Berkshire Hathaway (BRK.B) is the giant conglomerate and investment company that has been built up by Warren Buffett since he took control of the former textile company in 1965.  It's now number three on the Fortune 500 list by revenue and in 2017 was second only to Apple (AAPL) in annual profit, observes Shawn Allen, contributing editor to Internet Wealth Builder.

Berkshire's most important operating segment is insurance. It insures individuals and businesses directly and also has huge "reinsurance" operations where it provides insurance to other insurance companies.

Direct personal auto (GEICO) and the reinsurance of property, casualty and life including insuring against catastrophic events (such as hurricanes) are Berkshire's largest insurance areas and it also has large direct operations involving workers' compensation and medical malpractice. Interestingly, Berkshire does not directly offer home or life insurance.

Most insurance premiums collected are expected to eventually be paid out in claims. However, due the time lag involved, these funds, known as "float", are "temporarily" available to fund investments.

Berkshire now has $114 billion in float. Because new premiums typically come in the door slightly faster than claims are paid out, Berkshire's float constantly regenerates and grows and has provided an essentially permanent source of investment funds.

Berkshire uses float along with its own vast share owner equity (currently $358 billion) to invest in numerous wholly owned subsidiaries, a vast cash hoard of $106 billion, equity investments of $184 billion, and fixed income investments of $20 billion. Total assets are $703 billion.

You might be shocked to learn some of the companies or brand names that you are likely familiar with are owned by Berkshire. These include GEICO, NetJets, Dairy Queen, Procor rail cars, Fruit of the Loom underwear, Pampered Chef, and Benjamin Moore paint stores.

Berkshire also has large investments in such familiar brands as Kraft, Heinz, Tim Hortons, Burger King, Coke, American Express, Wells Fargo, Bank of America, and Apple.

Given Canada's huge struggle to simply twin the 715-mile Trans Mountain pipeline, I was intrigued to read that a pipeline company that Berkshire owns called Northern Natural Gas is substantially larger than Trans Mountain at 6,300 miles of mainline plus 8,400 miles of branch lines. This relatively unknown subsidiary of Berkshire actually rivals the size of TransCanada's Mainline which is 8,770 miles.

All told, Berkshire's vast array of subsidiary companies now employ 377,000 people including a remarkably tiny crew of just 26 at head office.

In 2017 operating earnings per share (which exclude volatile investment gains or losses and a massive 2017 income tax gain) were down 18%. This was mostly due to losses in its insurance operations primarily associated with three major hurricanes in the U.S., including Puerto Rico, and wildfires in California. However, in the first quarter of this year, operating earnings were up 49% with improvements in all major segments.

The price to book value ratio seems reasonable at 1.38. However, keep in mind that its cash and its large investment portfolio (together representing about 40% of assets) are already fully marked to market and therefore worth only book value.

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 $169. This provides some downside protection.

Given the inherent volatility of Berkshire's earnings, for adjusted earnings I assume 10% of book value on the basis that it has grown at an average of about 10% in the past ten years after reflecting investment gains. On this basis, the adjusted p/e is reasonably attractive at 13.8. However, the forward p/e based on analyst earnings estimates is not attractive at 19.8.

It seems likely that Berkshire will continue to grow its 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.

While Berkshire is certainly understandable to Buffett, it is a huge conglomerate and most investors could not claim to have a strong understanding of the company.

In terms of favorable long-term economics, Buffett has spent over 50 years building up Berkshire exclusively from companies and investments that, at least at the time of purchase, passed his tests.

The company certainly has able and ethical management and it also has able and ethical lieutenants in the wings to take over for Buffett. And I believe Berkshire is trading at a sensible price given Buffett's comments on valuation and based on my analysis in the value ratios section above. Ultimately, to buy Berkshire is to place trust in Buffett and to have confidence that he has built the company to thrive after he is no longer CEO.

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