Berkshire Hathaway Is Extremely Cheap

Stock in Warren Buffett's company is c-h-e-a-p. That is the view of Goldman Sachs (NYSE: GS  ) , which recently initiated coverage of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) with a 12-month price target of $152,000 on the "A" shares and $101 on the "B" shares, reflecting a 28% upside to current prices. Goldman's target is at the top of the range produced by the five analysts that follow Berkshire; the consensus average is $131,000. Are Berkshire shares the opportunity that Goldman describes?

Do Goldman's numbers add up?
I've done some work on Berkshire's valuation in the past, so Goldman's report was the opportunity to dust off the spreadsheet. Here are some results of my updated analysis:

 

% Days on Which the P/ BV Multiple* Was Lower Than Current Value (=1.34)

Average P/BV Multiple

Annualized Growth Rate in Book Value per Share**

Annualized Return, BRK-A Shares

Last 5 Years

21.0%

1.47

9.7%

7.1%

Last 10 Years

10.5%

1.59

9.2%

8.2%

Last 20 Years

8.6%

1.72

16.3%

15.1%

P = price. BV = book value.
*Closing value. **Based on the book value-per-share figure at March 31, 2010.
Calculated based on data from CRSP US Stock Database, 2009, Center for Research in Security Prices (CRSP), The University of Chicago Booth School of Business, and Berkshire Hathaway financial reports.

A couple of remarks on this data:

  • Although Berkshire's average price-to-book value multiple has been falling over the years, the current value is clearly at the low end of its distribution. Over the past five years, the multiple was higher on roughly four out of five trading days (based on end-of-day values).
  • The current multiple is at a 9% discount to its five-year average, and a 16% discount to its 10-year average.

One caveat with respect to this analysis: As Goldman rightly points out, "post the Burlington Northern acquisition, the contribution from non-insurance earnings will be larger than at any previous time in BRK's history ... [book value] ignores any increased value created within the operating businesses during the many years of ownership." In other words, the price-to-book multiple may become less and less relevant in valuing Berkshire shares.

Despite the impressive work that went into their initial report (71 pages' worth, no less!), not even the bright analysts at Goldman know where Berkshire's share price will be in 12 months' time. But that shouldn't matter to potential Berkshire investors (Buffett would be the first to say so). The relevant question is whether it is an attractive buy for the next 10 years or so.

The bottom line
At the end of January -- with shares at a price-to-book multiple slightly above the current value -- I wrote that it looked like a reasonable time to become a long-term shareholder, and I'm comfortable reiterating that opinion today. In an overvalued market, picking up shares in a business of Berkshire's quality at any discount to intrinsic value is an attractive proposition.

Warren Buffett acquired Burlington Northern because he has so much cash to reinvest, but the truth is he wishes he could buy these stocks.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Berkshire Hathaway is a Motley Fool Inside Value pick. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (49)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 14, 2010, at 1:21 PM, TheDumbMoney wrote:

    I think people are starting to worry about Buffett/Munger's successor. I think it is a mistake not to have floated a few possibilities to the market. People are discounting the drop that will occur particularly when Buffett passes on. The man may be the most marvelous capital allocator who has ever lived. It is statistically unlikely he will be alive ten years from now. Thus, BRK cannot trade at the same multiple of book value it traded at twenty years ago, even absent the business-composition change. 1.34 times book value is still 34% higher than book value, after all....

    On the other hand, the man is also great at picking people. So if you trust he has done that well, here, then this is just more of an argument that the company is trading at a discount. In other words, this may just be a situation where the market may be confusing uncertainty with risk.

  • Report this Comment On July 14, 2010, at 6:23 PM, ron153 wrote:

    Fairholme fund manager Berkowitz increased his Berkshire holdings substantially in the first quarter according to his SEC filings. He decreased his Class A share holdings, from 3,925 to 3,700, but increased his Class B share holdings from 241,507 to 3,763,000. On an equivalent basis, that's an increase of 52%. Fairholme has an excellent track record. Berkshire is one of the largest holding in my client portfolios.

    Ron Beasley

    www.rwbi.net

  • Report this Comment On July 14, 2010, at 7:22 PM, Starfirenv wrote:

    Well, since Buffett's BH owns an 11BILLION $ stake in GS (09' nos.) this is no surprise.

    I'd bet (Buffet's) Moodys rec's them both. What do you think? Incestious? GS was reccing ABACUS too. Has anyone looked into Moodys role in that?

  • Report this Comment On July 14, 2010, at 8:08 PM, WallstreetKnight wrote:

    Abacus was long before buffett had a stake in GS.

    So Moody's role in Abacus is irrelevant. No more conspiracy theories please.

  • Report this Comment On July 14, 2010, at 10:29 PM, susan400 wrote:

    dumber than a fool------LOST me,

    noe one especiall ya BRK owner wants a high price to book price,

    we want a Low/ price to book.

    objective is accumnulate value.

  • Report this Comment On July 15, 2010, at 7:35 AM, Gregeph wrote:

    You may also want to check out the detailed analysis and valuation of Berkshire done by investor Vinod Palikala. He values the B shares at $100. There's a link to the .pdf on my blog. http://gregspeicher.com/?p=491

  • Report this Comment On July 15, 2010, at 9:25 AM, TMFAleph1 wrote:

    @susan400,

    Could you explain your comment -- I don't understand it.

  • Report this Comment On July 15, 2010, at 11:49 AM, plange01 wrote:

    berkshire is extremely overpriced due to its recent purchase of burlington for top dollar in the middle of a depression! look for bershire to drop to the low 70's before its worth looking at...

  • Report this Comment On July 19, 2010, at 4:44 AM, Charnar wrote:

    Starfirenv-

    I'm relieved to see other entities agreeing with GS's assessment. If they were the only one's beating this drum I, too, would suspect incest. Have we learned nothing in the past 3 years about GS's scruples (or lack thereof)?

    Buffet essentially single-handedly saved GS from taking on too much water in '08 by investing $5B in Goldman while they were staring into the abyss, so GS owes him a reacharound. Big time.

    (Buffet was shrewd, though, practically extorting a great deal out of GS at the time. If only the government was this smart and realized that the "lender of last resort" ought to command a hefty interest rate! Especially when over-leveraged companies needing bailouts return to obscene profitability again!)

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