Whitney Tilson: Berkshire Hathaway Worth $178,000 a Share

Whitney Tilson: Berkshire Hathaway Worth $178,000 a Share
Whitney Tilson: Berkshire Hathaway Worth $178,000 a Share
Whitney Tilson has pegged intrinsic value of Berkshire Hathaway (NYSE:BRK.A ) (NYSE:BRK.B…) at over $178,000 a share.
Below is some highlights and the full presentation in scribd:
On page 14 Tilson increased his estimate of Berkshire’s intrinsic value to $178,366 ($98,366 in investments/share plus 10 x $8,000/share of pre-tax earnings of the operating businesses), nearly 50% above today’s price of $120,000.  Page 15 shows that  the stock trades at close to the largest discount to intrinsic value in two decades (despite the fact that he thinks the company has never been stronger, with fewer risks and a better mix of earnings drivers than ever).
3) As always, Tilson reads Buffett’s annual letter with great interest, and it did not disappoint.  Here’s Tilson’s quick take on it:
a)     Berkshire is firing on all cylinders.  As Buffett writes: “Our major businesses did well last year. In fact, each of our five largest non-insurance companies – BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy – delivered record operating earnings. In aggregate these businesses earned more than $9 billion pre-tax in 2011. Contrast that to seven years ago, when we owned only one of the five, MidAmerican, whose pre-tax earnings were $393 million. Unless the economy weakens in 2012, each of our fabulous five should again set a record, with aggregate earnings comfortably topping $10 billion.
b)    Given the diversity of Berkshire’s businesses, the company’s performance is a good indicator of the overall strength of the U.S. economy, outside of the housing sector, which Buffett says remains in a “depression.”
c)     At many points in his letter, Buffett shows the wide gap between book value and intrinsic value, concluding that book value is a “considerably understated” proxy for intrinsic value.  However, Tilson thinks he is being too conservative when he writes: “Over time, the divergence will likely become ever more substantial in absolute terms, remaining reasonably steady, however, on a percentage basis as both the numerator and denominator of the business-value/book-value equation increase.”  We think that over time, as Berkshire’s value has shifted from its stock portfolio, which is valued a market (i.e., book value), to operating businesses like GEICO and Burlington Northern, that Berkshire’s intrinsic value is a greater percentage premium to book value – yet the stock is currently trading near the lowest premium to book in its history.
d)    Buffett makes it very clear that he believes that Berkshire’s stock is significantly undervalued and that he’s eager to buy it back at 1.1x book value ($110,000/A share, only 8% below today’s price).  Tilson thinks this puts a firm floor on the stock price. 
e)     Berkshire is Tilson’s largest position because of its asymmetric return profile: 8% downside vs. 50% upside, with intrinsic value growing at roughly 10% annually.
f)      On the first page of the letter, Buffett did his best to put the succession issue to rest, writing: “Your Board is equally enthusiastic about my successor as CEO, an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire. (We have two superb back-up candidates as well.) When a transfer of responsibility is required, it will be seamless, and Berkshire’s prospects will remain bright.”  We don’t have a strong view on who the successor is, but don’t care because we think it’s highly likely that Buffett will be running Berkshire for at least five more years, maybe even 10. In addition, Tilson’s estimate of intrinsic value doesn’t include any Buffett premium.

BRK Slides 2-26-12

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