Investment Ideas & Company ResearchWarren Buffett

Berkshire Hathaway is Safe and Cheap

I own Berkshire Hathaway stock. In fact, it’s a stock I bought recently for the first time ever, despite following it for years. I think earlier this year it became (and to a large extent still is) far too cheap. It’s not a stock that I think has huge upside, but it is a stock that I think has no downside. (That said, I do think there is enough upside to get plenty excited). In proper investment parlance, the risk/reward of BRK is tremendous.

BRK is one of the most talked about stocks in the value investing community, and so I was hesitant to even put a post together, but as I read through the annual report and 10-K a couple weeks ago, I jotted down four main reasons why I think Berkshire is an attractive investment at these prices.

I’ll outline some comments in this post stating why I like the company and the current stock price, and then in a future post or two I might discuss in more detail a few things I noted while reading the annual report and 10-K.

Berkshire is attractive for four general reasons:

  • Cash-rich balance sheet
  • Strong earning power
  • Capital allocation (Buffett’s potential to capitalize on downturns)
  • Current stock price—Almost $100 of cash and investments per share and less than 7 times earnings for good businesses with above average ROE’s and a history of strong earnings growth

Note: everything related to per share numbers will be in B shares (which are 1/1500th of A shares).

Cash-rich Balance Sheet

Adjusting for the recent Precision Castparts acquisition which was finalized after 12/31/15, Berkshire has $98 per share in cash and investments. The balance sheet has an excess cash hoard of around $40 billion, and this cash pile grows at a rate of around $1.25 billion per month (this adds around $15 billion, or $6 per share of cash to the balance sheet each year that Buffett can reallocate or just let build).

Consider this: at the current rate that free cash is building up inside Berkshire, it will take just over 5 quarters to make back the entire amount of cash they used to fund the PCP acquisition (the largest in BRK history).

The balance sheet is one huge competitive advantage for Berkshire. Should trouble develop in the economy or if markets fall apart, Berkshire has the opportunity to create enormous value for shareholders by lending money to firms in need (and extracting a heavy toll for such funding), making acquisitions, buying stocks on the cheap, or even using a few months’ worth of free cash flow to buy back BRK stock if it trades much lower than the current quote.

Strong and Diversified Earning Power

Unlike many conglomerates, BRK has built a collection of quality compounding machines that produce copious amounts of cash flow that grows over time at a steady clip.

Insurance Businesses

Berkshire’s insurance business (with over $110 billion of stated net worth) is not only the largest insurance company in the world, but also one of the most profitable. It has produced 13 consecutive years of underwriting profits, and while this yearly streak will come to an end at some point as insurance markets continue to soften, over time these collection of assets will remain very profitable. Over this 13-year run the insurance businesses have produced a total of $26 billion of pretax profits for Berkshire and currently hold $88 billion in float—money that has been paid by policyholders and reserved by Berkshire for future claims.

This float is listed on the balance sheet as a liability, but in reality—as long as the insurance business continues to collect premiums and underwrite profitably—it is a valuable asset.

Buffett illustrates this value by calling float a revolving fund—each day Berkshire pays out millions of dollars of claims, which reduces float. But each day millions of dollars of new business is written, which adds to float. As long as policies are written profitably (premiums collectively offset claims and operating expenses), and as long as new premiums coming in replace claims going out, then float will be both interest-free and won’t have to be paid back.

As Buffett said in the recent letter: “Owing $1 that in effect will never leave the premises—because new business is almost certain to deliver a substitute—is worlds different from owing $1 that will go out the door tomorrow and not be replaced.”

So $1 of float is listed on the liabilities side of the balance sheet alongside $1 of debt—but the former is not only free but actually produces profits and will never have to be paid back. This is one reason why Buffett feels the book value (which counts this $88 billion as a full liability) understates the economic value of Berkshire.

