Berkshire Hathaway: Intrinsic Value (Part 1)

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Intrinsic value of Berkshire Hathaway – Today and Tomorrow

I thought I would take a look at Berkshire Hathaway and its intrinsic value to be able to compare it to the current stock price to see if there is any difference between them. The analysis of Berkshire’s intrinsic value will be divided into the following three parts:

  • Book value per share
  • Adjusted book value per share
  • Two-bucket approach

Book value per share

Warren has many times emphasized the change in book value as a proxy for the change in intrinsic value. For example, in his letter to shareholders in 2012 Warren wrote that “It’s our job to increase intrinsic business value – for which we use book value as a significantly understated proxy – at a faster rate than the market gains of the S&P.”

So, if this holds true, i.e., that book value is a significantly understated proxy of intrinsic business value, we can look to the change in book value to try to get a sense of the possible change in intrinsic value. From Berkshire Hathaway’s officially published annual reports – you find them here – book value per share in the last 10 years has been as follows in the table below. Percentage shows the change in book value per share from year to year.

BVPS2

Book value per share in 2003 was $50 498 compared to $134 973 at year-end 2013, a gain of 167.3% or a 10-year compounded annual growth rate of 10.3%.

BVPS1

Book value per share can be seen as another measure for a conservative estimate of intrinsic value. Remember this, and the words “a conservative one.” In the shareholder letter from 2012 Warren wrote that “The value of our float is one reason – a huge reason – why we believe Berkshire’s intrinsic business value substantially exceeds its book value.”

Book value per share at the end of the first quarter 2014 was $138,426.

This seems like a conservative measure, considering the fact that Warren is willing to buy back stock at prices of 120% of book value. Calculated from the $138,426 at the end of the first quarter 2014 120% gives a target buy back price level per share of $166,111.2.

Current stock price

Right now Berkshire, according to Google Finance, is trading at a price per share of $189,724.

Currently the Berkshire stock trades at a price to book multiple of 1.37, i.e., the stock price exceeds book value per share with 37% at the moment.

Compared to the 120% above book value where Warren is ready to buy back Berkshire stock, the current stock price is exceeding this target level with 14.2%.

Looking at the downside the current stock price would have to drop with 12.4% before Warren steps in and starts to buy back Berkshire stocks. In other words, there seems to be a pretty good downside protection at the moment.

Having looked at the book value per share and the downside scenario, in the next post I will take a look at an adjusted book value per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is informational and is in my own personal opinion. Always do your own due diligence and contact a financial professional before executing any trades or investments.

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