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.