Operating Businesses

Berkshire’s “Big Five” (BNSF, BH Energy, Marmon, Lubrizol, and Iscar) earned $13.1 billion pretax in 2015. This will soon be the “Big Six” as PCP will be included this year, and if we assume PCP’s earnings this group made over $15 billion. Buffett puts this in perspective in his letter by pointing out that a decade ago only BH Energy existed at Berkshire, and made less than $400 million. So close to $15 billion of earning power has been created in the last decade with virtually no dilution (5 of the Big 6 were purchased all-cash, and BNSF required a minor issuance of new shares).

Earning Power per Share

Including the underwriting profits (but excluding dividend and interest income) from the insurance businesses, BRK had about $8.20 per share in pretax profits in 2015. If we assume no earnings growth and include the pretax income that Berkshire will receive from PCP, we get to roughly $9 per share of pretax earnings.

Buffett has often talked about the intrinsic value of Berkshire Hathaway and how he and Charlie Munger think about it. They basically think of BRK’s value in two buckets: cash/investments per share and earnings per share. Since 1970, investments per share have compounded at 18.9% annually and earnings per share have grown at 23.4% per year. So it’s no surprise that BRK’s intrinsic value and stock price have also compounded at 20% or so for the past half century.

Of course, these rates of compounding are history, but we can still look at the two buckets and clearly see a huge margin of safety from not only a fortress balance sheet but also an earnings machine that is getting very low valuations at the current stock price.

Attractive Current Valuation

For $140 per share, we are getting $98 of cash and investments, and roughly $9 per share of pretax earning power. So backing out the investments per share, we are paying roughly 4.5 times pretax earnings for Berkshire’s businesses.

At Berkshire’s tax rate of around 30%, this is a P/E of around 6.5 for a diversified group of quality businesses that produce above average returns on equity and—as a group—are growing their earning power. Seems like a good bet.

Buffett once said he likes to pay 10 times pretax earnings for good businesses. I think this is because he thinks the businesses he buys can a) grow their earning power over time, and b) are probably worth somewhat more than 10 times pretax earnings.

At the current price, we’re getting these businesses for half of this general rule of thumb.

Book Value

“Today, the large—and growing—unrecorded gains at our “winners” make it clear that Berkshire’s intrinsic value far exceeds its book value. That’s why we would be delighted to repurchase our shares should they sell as low as 120% of book value. At that level, purchases would instantly and meaningfully increase per-share intrinsic value for Berkshire’s continuing shareholders.” –2015 Shareholder Letter (emphasis mine)

One reason why Berkshire’s book value understates the intrinsic value is that businesses that Berkshire buys never get marked higher, despite as a group growing earning power each year and becoming much more valuable as time goes on.

Another reason Berkshire’s true value far exceeds its book value is the insurance business. Earlier I mentioned the value of the float (which is listed as a liability), but we can also look at the asset side of the insurance balance sheet, where $15 billion of goodwill has been sitting since 2000 and has never been marked higher, despite float (and earning power) tripling during that time.

 “Charlie and I believe the true economic value of our insurance goodwill—what we would happily pay for float of similar quality were we to purchase an insurance operation possessing it—to be far in excess of its historic carrying value. Indeed, almost the entire $15.5 billion we carry for goodwill in our insurance business was already on our books in 2000. Yet we subsequently tripled our float. Its value today is one reason—a huge reason—why we believe Berkshire’s intrinsic business value substantially exceeds its book value.”

Berkshire’s current book value (using the current price for KHC shares) is around $105 per share. The stock price is around $140, or roughly 1.3 times book, just a touch above the 1.2x level where Buffett thinks is significantly undervalued and would buy back shares.

One thing to consider: just from cash building up throughout the year, book value will grow to around $111 per share by year end. Who knows what the $98 investment portfolio will do in the next year, but over time I would expect this to grow at rates similar to the S&P 500, or say 6-8% annually. But assuming no change in the investments per share, we still get to around $111 per share in book value just through retained earnings by year end. This puts the level Buffett would be willing to buy shares at around $133. And it continues to grow from there as earnings continuing building up. In less than 2 years the current stock price will be less (possibly much less) than 1.2 times book value even if the investment portfolio goes nowhere. Time is the friend of the wonderful business.

