My updated estimate of Berkshire Hathaway's intrinsic value

Today, in my final installment of this week's series on Berkshire Hathaway (BRK-B), I'll update my estimate of the company's intrinsic value...

(If you missed them, in yesterday's e-mail, I dug into the Berkshire's first-quarter earnings report. And in Monday's e-mail, I covered the highlights from the company's annual meeting.)

As a reminder, Berkshire released its first-quarter earnings report on Saturday (you can see the full Form 10-Q here and the press release here).

If you've been following along with me over the years, you'll know that I've been calling Berkshire "America's No. 1 Legacy Stock" or "America's No. 1 Retirement Stock." That's because it offers a unique combination of safety, growth, and (at many times) undervaluation.

It's also why, on December 1, 2023, 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.

Since that issue, subscribers who followed our advice to buy the stock are up 42%.

(For our full breakdown on Berkshire, subscribers can read that Investment Advisory issue right here. And if you aren't a subscriber, you can find out how to gain instant access to it – along with the entire archive of monthly issues and the full portfolio of open recommendations – by clicking here.)

Turning to the stock right now, let's take a look at the valuation...

Longtime readers know that 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 a bit more than $457,000 per A-share. Since then, Berkshire's stock portfolio has declined by a bit more than $6,000 per share, so that's about $451,000 today.

Berkshire's trailing 12-month pretax operating earnings were about $26,600 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 $12.1 billion of pretax earnings. I think this figure is conservative, given that Berkshire's total insurance and investment income has averaged $9.7 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. You'll notice that 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 $26,600 to arrive at a value of a bit more than $292,000 per share.

Thus, my estimate of Berkshire's intrinsic value is roughly $451,000 (cash and investments) plus a bit more than $292,000 (operating businesses), for a total of roughly $743,000 per A-share or $495 per B-share.

This table shows this calculation for each year-end starting in 2002:

The A-shares closed yesterday at $768,000, meaning that the stock is currently trading at a roughly 3% premium to my estimate of its intrinsic value.

What this means is that I think over the next five years, Berkshire's stock is likely to match the performance of the S&P 500 Index. In other words, if the S&P 500 compounds at 5%, I would expect Berkshire to do the same.

Longtime readers know that I usually think the best times to buy are when the stock is trading at a 10% or greater discount to intrinsic value. And like I said, it's at a premium today.

But that certainly doesn't mean I think Berkshire is a sell at these levels...

First, I think my valuation estimate could prove to be conservative and that Berkshire's stock could surprise to the upside.

As I discussed yesterday, the company could start paying a dividend.

And Buffett's designated successor for the CEO position, Greg Abel, could start to play a more hands-on role in managing some of the businesses. In particular, Berkshire-owned railroad Burlington Northern Santa Fe is the only major railroad in North America that hasn't adopted "precision railroading" to dramatically boost its earnings – but it appears to be taking steps to do so, as I discussed in my October 16 e-mail.

Second, as I've written many times, the key to long-term investment success isn't just buying the stocks of great companies at attractive prices...

It's also holding them for many, many years (ideally decades) even through periods when they appear to be fully valued.

That's why my friend Chris Stavrou is a wealthy man today. As I described in my June 20 e-mail, he bought Berkshire's A-class shares a half century ago at $400. And while he has sold some along the way, he still owns the stock.

You only need one investment like this in a lifetime...

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.