My updated estimate of Berkshire Hathaway's intrinsic value; Glenn Tongue on whether Warren Buffett will resume share repurchases; A 'new normal' at Berkshire; Answering marathon questions from readers
1) As longtime readers know, I've called Berkshire Hathaway (BRK-B) "America's No. 1 legacy stock" and "America's No. 1 retirement stock" for years...
Berkshire offers a unique combination of safety and growth. And more often than not, the stock also offers great value.
Here at Stansberry Research, my team and I recommended buying Berkshire's B-shares in the December 2023 issue of Stansberry's Investment Advisory.
At the time, Berkshire was trading at a 14% discount to intrinsic value. And subscribers who followed our advice since then are up 32%.
(Investment Advisory subscribers can access that original issue as well as the entire archive of monthly issues and our full portfolio of open recommendations. If you aren't a subscriber, you can find out how to become one as part of a special presentation right here.)
My last update on Berkshire was on August 6 after second-quarter earnings. At the time, I calculated that the stock was trading at a roughly 7% discount to my estimate of its intrinsic value.
As such, I said that the stock was a "comfortable hold" at that point. And as I also noted, "I usually think the best time to buy is when the stock is trading at a 10% or greater discount to intrinsic value."
I covered the company's latest earnings report in yesterday's e-mail. So today, I'll update my estimate of the stock's intrinsic value...
As longtime readers know, I take Berkshire's cash and investments per share and add the value of the operating businesses in order to estimate the stock's intrinsic value. (I believe CEO Warren Buffett uses a similar method.)
For the quarter that ended on September 30, cash and investments came in at about $492,500 per A-share. Since then, the stock portfolio has gained roughly $6,800 per share. So the total today is around $499,300.
Meanwhile, Berkshire's trailing-12-month pretax operating earnings were about $27,500 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 works out to $12.8 billion of pretax earnings.
This is conservative given that Berkshire's total insurance and investment income has averaged $11.8 billion annually over the past 10 years.
Keep in mind that investments and earnings per share ("EPS") are the two drivers of Berkshire's value...
In the chart below, you can see how these have done since 2002. Sure, there are occasional dips. But overall, this is an extraordinary record of consistent growth:
I've said previously that a conservative, below-market multiple for the stock is 11 times earnings. Using Berkshire's pretax operating earnings of about $27,500 per share, I get a value of roughly $302,500 per A-share.
Putting it all together...
I estimate Berkshire's cash and investments are worth around $499,300. And I estimate that the operating businesses are worth roughly $302,500. This comes to a total of about $802,000 per A-share (or $535 per B-share).
This table shows this calculation for each year-end since 2002:
Yesterday, Berkshire's A-shares closed at $712,170. That means the stock is trading at a roughly 11% discount to my estimate of intrinsic value.
With this new estimate in mind, I expect that Berkshire's stock will modestly beat the S&P 500 Index over the next five years. So if the S&P 500 compounds at 5%, I would expect Berkshire to do roughly 6% to 7%.
2) Considering all this, might Berkshire's shares be cheap enough for Buffett to resume buybacks?
I posed this question to my friend and former hedge fund partner Glenn Tongue. As he told me in a private e-mail:
As you showed in [your breakdown], 62% of Berkshire's value is embedded in marketable securities (37% cash, 25% stocks), while the remainder comes from wholly owned operating businesses.
The former has grown 10% this year, while the latter is up 6%. Blending these two components, that's 8.4% growth in intrinsic value over 10 months, or 10.1% annualized. Yet the stock is only up 4.6% year to date.
Buffett last repurchased shares in the second quarter of 2024, at around $630,000 per A-share ($420 per B-share). Five quarters later at 10% annual growth in intrinsic value equates to around $709,000 per A-share ($473 per B-share) – almost exactly where the shares are today.
As such, Glenn said that it wouldn't surprise him if Buffett resumes buybacks.
However, as he continued:
With Buffett turning over the CEO role to Greg Abel at the end of the year – less than two months from now – he may choose to let his successor decide what to do with Berkshire's astounding $382 billion cash hoard...
The big-picture takeaway is Berkshire is attractively valued and is growing at an impressive rate for a trillion-dollar market cap company. Messrs. Buffett and [Charlie] Munger have always said they wanted to build Berkshire into a powerful, resilient company with a Fort Knox balance sheet. No doubt they succeeded.
Thank you, Glenn!
