How to Value Buffett's Berkshire

04/10/2014 8:00 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

My favorite value stock remains Warren Buffett’s holding company; its diversified operations make this stock similar to owning a mutual fund with a long history of beating the market, explains Ian Wyatt, growth stock expert and editor of $100K Portfolio.

We added Berkshire Hathaway "B" shares (BRK-B) to our $100k Portfolio in March 2011, and the stock is one of my biggest personal holdings.

Berkshire Hathaway had a record year in 2013. Sales grew by 12%, and net income soared 32%, reaching a staggering $19.5 billion. That means the company's profits stand at $1.6 billion per month! Meanwhile, the company's investments per share increased nearly 14% and now stand at $129,253.

Buffett has been aggressively looking to make big acquisitions, which he describes as "elephant hunting." Last year, Berkshire closed two such transactions. The company bought a 50% stake in H.J. Heinz for $12 billion, and purchased utility giant NV Energy for $5.6 billion.

Buffett has continued to transition investment management to Todd Combs and Ted Weschler. According to this year's shareholders letter, both of Buffett's investment successors manage a portfolio of more than $7 billion.

The transition to Combs and Weschler is an important part of Berkshire's succession plan, and gives these two talented investment managers sizable stakes of the company's investment portfolio.

Berkshire has investments of more than $1 billion in 16 different companies. The largest of these investments include Wells Fargo (WFC), The Coca-Cola Company (KO) at $16.5 billion, American Express (AXP), International Business Machines (IBM), and Bank of America (BAC).

Berkshire Hathaway A-shares (BRK-A) currently trade at $186,000. The same valuation would apply to the B-shares—each of which represents 1/1,500 of an A-share.

At the end of 2013, Berkshire had investments per share of $126,000. Meanwhile, for Berkshire's wholly-owned operating businesses (excluding insurance), we estimate EPS of roughly $9,700.

I value Berkshire's operating businesses, conservatively, at ten times pre-tax earnings, or $97,000 per share. With investments per share valued at $126,000, and the operating businesses valued at $97,000, the company's A-shares are worth $226,000. That translates into $150 per B-share.

In our 100k Portfolio, Berkshire Hathaway remains a favorite holding. The company offers investors a huge amount of diversification and an extremely well-managed business that is focused on delivering value to shareholders.

Even after strong returns in 2013, Berkshire shares remain undervalued today. Long-term investors who share my bullish view on America's rebound should be buying Berkshire stock at these levels.

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