Sunday, April 19, 2015 6:18:37 PM
By Brendan Mathews | April 17, 2015
Click For motley Link
Every year, I value Berkshire Hathaway (NYSE: BRK-B ) (NYSE: BRK-A ) using the "two-column" approach (if you're not familiar with this approach, don't worry, I'll explain it). About a year ago, I found it to be at least 20% undervalued at $116 per B-share. Fast-forward to 2015, and the B-shares have advanced 22% to $142. So I figured it was time to sharpen up my pencil and reestimate the value.
My conclusion: The stock is just as undervalued, even at today's higher prices.
My valuation approach
Berkshire is a huge company and notoriously difficult to value. Fortunately, Warren Buffett provides a pretty good framework for evaluating the intrinsic value. He laid it all out in his 2010 letter to shareholders. Basically, the value of Berkshire Hathaway shares comes down to two quantitative factors:
Investments per share
Operating earnings per share
Read on to see my math and assumptions, and feel free to use this two-column methodology to create your own valuation.
1. Investments per share
As of the end of 2013, Berkshire held $140,123 per A-share in investments (about $93 per B-share). That was an increase of 8% during the year. The portfolio of investments includes debt and stock in quite a few companies, but the "big four" are American Express, Coca-Cola, IBM, and Wells Fargo. Most of these investments are liquid with reliable market prices. Thus, I simply value the investment portfolio at $93 per B-share.
2. Operating earnings per share
During 2014, Berkshire's operating businesses generated $10,847 per A-share in pre-tax earnings (or $7.23 per B-share). This represented 19% growth over the previous year.
So, what is $7.23 in pre-tax earnings per B-share worth? The S&P 500 trades at 20 times after-tax earnings, or 13 times pre-tax earnings if you assume a 33% tax rate. Some might argue that since Berkshire's collection of businesses are of higher quality than the index's, they deserve a premium. Some might also argue the index is overpriced at the moment. I won't delve into that debate, which is highly subjective by nature. I'll just be conservative and assume Berkshire's operating businesses are worth at least 10 times pre-tax earnings, or $72 per B-share.
Foolish takeaway
If I sum up $93 per B-share in investments and $72 per B-share for the operating businesses, that gives me a grand total of $165 per B-share. That's 16% more than the current trading price of $142 per B-share. That tells me Berkshire Hathaway still looks attractive, even if I calculate the value with a very conservative set of assumptions.
TRUTH
I've never claimed to have all the answers but feel i'm beginning to corner the market in questions worthy of them.
Recent BRK.A News
- Intel Secures $3.5 Billion Subsidy, Stellantis Backs EU Emissions Targets, BP and Apollo Reach $1 Billion Deal • IH Market News • 09/16/2024 10:03:27 AM
- Big Lots Falls 27%, Considers Bankruptcy; DraftKings Acquires Simplebet, Berkshire Hits $1 Trillion • IH Market News • 08/29/2024 10:06:50 AM
- Toyota Reports Another Global Production Decline, Delta Sues CrowdStrike, Meta Launches AI Studio for Custom Chatbots • IH Market News • 07/30/2024 10:00:51 AM
- Berkshire Sells BofA Holdings, Ryanair Shares Drop 12%, Delta Still Struggling After IT Disruption • IH Market News • 07/22/2024 09:44:17 AM
- Darden Acquires Chuy’s for $605M, BYND Drops 14% Amid Debt Restructuring, Petco Appoints Ex-Five Below CEO • IH Market News • 07/18/2024 09:59:44 AM
