In October I shared a valuation analysis of Berkshire Hathaway Cl A common stock based on a multiple regression of BRK/A's book value and interest rates compared to its price. While the calculation is very simple it has had a surprisingly good fit with BRK/A selling price over the last 15 years.
At the time, based on the book value through mid-year, I estimated that the year-end 2006 fair value of BRK/A was about $105,000 per share. The chart above shows that Mr. Buffett's stock will likely finish the year near $110,000 and, according to our model is slightly over priced. Having said this, I have estimated BRK/A's year-end 2007 book value at $77,000. Using that figure and my estimate of interest rates, I arrive at a 2007 year-end "fair value" for BRK/A of just over $124,000. That is approximately a 13% expected return.
That seems like a good bet to me. Berkshire Hathaway is in a sweet spot in almost all of their businesses. I am still in the camp that believes that housing problems will slow economic growth more than expected. If this is the case, there is no stock I can think of that has more quality and profit potential than BRK/A.
PS. If anyone has a book value guess that you would like for me to plug into my model, please comment below, or email me. There are no Wall Street estimates that I see that I believe are reliable.
We own the stock in our Capital Builder style of management. It is the only stock we own that does not pay a dividend. DCM employees and my family own the stock.
This blog is for information purposes only. Do not make buy and sell decisions based on anything you read here. Please consult your own financial advisor.
5 comments:
I have also found this to be a dependable source to help compute the value of BRK:
http://creativeacademics.com/finance/IV.html
I perceive your "fair value" estimate is not quite up to date if you figured it out at mid-year book value. Nontheless, I thank you for your input and wish you a happy next year.
Disclosure: I own BRK
For BRK, an increasing share of profits and value are derived from non-insurance operating earnings. While book value is reasonable for insurance and financial companies, it isn't reasonable for the other operating companies.
Thus, the spread between book value and intrinsic value is widening over time and a regression analysis based on book value will substantially underestimate intrinsic value.
A more accurate means to estimate intrinsic value is to use the method recommended in the shareholder letter to separately value investments and insurance and add a multiplier of earnings for non-insurance operating segments.
Float valuation is the key to understanding BRK's insurance business. Buffett states that a dollar of float is worth more than a dollar of value for BRK. I get around $70,000 per share for float. This number varies widely based on return on investment assumption. I assume 7%, which is much lower than historical rates for BRK.
BRK has $33,719 per share of "Statutory Surplus" investments (p21 Q3 report).
The operating companies at 20x earnings produce a per share value of around $50,000 by annualizing Q3 earnings.
Add it all up and you get about $150,000 per share.
what is your view on BRK-B share?
is it going to be as good as BRK-A?
Thanks
BRK/B is every bit as good as BRK/A. It represents 1/30th of a share of Cl A. I have found it to be reasonably efficiently traded. With BRK/A trading at approximately $109,900, Brk/b should be trading $3663. It closed Friday at $3650. Cl A is always convertible into Cl B, but not the other way around. We own Class B.
Thankyou to the two commentors on their appraisal techniques for BRK/A. I have seen a number of fairly long evaluations of the "free float" and sum of the parts valuations. Even though we all know that Wall Street is not a big fan of BRK/A or BRK/B the analysts I have seen do reports always take the free float, the fair value of the stock holdings, and a break up of the parts of the company. What I'm trying to say is I think these unusual qualities of BRK have been reasonably well understood for a while and are being priced in to the current trading price of the company.
If you look at the green bars on my chart, you will note how closely they have tracked BRK/A's actual price over the last 15 years. The R2 is over 90 with good p-values.
BRK's price may not be right, but it appears that it is the price that the market is willing to pay. Having said this, if BRK has a good year in 2007, its a pretty good bet that it stock will follow. (I'm sounding a bit like captain obvious)
Again thank you to you both for your thoughts. Please comment anytime.
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