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What's Buffett's Berkshire Hathaway Worth?
03/26/2019 5:00 am EST
Berkshire Hathaway (BRK.B) traces its roots all the way back to 1839 as a textile manufacturer. Warren Buffett began acquiring its stock in 1962, eventually taking control of the company, notes Ben Reynolds, editor of Sure Dividend.
Since that time Buffett and Vice Chairman Charlie Munger have turned the business into one of the largest companies in the world. The $502 billion market cap company trades under two classes, an ‘A’ share and a ‘B’ share, which is pegged at 1/1,500th of an A share.
On February 23rd, 2019 Berkshire released Q4 and full year results for the period ending December 31st, 2018. Operating earnings for the quarter totaled $5.72 billion ($2.32 per share) against $3.34 billion ($1.35) in Q4 of 2017. For the year operating earnings totaled $24.78 billion ($10.05) against $14.46 billion ($5.86) in 2017.
Note that previously Warren Buffett had suggested that book value provided a reasonable, albeit imperfect, measure of Berkshire’s value over time. As such, we had been using this metric as a valuation yardstick for the security.
However, as of the most recent annual report, Buffett said that it was now time to abandon that practice. Given this stance, we have reverted to looking at operating earnings-per-share, excluding the impact of equity gyrations.
With the scores of operating businesses under Berkshire’s umbrella spanning the economy, along with a model of retaining all earnings coupled with a significant cash hoard that can fund future growth, we have projected mid-single digit improvements on the bottom line.
While Berkshire is exceptionally valuable, the security is not especially straight forward to value. Looking at the P/E ratio alone only tells half of the story. As such, here’s how we think about Berkshire’s valuation.
The company is composed of five main types of assets, highlighted in the overview above. We combine three of those parts — insurance subsidiaries, non-insurance subsidiaries and shared control businesses — as one valuation component.
This portion of the business provided operating earnings of $24.8 billion last year or $10.05 per share. If you apply a conservative valuation to that number, say 14 times earnings which incorporates both the idea of solid profitability mixed with some difficulty growing at the current size, you reach ~$347 billion or a ~$141 per share.
Next up is the collection of marketable investments, including American Express (AXP), Apple (AAPL), Bank of America (BAC), Coca-Cola (KO), Wells Fargo (WFC) and many more, which are independent from the operating businesses.
Those investments have a market value of $173 billion at the end of 2018. If the entire position was liquidated, the tax owed would total about $14.7 billion, bringing the value down to $158 billion or so. On a per share basis that works out to roughly $64.
Finally, you have Berkshire’s cash position which totaled $112 billion, plus another $20 billion in fixed-income instruments. Buffett has indicated that $20 billion is “untouchable” to guard against extreme calamities.
The remainder is not required to operate the business and will aid in future growth via buying wholly-owned or partially owned businesses or repurchasing stock. For our purposes we ignore the fixed-income assets and take out an additional $20 billion to get to $92 billion or roughly $37 per share in available cash.
Collectively these three components add up to a fair value estimate of $242 per share, which is the number we have used in our calculations above.
Berkshire’s competitive advantage has been Warren Buffett and Charlie Munger for over 50 years. However, even without these two the business will still possess a significant advantage in the dozens of wholly-owned businesses spanning the economy, along with the other two legs of the company.
While size makes growth difficult, the diversified set of assets also allows capital to flow toward promising areas. Moreover, without a dividend payment, funds are allowed to compound internally and add to the safety of firm.
Berkshire Hathaway has an exceptional collection of assets. We believe the current valuation looks compelling when you look at the assets collectively. Berkshire Hathaway is a borderline buy or strong hold at current prices.
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