While it’s certainly possible for the stock price to fall below (maybe significantly below) this hypothetical buyback price over temporary short-term periods, over time I think there is very little chance of losing any money at the current price. If the S&P drops 25%, BRK will certainly fall as well. But if BRK stays much below $125 or so for very long, Buffett will likely begin buying shares, which will be very positive for earning power per share and also value per share. (Note: Don’t think of this as a “Buffett put”—he has no interest in “propping up” the stock. He’s willing to buy shares at 1.2 times book because he thinks that is a bargain price that is much below intrinsic value).

I think the current price is cheap, but the mid-120’s was a no-brainer.

Buffett’s Reputational Value

Berkshire can create value based on Buffett’s name and reputation. This is especially true during troubled times (see GE, BAC, GS deals to name a few). But even in normal times, Buffett’s name has created enormous value for shareholders, as he can partner with owner/operators like 3G at attractive terms. Consider the 3G partnership that started with Heinz and is now Kraft Heinz (KHC):

Buffett invested a total of:

  • $9.5 billion in common stock
  • $8.0 billion in preferred stock
  • $17.5 billion total

This total investment of $17.5 billion is now worth $33 billion, and has achieved an IRR of around 45%.

(Berkshire owns 325.4 million shares of KHC that is currently valued at $25.1 billion before reserving for taxes—and this resulted from a $9.5 billion initial investment).

Berkshire has also collected around $1.5 billion of dividends from the preferred stock.

By the way, this $33 billion of value is carried on BRK’s books at $23 billion, so this is an additional $10 billion gap between book value and intrinsic value.

To Sum It Up

Berkshire is a fortress that’s undervalued. It’s too big to become a home run, but one of my favorite investment situations is where I see almost no chance of permanent downside and very high chances of decent gains over the next couple years. I was buying BRK thinking there was virtually no chance of losing money and a decent chance at 50% gains in 3 years. Sometimes, the market corrects itself quickly, which has the impact of “pulling forward” two or three years’ worth of gains in a year or so.

But while we wait for the upside to occur, Berkshire is a safe and cheap stock whose value will actually increase in the event of the “black swan”, a bear market in stocks, or an economic recession.

———

John Huber is the portfolio manager of Saber Capital Management, LLC, an investment firm that manages separate accounts for clients. Saber employs a value investing strategy with a primary goal of patiently compounding capital for the long-term.

I established Saber as a personal investment vehicle that would allow me to manage outside investor capital alongside my own. I also write about investing at the blog Base Hit Investing.

I can be reached at john@sabercapitalmgt.com.

25 thoughts on “Berkshire Hathaway is Safe and Cheap

  1. As always, great post. The “Heads I win, tails I don’t lose very much” approach to investing is so deeply under appreciated, but is likely the straightest path to long-term outperformance. Prudent investors view intrinsic value as a range (or distribution of probabilities), rather than a specific number, and only participate when the odds are in ones favor. In this way, investing is more similar to poker, where expected value dominates the thinking, rather than roulette where 100% conviction does.

    Buffett and Munger have been practicing this approach for decades, with Munger recently discussing it as it regards IBM:

    “I am neither a believer or a disbeliever…They have an old business from which cash continues to flow…
    “I would say the jury is out.. It may work in a mediocre way, it may work big, I just don’t know.”

    i.e., cheaply priced company earning substantial profits on a small capital base. Any upside or growth in new businesses is gravy. As you clearly laid out, Berkshire is currently valued this way, and I’d also agree with Munger on IBM, along with a few others (AAPL, PLOW, AXP).

  2. As always, great post. The “Heads I win, tails I don’t lose very much” approach to investing is so deeply under appreciated, but is likely the straightest path to long-term outperformance. Prudent investors view intrinsic value as a range (or distribution of probabilities), rather than a specific number, and only participate when the odds are in ones favor. In this way, investing is more similar to poker, where expected value dominates the thinking, rather than roulette where 100% conviction does.

