My updated estimate of Berkshire Hathaway's intrinsic value; How I would change my portfolio allocation
Over the weekend, I attended the Berkshire Hathaway (BRK-B) annual meeting for the 27th time. And in yesterday's e-mail, I shared my thoughts on the meeting, the new CEO Greg Abel, and the company's first-quarter earnings.
Today, I'll take a look at the stock and update my estimate of Berkshire's intrinsic value...
I've long called Berkshire "America's No. 1 legacy stock"... But it has been a stinker over the past year, underperforming the S&P 500 Index by 40 percentage points since Warren Buffett announced he'd be stepping down at last year's meeting on May 3, 2025.
Since the all-time high closing price of $809,350 per A-share the day before the meeting, Berkshire's stock is down 13.2%. Meanwhile, the S&P 500 is up 26.6%:
I'm not surprised by this outcome. I was bullish on the market back then, but I saw that Berkshire, which had doubled over the previous two and a half years, had gotten ahead of itself.
In my May 7 e-mail last year, I calculated that the stock's intrinsic value was only $743,000 per A-share, meaning it was 8.9% overvalued at its peak.
But today, the situation has reversed – making the stock look attractive now...
As longtime readers know, to calculate my estimate of intrinsic value, I take Berkshire's cash and investments per share and add the value of the operating businesses. (I believe Warren Buffett has long used a similar method.)
At the end of the first quarter, cash and investments were $503,000 per A-share. Thanks to the market's strong performance since then, Berkshire's stock portfolio has gained roughly $10,000 per share. That brings the total to around $513,000.
Next, here's how I calculate Berkshire's pretax operating earnings for the quarter...
First, I take stated trailing-12-month operating earnings of $52.5 billion. Then I adjust for normalized earnings from Berkshire's insurance segment by subtracting $25 billion of profits from insurance underwriting and investments. Then I add back half of the average over the past two years, which is $13 billion. (I think this is conservative, given that insurance and investment income has averaged $11.5 billion per year over the past decade, and Berkshire is much bigger now.)
The result is adjusted pretax earnings of $40.5 billion, equal to $28,131 per A-share.
Investments and earnings per share ("EPS") are the two components of Berkshire's value, which you can see in the chart below. While there have been occasional dips, this is an extraordinary record of consistent growth:
A conservative, below-market multiple on Berkshire's earnings is 11 times. So at $28,131 in EPS, that equals $309,000 per A-share.
Putting it all together, we add cash and investments of $513,000 to the value of Berkshire's operating businesses of $309,000. This totals $822,000 per A-share and $548 per B-share.
Here's a table showing this calculation going back to 2002:
Yesterday, Berkshire closed at $702,790 per A-share. That means the stock is trading at a 14.6% discount to my estimate of intrinsic value.
So, in the past year, Berkshire has swung from being 8.9% overvalued to 14.6% undervalued. That's why it wasn't attractive then – but is today.
I'm especially bullish because in addition to today's discounted stock price, I'm optimistic that Abel can create value via operational improvements and capital allocation.
This combination leads me to believe that Berkshire's stock is highly likely to beat the S&P 500 over the next five years, perhaps by a margin of two to three percentage points. So if the S&P 500 compounds at 5%, I would expect Berkshire to do roughly 7% to 8% – with a bias toward the upside.
As a result, I want to update my thoughts on portfolio allocation...
In my August 19 e-mail, I discussed why, for the indexed part of my personal portfolio, I reduced the allocation in a traditional S&P 500 fund from 100% to 40%. I then put 40% in an equal-weight S&P 500 fund and 20% in an international fund.
Today, assuming the funds are in a tax-free retirement account, I would trim the two S&P 500 funds by 10% and add a 20% Berkshire stock position. This would result in a 30/30/20/20 allocation.
My Stansberry's Investment Advisory team and I recommended buying Berkshire's B-shares in late 2023, when they were trading at a 14% discount to intrinsic value. Subscribers who followed our advice since then are up 32%.
If you aren't a subscriber yet, you can find out how to become one right here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.