My updated estimate of Berkshire Hathaway's intrinsic value
In the final installment of this week's series on Berkshire Hathaway (BRK-B), today I'll update my estimate of the company's intrinsic value...
(In yesterday's e-mail, I broke down the company's excellent first quarter. And in Monday's e-mail, I covered the highlights from my weekend trip to Omaha, Nebraska for Berkshire's annual meeting – my favorite event of the year.)
As a reminder, on Saturday the company released its first-quarter earnings report (you can see the full 10-Q here and the press release here).
For many years I've been calling Berkshire "America's No. 1 Retirement Stock" because it offers a unique combination of safety, growth, and undervaluation.
While the undervaluation right now isn't as great as it has been at certain times in the past, I still like the stock and think it should be the bedrock of any conservative portfolio.
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 first quarter, cash and investments were about $397,000 per A-share. Since then, Berkshire's stock portfolio has risen by about $7,000 per share, so that's about $404,000 today.
Berkshire's trailing 12-month pretax operating earnings were about $22,900 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 $7.8 billion of pretax earnings. I think this is conservative, given that Berkshire's total insurance and investment income has averaged $8.5 billion annually over the past 10 years.)
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 earnings per share of $22,900 to arrive at a value of about $252,000 per share.
Thus, my estimate of Berkshire's intrinsic value is $404,000 (cash and investments) plus $252,000 (operating businesses), for a total of roughly $656,000 per A-share or $437 per B-share.
This table shows this calculation for each year-end starting in 2002:
The A-shares closed yesterday at $611,258, meaning that the stock is currently trading at a roughly 7% discount to my estimate of its intrinsic value.
That's not a bad discount... But again, the undervaluation isn't as great as it has been at certain times in the past.
However, I still like the stock overall because it remains somewhat undervalued, is incredibly safe, and its intrinsic value is growing nicely.
Now, keep in mind that it's important to have reasonable expectations...
Given its moderate undervaluation today, I think over the next five years, Berkshire's stock is likely to do perhaps two percentage points (compounded annually) better than the S&P 500 Index. In other words, if the S&P 500 compounds at 5%, I would expect Berkshire to do 7%.
Best regards,
Whitney
P.S. On December 1, my colleagues and I recommended buying Berkshire's B-shares (at a 14% discount to intrinsic value) in that month's issue of Stansberry's Investment Advisory.
For our full breakdown on Berkshire, subscribers can read that Investment Advisory issue right here. (Since that issue, subscribers who followed our advice to buy the stock are up 13%.)
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