Will Berkshire Hathaway Get a Boost in Book Value?
12/04/2017 5:00 am EST
He took control in 1965 of a then large but very much declining textile company and proceeded to transform it into a holding company for investments, including its many wholly owned subsidiaries.
In 2017 to date, Berkshire's share price has increased by 12% from its price of $162.98 at the start of the year.
Berkshire's revenue and earnings growth is impacted by "lumpy" realized gains and occasional losses on investments disposed of, as well as by occasional larger losses associated with its catastrophe insurance operations.
In 2017, operating earnings per share are down 16% through the end of the third quarter due to losses in its insurance operations primarily associated with hurricanes Harvey, Irma, and Maria as well as an earthquake in Mexico.
The price to book value ratio seems reasonable at 1.47. Buffett has indicated on several occasions in recent years that Berkshire's intrinsic value far exceeds its book value and that the difference has widened in recent years. Berkshire will buy back shares if the price dips below 120% of book value. That means at a price below $150. This provides some downside protection.
Given the inherent volatility of earnings, I believe that a relevant view of adjusted earnings is to use 10% of book value on the basis that book value has grown at an average of about 10% in the past ten years after reflecting investment gains.
This is conservative as it does not consider the benefits of deferred taxes nor does it add back the amortization of goodwill-like intangibles. On this basis, the p/e is reasonably attractive at 14.6.
It seems likely that Berkshire will continue to grow in size and earnings at an acceptable rate in the future. However, this would likely be in the range of perhaps 10% per year and not the huge growth of bygone years.
Berkshire could see a large one-time boost from tax reform as its huge deferred tax liabilities could be reduced substantially. This could lead to an accounting gain in the order of $34 billion, which would boost book value per share by 11%. And, there would be ongoing benefits from the lower tax rate as well.
Berkshire does not pay out any dividends because all earnings are retained for reinvestment. However, due to its massive cash position of $109 billion, which represents 16% of its assets and amounts to $44 per share, it is possible that Berkshire will finally introduce a dividend in 2018. We rate the stock a buy.