Is It Time To Buy Berkshire Hathaway Shares?

Over the last few years Berkshire Hathaway has underperformed the S&P 500. The company may be underperforming the broader indexes, however the company has been growing its business value at above 10% annually. Berkshire's business value has for the last few year exceeded market value. The company's B shares sell for far less than estimated intrinsic value. The combination of reporting lower than expected second quarter earnings and the two day drop in the market has resulted in Berkshire's B shares trading at $129/share.

Under Buffett's stewardship, Berkshire Hathaway grew from a failing textile business to one of the largest companies in the world.

When Buffett took over Berkshire Hathaway had a market value of $22 million dollars and a book value of $19/share. Today the company has a market value of over $300 billion dollars and a book value of $145,000/share for A shares, and $103/share for B shares. Berkshire Hathaway has outperformed the S&P 500 over the last 50 years, with only a few years of underperforming the S&P 500. Few investors and businessmen have ever achieved what Mr. Buffett has. Berkshire Hathaway is a gem in the rough, a one of a kind company that comes along once in a lifetime. The company won't be able to meet the kind of returns it did during the last 50 years because of all the massive capital the firm has. Berkshire Hathaway will still be able to outperform most businesses and even the market over time.

The company's top five largest operating subsidiaries produced $12 billion dollars in pretax earnings in 2014. Berkshire Hathaway has various operating subsidiaries, with the firm's insurance operations being the largest driver of the firm's earning power. The company produced $24 billion dollars in underwriting profits with $83 billion in float for Berkshire to invest.

Berkshire Hathaway's powerhouse five produced $12 billion dollars in pretax earnings up by $1.6 billion from 2013. Berkshire Hathaway has dozens of other non-insurance subsidiaries which earned $5.1 billion dollars in 2014 up from $4.7 billion in 2013. More and more of the company's earnings are coming from non-insurance subsidiaries, creating a more diverse earning power for Berkshire Hathaway. In October 2014, Berkshire Hathaway bought Van Tuyl Automotive, a group of 78 automotive dealerships.

In the 2010 Berkshire Hathaway annual report, Mr. Buffett outlined his two-column valuation method to value the company. The two-column method, outlined on page six of the 2010 annual report, is a simple and efficient way to value the firm.

Based on the two column method, Berkshire Hathaway B shares are selling a discount to estimated business value. This method is the best way to value Berkshire Hathaway since it takes into context the diversified way the company creates value for shareholders.

Two column method (B shares):

Since pretax earnings for B shares are $11.97 a share and we multiple that by 10, then you'll get $119.7/share. After you multiplying pretax earnings by 10, than you'll add investments per share of $69.00 to $119.7 and get $188.70 per share. Now let's slap on a 12x multiplier for pretax earnings. That will give you $143.64/share in pretax earnings. Then you'll add that to investments per share to get a two-column value of $212/share. This will give Berkshire's B shares a value range of $188 to $212 per share for the company. Based on the two column method both A and B shares are selling at a over 20% from estimated business value.
Published on Aug 25, 2015
By Cody Eustice
Cody is a freelance writer who has been writing financial articles for various sites for over a year now. He is a value investor looking for companies that sell for far less than their estimated business value.

Copyrighted 2016. Content published with author's permission.

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