Living in Nebraska in the 1980s and 1990s, I met several Nebraskans who had a chance to be early investors with Warren Buffett, but regretted they passed up the opportunity. Most people felt Buffett's stock in Berkshire Hathaway (NYSE: BRK-B) was too pricey and stayed away.
Then I met a savvy business woman in Grand Island, Nebraska, who bought 100 shares of Berkshire Hathaway in 1981 and was worth $2 million by 1995. She sold a few shares to expand her own business but held most of her original shares because she saw so much promise in Buffett and Berkshire. She inspired me. I wanted to buy stock too, but I could not afford the A shares, at the time worth more than $22,000.
The stock climbed higher.
Then Buffett decided to issue B shares on May 9, 1996. As a newly married man, I didn't have much money. But I drained our bank accounts to buy four shares of Berkshire Hathaway Class B Shares for $1110 apiece. I did not want to be the person who looked back on life with regret. I was the only person in my circle of family and friends who decided to buy stock in Berkshire Hathaway through the Class B IPO in 1996. Sometimes you have to be different, even a rebel, to get ahead.
Those original four shares are now worth $22,546 after stock splits, or up 5 times our original investment of $4440. I believe Berkshire Hathaway remains a buy today. The stock has hidden value because businesses owned by the company are carried on the books at a discount to their intrinsic value. Buffett has created a deep bench of managers who will replace him after he is gone. He turned 83 on Aug. 30. Berkshire stock, at 1.39 times book value, carries a slight premium to its peers, but still has the value of having Buffett as chairman and CEO.
The Buffett legacy
Over the past 48 years Warren Buffett, has diversified his company by purchasing over 80 great businesses. His office in Omaha is lean and efficient with about 25 employees, but he has a deep bench of smart managers running Berkshire companies. Several of his managers have a reputation as leaders in their fields, including Matthew Rose, CEO of Burlington Northern Santa Fe, one of Buffett's best acquisitions in recent years.
To develop an even deeper bench, Buffett hired two investors, Todd Combs and Ted Weschler to help manage assets. Both were successful on their own, but now have the enviable opportunity of working under the Oracle of Omaha, managing at least $5 billion apiece. Last year, they both beat the S&P 500. I predict Buffett's protégés, who work in the same office with Buffett, will only get better. The succession plan includes making his son Howard Buffett chairman of the board, whose job will be to ensure the Buffett culture continues.
Buffett made a fortune in the insurance business. Geico continues to be one of his best profit centers. But I'm glad he diversified into utilities, industrial companies and transportation. BNSF is a huge money maker. "During the past two decades, however, we've increasingly emphasized the development of earnings from non-insurance businesses, a practice that will continue," the 2012 Annual Report said.
There are multiple examples of CEO's trying to be like Buffett in the field of acquisitions, but few have done it better than Buffett. He readily admits when he makes a mistake, but he doesn't make many. I live by several Buffett rules including "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."
The company really shines when there is a stock market crash, such as in 2008-09 when Buffett made several deals, including lending money to Bank of America (BAC +0.75%), Goldman Sachs and General Electric, earning 10% interest on those in loans, plus equity gains.
Berkshire's first-quarter earnings were up 51% to $2,977 per Class A or $1.98 per Class B share year over year.
Second-quarter earnings were up 46% to $2,762.84 per class A share or $1.84 per Class B share year over year.
Valuation
Berkshire Hathaway is valued at 1.39 times book value and a 15 P/E. The stock has traded as low as 1.15 times book and as high as 1.45. Buffett said the company would buy back shares at 1.1 times book.This gives investors a bit of protection, although buy-backs are no guarantee of holding up a stock price.
When compared with similar companies, Berkshire Hathaway carries a premium over Markel (MKL +1.03%), valued at 1.15 times book value and a 20 forward P/E ratio; and Leucadia National (LUK +3.37%), valued at 1.10 times book value and a 7.16 trailing P/E.
We can count on Buffett's book value to be an understatement of the real worth of his businesses. When I first bought stock in Berkshire Hathaway, I received "An Owners Manual," which described Buffett's view that intrinsic value is the "only logical approach to evaluating the attractiveness of investments and business." He states that Intrinsic value "is the discounted value of the cash that can be taken out of a business during its remaining life." Book value for a business is assets minus liabilities.
"Our March 31, 1996, book value of $15,180 far understates Berkshire's intrinsic value, a point true because many of the businesses we control are worth much more than their carrying value," Buffett wrote.
Book value has grown over 19.7% annually through 2012 since Buffett took over the company in 1965, but I believe the company's true worth is far more than the current stock price. Book value on June 30 was $122,899.
Conclusion
I would not recommend you drain all your bank accounts in order to buy the stock. However, if there is one stock to own for the long-term, it is Berkshire Hathaway. There is no company in the world quite like it. Prospects going forward are still good. Investors stand to benefit from Buffett's lifetime of acquiring great businesses.
Many of these businesses are carried on the books at a discount to their intrinsic value. I expect earnings to continue to grow as the economy improves.
