need you to make a donation to Tilson's campaign.
Thank you, Porter!
If you'd like to join us, you can get more details here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.