    Buffett and Munger have been practicing this approach for decades, with Munger recently discussing it as it regards IBM:

    “I am neither a believer or a disbeliever…They have an old business from which cash continues to flow…
    “I would say the jury is out.. It may work in a mediocre way, it may work big, I just don’t know.”

    i.e., cheaply priced company earning substantial profits on a small capital base. Any upside or growth in new businesses is gravy. As you clearly laid out, Berkshire is currently valued this way, and I’d also agree with Munger on IBM, along with a few others (AAPL, PLOW, AXP).

  3. Hi John, great work as usual, keep it up! I am not on top of the BRK valuation but if NAV per share is $105 but cash and investments is $98 then that seemingly implies NAV per share of $7 for the operating businesses which seems incorrect? I am probably missing something and would appreciate your thoughts.

    1. Hi Richard,

      The book value is 103, or 105 if you mark the KHC price to current market. This book value per share obviously consists of the assets (cash, receivables, securities, property, etc…) less the liabilities (payables, unpaid claims, debt, etc…). So on the asset side of the balance sheet there includes $98 per share of cash and investments, and also businesses. But these get offset in part by the liabilities. Not sure if that answers your question?

      What I was doing in my post is simply valuing the company the way Buffett has often talked about it: by taking BRK and looking at two separate companies (or “buckets” of value). One is the $98 per share of cash and investments. The other is a collection of operating businesses that employ a variety of assets (funded by debt and equity) that collectively produce around $9 per share of pretax earnings.

      So it’s just a way to look at what the company consists of and where the value comes from.

  4. Good write up. I have never spent a huge amount of time reading Berkshire filings though I do gloss them from time to time. Berkshire does look cheap by conventional standards.

    Re: the float. A technical question. On the asset side of the balance sheet is the 15.5 billion in ‘good will’ the only way he records the value of that float? In which case Berkshire records the float as a net liability of ~70 billion. Is that correct?

    1. Well, no the goodwill is basically just the aggregate amount of money that BRK has paid above and beyond the book value of the businesses it has acquired. It doesn’t have anything to do with the float. The float is a liability on the balance sheet (basically the unpaid claims that will be paid out to policyholders). But the premiums that came into Berkshire are cash that it gets to invest for its own benefit. So these premiums (cash) are on the asset side of the balance sheet. Some of it is cash, much of it is invested in securities such as stocks and bonds, etc…

      So the float is listed as a liability, but it is invested in assets that reside on the balance sheet. What Buffett is saying is that these unpaid losses should not be valued as a full liability (the same way debt or other liabilities are). This is because the float doesn’t have to be paid back if new premium volume offsets claims and underwriting is done profitably. In this case, float has no cost of capital, unlike debt which carries a cost. Actually, float not only has $0 cost of capital in this case, but has negative cost (BRK gets paid to hold it). As Buffett once said about float: “it has had a value to Berkshire greater than an equal amount of net worth would have had.”

      Not sure if that answers your Q, but hopefully that helps. Thanks for reading Ben.

  5. Thanks for the article – it’s not easy to condense it such a simple & pragmatic way an analysis, but this is really excellent.

    I do have a question though on how you get to the 98$ cash & investments, as I made my own intrinsic valuation estimate a few weeks ago:
    – start of page 11 (all page numbers given are pdf page numbers) cash & investments are given as $159,794 per A share. Divide by 1500 to get B share equivalent which is $106,5 roughly
    – Precision Cast Parts acquisition cost is stated on page 6 as “for more than $32 billion of cash”, but I saw other articles like Bloomberg saying $37,2 billion. Let’s say $32 billion.
    – Page 38 gives number of average equivalent class A shares outstanding = 1,643,183
    – Equivalent A share cost per share of Precision = $19,474
    – Equivalent B share is 1500th of prior figure which is $13
    – 106 – 13 = $93,50 roughly…

    Thanks,

    Seamus

    1. Yeah good question Seamus. The PCP acquisition was funded with around $20 billion of cash and around $10 billion of debt. (The 10-K lists the exact figures, I’m going off memory). So subtracting roughly $20 billion of cash (or about $8 per B share), gives us around $98 per share of cash and investments.

