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Still Betting on Buffett
04/07/2014 8:00 am EST
We received one last earnings report over the weekend, and it came from our single largest position, which happens to be the holding company for Warren Buffett, explains Matt Coffina, editor of Morningstar Stock Investor.
It was a strong finish to an all-around solid year for Berkshire Hathaway (BRK-B). The high-level takeaway is that book value per share advanced 18%.
CEO Warren Buffett focuses on book value per share as an objective—though significantly understated—proxy for intrinsic value.
Under Buffett's leadership over the past 49 years, Berkshire's book value per share has compounded at an incredible 19.7% annual rate.
However, over the last ten years, book value per share has grown roughly 10% annually, reflecting the challenges of growing from such a large base. I suspect 10% annual book value growth is about what we can expect from Berkshire going forward.
Assuming the price/book multiple stays at the current level—which I think is likely, if not conservative—then we can expect similar total returns from Berkshire's stock over the long run.
In the current market environment, I view a 10% annual return as very acceptable, especially if it's coming from such a steady, broadly diversified, well-managed company as Berkshire. I expect Berkshire to remain the largest holding in the Tortoise for the foreseeable future.
Berkshire tends to underperform in strong bull markets. However, the company more than makes up for this through massive outperformance during bear markets: Book value per share only declined 9.6% in 2008, while the market was down 37%.
Berkshire made two large acquisitions during 2013, spending $18 billion for utility NV Energy and a large stake in ketchup maker H.J. Heinz. According to Buffett, "both companies fit us well and will be prospering a century from now."
Investment managers Todd Combs and Ted Weschler continue to take on greater responsibility for running Berkshire's equity portfolio, overseeing more than $7 billion each. Both are reported to have handily outperformed the S&P 500 (SPX) in 2013.
Buffett remains open to repurchasing shares at up to 120% of book value, but Berkshire shares didn't breach that level at any time in 2013. According to Buffett, "per-share intrinsic value exceeds that percentage of book value by a meaningful amount."
Book value stands at roughly $90 per Class B share, so 120% would imply a share price of $108. Under normal market conditions, I think this is likely to serve as a floor under Berkshire's share price, particularly considering the company's abundant cash reserves.
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