- Match Group Soars 8% Amid Potential Sale Pressure; Deutsche Bank Anticipates 2Q Loss, and More • IH Market News • 07/16/2024 10:10:09 AM
- Doordash and Deliveroo Terminate Talks; Universal Announces UK Theme Park Plan, and More News • IH Market News • 06/26/2024 11:08:35 AM
- SolarEdge Stock Falls 13%, Wegovy Approved in China, Grail Nasdaq Debut, Apple Rejects Meta Chatbot • IH Market News • 06/25/2024 10:36:11 AM
- Fisker Files for Bankruptcy, Chegg Stocks Rise on 23% Workforce Reduction, and More • IH Market News • 06/18/2024 11:02:13 AM
- Paramount Ends Skydance Talks, Oracle Shares Surge 8.7% on New Partnerships, and More News • IH Market News • 06/12/2024 11:19:10 AM
- NJASAP OFFICER ELECTION CONCLUDES WITH MEMBERSHIP MANDATE • PR Newswire (US) • 06/11/2024 05:40:00 PM
- Apple Showcases AI at WWDC 2024, Nvidia Stock Split Starts Today, and More News • IH Market News • 06/10/2024 11:29:44 AM
- NetJets launches assault on elected pilot union official • PR Newswire (US) • 05/22/2024 10:04:00 PM
- Chubb Stock Soars 9% with Berkshire Acquisition, AST SpaceMobile jumps 37% on AT&T deal, and More News • IH Market News • 05/16/2024 11:27:07 AM
- Perficient Stock Soars 52.9% Post-Acquisition; Luminar Declines 10% Amid Workforce Cutbacks, and Other News • IH Market News • 05/06/2024 12:09:00 PM
- Philips Stocks Soar 47% Following US Deal, Tesla Bolsters Presence in China, and More News • IH Market News • 04/29/2024 11:11:24 AM
- Paramount’s Shares Surge Following Sony and Apollo’s Joint Bid; ISS Backs Berkshire Hathaway Director Re-election, and More • IH Market News • 04/19/2024 11:31:22 AM
- Unilever Initiates Ice Cream Division Spin-Off and Announces Job Cuts; Berkshire Ramps Up Share Buyback Efforts, and More • IH Market News • 03/19/2024 11:33:10 AM
- Tesla Exits Market Top 10, Victoria’s Secret Stock Tumbles 30% on Weak Forecast • IH Market News • 03/07/2024 10:43:17 AM
- U.S. Stocks May Lack Direction Following Yesterday’s Modest Pullback • IH Market News • 02/27/2024 02:14:46 PM
- Cisco Systems Stock Drops 5% Following Restructuring Plan, Berkshire Trims Apple Stake, and Latest News • IH Market News • 02/15/2024 11:34:25 AM
- NetJets' sterling safety record at risk as Fractional threatens litigation against its Pilot Union • PR Newswire (US) • 01/26/2024 01:00:00 PM
- NetJets threatens litigation over alleged slowdown • PR Newswire (US) • 01/19/2024 10:15:00 PM
- Wall Street Highlights: Tesla Cuts Prices in Germany, Interactive Brokers Increases Revenue by 17%, and More • IH Market News • 01/17/2024 11:33:30 AM
- Wall Street Highlights: Apple Cuts iPhone Prices in China, Microsoft Launches Copilot Pro Subscription, and More • IH Market News • 01/16/2024 11:15:52 AM
VHAI - Vocodia Partners with Leading Political Super PACs to Revolutionize Fundraising Efforts • VHAI • Sep 19, 2024 11:48 AM
Dear Cashmere Group Holding Co. AKA Swifty Global Signs Binding Letter of Intent to be Acquired by Signing Day Sports • DRCR • Sep 19, 2024 10:26 AM
HealthLynked Launches Virtual Urgent Care Through Partnership with Lyric Health. • HLYK • Sep 19, 2024 8:00 AM
Element79 Gold Corp. Appoints Kevin Arias as Advisor to the Board of Directors, Strengthening Strategic Leadership • ELMGF • Sep 18, 2024 10:29 AM
Mawson Finland Limited Further Expands the Known Mineralized Zones at Rajapalot: Palokas step-out drills 7 metres @ 9.1 g/t gold & 706 ppm cobalt • MFL • Sep 17, 2024 9:02 AM
PickleJar Announces Integration With OptCulture to Deliver Holistic Fan Experiences at Venue Point of Sale • PKLE • Sep 17, 2024 8:00 AM