My updated estimate of Berkshire Hathaway's intrinsic value
For years, I have called Berkshire Hathaway (BRK-B) "America's No. 1 legacy stock" and "America's No. 1 retirement stock." And for good reason...
It offers a unique combination of safety, growth, and... more often than not... a great value.
That's why my team and I recommended buying Berkshire's B-shares in the December 2023 issue of Stansberry's Investment Advisory.
Back then, shares were trading at a 14% discount to intrinsic value. And subscribers who have followed our advice since then are up 29%.
(Investment Advisory subscribers have access to our original issue, plus the entire archive of monthly issues and the full portfolio of open recommendations. If you aren't a subscriber, you can find out how to do so by clicking here.)
I covered Berkshire's latest earnings report in yesterday's e-mail. So now it's time to update my estimate of the stock's intrinsic value...
My last update was on May 7 after first-quarter earnings. I concluded the stock was a hold at that point, not a buy. It was trading at a roughly 3% premium to my estimate of its intrinsic value. As I explained...
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.
It was a good call. After a period of substantial outperformance, Berkshire's stock had gotten ahead of itself...
It's down approximately 11% since that e-mail. Meanwhile, the S&P 500 Index rose 12%:
So, is the stock back to being a buy? Let's take a look...
To estimate Berkshire's intrinsic value, I take its cash and investments per share and add the value of the operating businesses. (I believe Warren Buffett uses a similar method.)
For the quarter that ended on June 30, cash and investments were around $454,000 per A-share. Since then, the stock portfolio has lost about $3,700 per share. So the total is about $450,000 today.
Trailing-12-month pretax operating earnings were about $27,200 per A-share.
I account for volatile insurance and investment income by subtracting it and then adding back half of the average over the past two years. That comes out to $12.6 billion of pretax earnings. That's conservative given that Berkshire's total insurance and investment income has averaged $11.7 billion annually over the past 10 years.
Investments and earnings per share ("EPS") are the two drivers of Berkshire's value. You can see in the next chart how they have done since 2002. Despite the occasional dips, it's an extraordinary record of consistent growth:
A conservative, below-market multiple for the stock is 11 times earnings. Using Berkshire's pretax operating earnings of about $27,200 per share, I get a value of around $299,000 per A-share.
Putting it all together... I estimate Berkshire's cash and investments are worth roughly $450,000 and its operating businesses are worth about $299,000. This comes to a total of about $749,000 per A-share, or $499 per B-share.
The table below shows this calculation for each year-end since 2002:
A-shares closed yesterday at $694,750. That means the stock is currently trading at a roughly 7% discount to my intrinsic-value estimate.
With this new estimate in mind, I think Berkshire's stock should modestly beat the S&P 500 over the next five years. If the S&P 500 compounds at 5%, I would expect Berkshire to do roughly 6%.
As longtime readers know, I usually think the best time to buy is when the stock is trading at a 10% or greater discount to intrinsic value. Today, that would be around $674,000 per A-share, or $449 per B-share.
With all this in mind, I would say Berkshire is still a "comfortable hold" right now. But if you're looking to buy the stock, you may not have to wait long for an attractive entry price.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.