  6. It’s an interesting analysis to simply add up all of Berkshire’s investments in public equities at market and then add all the control investments at cost and then subtract debt (not liabilities).

  7. Amazing post. Love BRK stock but never purchased yet. I will wait a bit for a dip probably until the Jan-Feb price range.

    I feel so lucky to discover your blog! Just read your ROE related posts and they are amazing as well.

    Cheers!

    BeSmartRich

  8. Nice article which got me thinking. If BRK is such a downside protected company, it should have a low beta to the S&P. It really doesn’t. Beta using daily returns is about 83% for the last two years. Here’s my guess why.

    The key to BRK is the return on the insurance float + BRK’s own capital. If interest rates are going to be lower for longer, this is bad for that return. With the Fed seemingly targeting the equity market, rate expectations rise and fall with the S&P – hence the beta. Also, capital moves into insurance as lower-risk alternatives lose appeal.

    The downside protection the authorities are giving to equities is bad for BRK in another way. With no good businesses in dire need of liquidity, Buffet has no one to save. He can of course still buy good companies whose owners want to be under his umbrella, but he pretty much pays fair price for them.

    On another note, I’m not enthralled with BRK’s operating companies. They are weighted to the industrial sector, and that sector has come under heavy foreign competition. BNSF is in particular trouble. It’s major business lines are coal and crude. These are down, and you can make a good case that they are down permanently. The recent change in oil prices, which I believe is long-term, has disadvantaged RRs vs. truckers.

    1. Hi Burt,

      Thanks for the comment. I think you and I have a different measure of risk. I don’t look at risk in terms of how the stock price behaves relative to the index. In fact, I had no idea what the beta is for BRK until you mentioned it. In general, I think it has far less downside than the average stock (or a basket of stocks that make up any particular index). I also think it probably has similar upside. If the market takes off to the upside, I’d probably expect BRK to perform somewhere in line with it. If the market tanks, BRK will significantly outperform. However, I’m not even that concerned with how the stock price reacts in the near term. I think the business will continue compounding value just about every year, and the stock price will follow. Last year, the stock dropped 15% while book value increased 6% or so. This made BRK a much better value than it was a year ago, especially at the price the stock was a couple months ago. As for the businesses, yes–there are certainly cyclical businesses that have current macro headwinds. But I don’t think this really concerns Buffett at all. BNSF is a major cog in the US economic supply chain, and it will continue to be that way for decades to come. Coal might be in secular decline, but I don’t think oil is. Production will rise and fall as it always has, but we’ll continue consuming oil at a rate of somewhere around 15-20 million barrels every day, as we have for decades. BNSF will get their fair share of that volume.

  9. Hey John,

    Interesting post. I am, though, shocked by the amount of “cash and investments” you are counting. $98 per B Share equivalent is just wrong, however you slice it. If you think of Berkshire as having a market cap of $333 billion, the 98/140 ratio you mention would imply them having $233 billions in cash and investments in the balance sheet. It does not make sense.

    Probably the mistake is coming from counting how much cash is in the insurance business, without deducting the liability side. It’s like saying a bank has a lot of cash that more than covers its market value, without looking at the liability side coming from the deposits. Does that make sense to you?

    To be fair, I agree that BRK is cheap and a great investment, but for other reasons. The book value is somewhere around $150k per A share, and buffet will buyback stock at some $180k, so the downside is limited.

    Let me know your thoughts. Best, Davi

    1. Hi Davi,

      The $98 per share is correct. In fact, as of year end there was $106 per share in cash and investments. If you take a look at the balance sheet, you will notice that there is in fact $246 billion of cash and investments on the balance sheet (there is actually more if you mark KHC to market).

