It's true: We talk about Warren Buffett a lot. Probably too much. We treat him like he walks on water. We pretend he makes Mother Teresa look like a jerk, Einstein like a dimwit, Soros like a lout. I'll be the first to admit the investment community can go overboard when it comes to worshiping the dear Oracle.
But what doesn't get talked about enough is Buffet's creation, Berkshire Hathaway
1. It's cheap
Berkshire's a big, rambling conglomerate made up of both investment securities and wholly owned businesses. Some of the largest are insurance subsidiaries where net income can be quite sporadic, so valuing this beast can be daunting.
Since Berkshire's a long-term oriented acquirer of assets where the goal is often price appreciation, not necessarily income, the most common valuation metric used is the price-to-book-ratio. This yields a more meaningful measure of value than, say, the P/E ratio.
The good news is that Berkshire trades at one of the lowest price-to-book values in years. Have a look:
|
Year |
Average Price-to-Book Value |
|---|---|
|
1994 |
2.06 |
|
1995 |
2.60 |
|
1996 |
2.50 |
|
1997 |
2.18 |
|
1998 |
2.47 |
|
1999 |
1.99 |
|
2000 |
1.53 |
|
2001 |
1.78 |
|
2002 |
1.84 |
|
2003 |
1.68 |
|
2004 |
1.74 |
|
2005 |
1.54 |
|
2006 |
1.53 |
|
2007 |
1.61 |
|
2008 |
1.58 |
|
Current |
1.29* |
|
Average |
1.87 |
Source: Capital IQ, a division of Standard & Poor's.
*As of Dec. 24, 2009.
That alone convinces me shares are a buy today.
Some might scoff, wondering why an insurance conglomerate deserves any premium to book value. That brings me to point number two.
2. Diversification
It's true that your average insurance company doesn't deserve much, if any, premium to book value. Berkshire's different. Though it's heavy in insurance -- particularly reinsurance -- the diversification of its business lines are immense. Some of its wholly owned subsidiaries include:
- Ben Bridge Jeweler
- NetJets
- The Pampered Chef
- See's Candies
- Business Wire
- Iscar (metal cutting tools)
- Clayton Homes
- Benjamin Moore (paint)
- Fruit of the Loom
- MidAmerican Energy (utilities)
- Burlington Northern Santa Fe (railroad, acquisition pending)
Plus, there's the $57 billion (as of Sept. 30) common stock portfolio that holds names like Coca-Cola
All of these are great businesses with real potential to grow above an average market return over the long haul. This is a quality franchise. Berkshire absolutely deserves a premium to book value, even without the "Buffett premium."
3. Panic overblown
Berkshire shares are down 30% since the end of 2007, probably because it was overvalued to begin with. But two other areas of concern have made investors anxious lately: derivatives that could cost the company billions, and Buffett's mortality.
In years past, Berkshire sold equity puts on global stock market indices. After markets crashed last year, it looked like the company could be on the hook for tens of billions of dollars in losses over the next decade or so. Scary, chilling, daunting ... I know.
But those threats have been nearly eliminated now that a) Buffett renegotiated the contracts at lower strike prices in exchange for nearer expiration dates, and b) global stock indices have rebounded 50%-60%. Even if markets crash anew, the renegotiated terms of the contracts mean the odds Berkshire will actually end up in the green are quite good.
Now on to Buffett's mortality. Yes, he's an old man and could very well pass in the coming years. Sad, but true. But how much will this impact Berkshire's long-term value? Far less than most think.
Berkshire is entirely decentralized, with managers of individual subsidiaries in charge of their own businesses. Buffett simply uses their profits to buy more stuff. True, he's the best at buying "stuff," and Berkshire sans Buffett won't have the growth potential it had in the past. But it won't destroy the earnings machine he's already created. This is an enduring engine that doesn't need Buffett, just as Wal-Mart
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