3) A recent Wall Street Journal article discusses a "new normal" at Berkshire...
This chart from the article shows that Berkshire has substantially underperformed the market since Buffett announced at the annual meeting on May 3 that he would be stepping down at the end of the year:
And the article asserts that:
Berkshire is losing its "Buffett premium," or the higher price investors are willing to pay to own Berkshire's stock thanks to the longtime chairman and CEO's presence.
Berkshire's Class B shares have declined 11% since the May meeting, in part on concerns about how Berkshire will manage without Buffett, some analysts say. In comparison, the S&P 500 index has gained 20% during that stretch. For the year, Berkshire shares are underperforming the benchmark index by the widest margin since 2020.
I can't completely discount this theory. But I think there are two bigger reasons for Berkshire's underperformance over the past six months...
First, the stock had surged and gotten ahead of itself – to the point where it was overvalued.
As I wrote in my May 7 e-mail, "the stock is currently trading at a roughly 3% premium to my estimate of its intrinsic value." It has generally traded at a 5% to 15% discount in recent years, so it's now back to normal.
Second, the market's huge surge has been driven mostly by tech stocks – in particular, investor enthusiasm for AI. So it's not surprising that a stock like Berkshire is getting left behind over a short period of time.
4) Thanks to the many readers who congratulated me on my sub-four-hour marathon on Sunday, which I shared in yesterday's e-mail.
I'll address three questions that folks asked me:
How did I run 3 minutes and 16 seconds faster than I did 10 years ago?
I estimate that my shoes made a 15-minute difference – seriously.
My Pumas, the Nike Alphaflys, and other new shoes with special, bouncy foam and carbon-fiber plates make a huge difference. During my training runs, I'm a full minute per mile faster in these shoes relative to traditional running shoes.
And of course, a race like this is both a physical and mental challenge...
Over the past 10 years, while I didn't run any marathons until Sunday, I've been busy keeping up with similar challenges:
- Seven 24-hour World's Toughest Mudders (completing 60 to 80 miles and hundreds of obstacles each time and setting the all-time 50-plus age group record)
- Three dozen shorter Tough Mudder and Spartan races (including a few eight- and 12-hour ones)
- A lot of mountain/rock climbing (the Nose of El Capitan, Mont Blanc, the Eiger, Matterhorn, Mount Whitney, Mount Shasta, Forbidden Peak, and a dozen more – plus, just six weeks ago, over a nine-hour day followed by a 13.5-hour one, I summited the Grand Teton)
Every one of these climbs involved 10 to 24 hours of sustained physical exertion, so, frankly, four hours isn't that big of a deal. The only question was speed, based on how my legs would hold up.
What did I eat and drink?
A short answer is "not enough"...
I started the race weighing 165 pounds and ended it at 160 pounds. I lost 3% of my body weight due to dehydration (I'm now back to 165). I was drinking small cups of Gatorade at almost all of the stations every couple of miles along the course, but it clearly wasn't enough – I'm lucky I didn't "bonk."
On Saturday night, I carbo-loaded with spaghetti Bolognese. Four hours before my start on Sunday, I had my usual bowl of cereal after I woke up at 7:30 a.m. (granola, a handful of Frosted Mini-Wheats, Cheerios, and half a banana with almond milk). And 45 minutes before I started, I had a cinnamon-raisin bagel, some Gatorade, and, most importantly, four ibuprofen (800 mg).
I then took four more ibuprofen 2.5 hours into the race.
Message boards say this is dangerous. But I take lots of "vitamin I" throughout the year, so my body is used to it – and reducing pain and inflammation during the race is key (to be clear, this is not medical advice – I'm just saying it works for me).
During the race, I had a little packet of Skittles and some gummy candy in the back of my running shorts... but I didn't touch them.
Instead, I grabbed Nerds and gummy worms from spectators, which I chomped on constantly for the last 20 miles.
My running coach, Alan Bautista, ran with me from miles 12 to 17 and gave me Coke (which I enjoyed) and GU Energy Chews (which I didn't like – I tossed them aside after eating two and went back to Nerds).
My oldest daughter Alison and my wife Susan gave me a few more sips of Coke at miles 18 and 23. And a banana that someone handed me at mile 19 was key.
Am I going to do it again?
Next year's New York City Marathon is on Sunday, November 1. That's my 60th birthday, so I'm definitely going to run it again.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.