      If you read the annual letter, take note of how Buffett himself references this: “In 2015, our per share cash and investments increased 8.3% to $159,794” (or $106.52 per B share).

      You can gain an understanding of how Buffett thinks (and how he recommends shareholders think) about intrinsic value. He divides BRK into two categories: investments per share and operating businesses. See page 113-114 of the annual report for a simple discussion of this.

      The $98 (as opposed to $106) comes from my estimate post-PCP acquisition (it took about $8 per share of cash but will add significantly to operating income).

      Regarding liabilities, I don’t think a bank’s liabilities are comparable at all to Berkshire’s liabilities. The insurance float is free and permanent (BRK actually makes money from the float, as it is a profitable insurance company). See my discussion on float in the post and why it shouldn’t be given the same economic value that other liabilities such as debt gets. It’s actually a source of value for Berkshire shareholders. My post on Markel a while back also explains float (http://basehitinvesting.com/markel-mkl-a-compounding-machine/). BRK has some debt, but it is supported (and paid for) by the operating businesses. This is why I think Buffett breaks out cash and investments–he considered that lump of sum as an uninhibited source of value for BRK.

      I see no reason why we shouldn’t evaluate BRK the same way Buffett does.

      Hope this helps. Thanks for the comment Davi.

  10. John — I realize that I’m a little late to the conversation. I’m a big fan of Berkshire, but I have a question about your back-of-the-envelope valuation. What are your thoughts in general, and in this case in particular, about subtracting cash from market price for purposes of a P/E valuation? I guess that the main argument against is if you don’t have confidence that it will be used to generate returns at the current ROE levels. Maybe in a case like Berkshire, where it’s helmed by one of the great capital allocators of all time, that’s not a concern (although even in that case, presumably Buffett isn’t making those decisions at his operating companies, so you have to be comfortable with those folks as well). However, what about more generally when you’re not dealing with a Warren Buffett caliber allocator. (Also, with respect to your point about Buffett buying at 10x earnings, it would be useful to know what the ROIC and growth figures are of the operative companies as a whole. That way, you could get a sense for how undervalued that 10x figure is).

    1. Yeah I think the way I wrote it up has caused a few people to question it, but I’m not looking at the two categories as two separate unrelated entities or businesses (so it’s accurate to say you can’t strip out the cash and dividend it to shareholders or something like that, because the cash/investments are required to hold against the insurance liabilities). I’m simply using the two buckets as sources of value for BRK shareholders, which is the way I think Buffett looks at it. Basically, the way I think about it is this: what do you get when you buy a share of BRK stock? You get around $100 per share in cash and investments. You also get a bunch of high quality businesses that have produced oodles of earnings over time. In addition, you also get an insurance business that has always been better than breakeven (if this continues into the future, then float is both costless and permanent). As long as this insurance company is profitable, the cash and stock portfolio can continue to compound over time and produce further value for shareholders (so this $100 per share of investments should be thought of as $100 of value). The operating businesses produce around $9 per share of pretax earnings (after paying for all the interest charges on the debt). So this too should be thought of as a source of value. People can make their own judgments about what this earnings stream should be valued at, or what the future prospects are for the investments and operating businesses, but because the insurance company has what amounts to permanent capital, I think Buffett thinks of the stock portfolio as an unencumbered source of value.

      As for the operating businesses, they are very good businesses on balance that produce cash earnings (BRK has $187 billion of retained earnings on the balance sheet, an astounding figure). These generally are good businesses that produce attractive returns on capital. Each one is different and they have varying degrees of quality, but on balance, it’s a collection of good businesses that will be earning much more in 5 to 10 years than they are now. To me, that’s why Buffett is willing to pay 10 times pretax (and often much more) for these businesses.

      Hope that helps. Thanks for the comment Zack.

  11. Hi John,

    excellent analysis!

    I do have a question about your comment as following:As Buffett once said about float: “it has had a value to Berkshire greater than an equal amount of net worth would have had.”

    Do you recall when Buffett actually said that? and what’s your understanding?

    I do agree ‘float’ is a very soft liability, or in fact an asset. But I don’t understand why it is more valuable than actual asset.

    Thanks,

    Xiang.

    1. Good question Xiang. I do recall Buffett saying that, and I think he’s repeated that general concept on numerous occasions–the quote is probably from one of the annual letters.

      The reason he is saying that is has more value than equity is because the insurance company has produced profits over time, and he expects this to continue going forward. So while the float is listed on the balance sheet as a liability (namely unpaid losses and unearned premiums), it is in economic terms a very valuable asset because of the fact that BRK is a profitable insurance business. The $88 billion of float is listed as liabilities that will eventually have to be paid out, but if BRK can write enough business to replace these payouts (i.e. bring in enough premiums to match the claims that go out the door) and if they can do this profitably (meaning premium volume exceeds claims and operating expenses), then this $88 billion will effectively never be paid back (it’s a revolving fund… dollars will leave, but new dollars will come in). This is valuable because it effectively means that the assets BRK holds using this float (cash and investments) are assets that are not encumbered in any way (they’ll never have to be sold to pay for claims).

      And the reason I think Buffett calls it better than equity is simply because it has grown over time as well as been profitable over time, so float isn’t just free, it makes money for BRK.

      Hope that helps…

  12. Hi John,

    Thanks for your post – as always it is helpful and insightful. Have 2 questions here, just want to see if you have any views. First question is have you tried value Markel using Buffett’s idea of intrinsic value? Second question is have you tried to look at Berkshire from the lens of Greenblatt’s magic formula?

    Buffett’s approach is adding a) investment + cash per share and b) pre-tax EPS x a certain multiple (call it 8-10x) to get an intrinsic value. I think book value is getting more irrelevant over time as investment + cash per share falls in proportion, and book value of operating business can only be revised down but not up over time. In addition, goodwill and intangible assets are constituting a larger proportion of the book value of the operating business. I think the 1.2x P/B buyback yardstick is more of a convenience. As of July 11, 2016, I calculate that the investment + cash per share is around $97 for BRK/B (after KHC’s mark-to-market), and I agree with you that the pre-tax EPS share in 2016 is about $9 after taking into account PCP’s contribution. Hence the intrinsic value per share is around $169 – 187 (8-10x pre-tax EPS). That calculation is pretty straightforward.

    However, when I apply that analysis to Markel, it doesn’t make sense. Markel’s portfolio per share is $1,302/share in 2015. My calculation of Markel’s pre-tax EPS (excluding investment gain) is about $54 in 2015. Giving a 10x multiple the intrinsic value is high at $1,842 per share. I think I can’t just use $1,302/share as it is leveraged, but after deducting debt per share this figure is still higher than today’s share price. Does it suggest even the business is valued zero, the stock is still worth more? I don’t think this analysis is correct. However, if further adjustments are needed for Market, why don’t we need to adjust the intrinsic value calculations for Berkshire too? Berkshire also has debts.

    For the second question, although magic formula doesn’t work for financials, I have tried to do that on Berkshire and just to see how things go. At today’s share price of $144 that I paid, I get $97 investment plus cash, and I paid $47 for BRK’s operating business which generates $9 pre-tax EPS in 2016 (19% pre-tax earnings/EV yield). My calculation of invested capital per share of Berkshire is $13/share (Total assets – cash – investment – goodwill & intangibles – all liabilities excluding debts). That is a very high 69% ROIC. This would rank very highly in any magic formula table I think. Do you think this kind of analysis is correct?

    Cheers,
    TC

  13. John — I realize that I’m super late to the conversation here, but I was just reading up on BRK and ended up here. This is very helpful. One thing that I don’t know that I follow, however, and maybe I’m just missing something. But aren’t you using operating income here, which is an enterprise value metric? If so, don’t you need to adjust market cap not just by cash and non-operating assets but debt as well? In other words, shouldn’t you be adding debt to the market cap in order to compare your EBIT multiple?

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