Whitney Tilson extends an invitation to Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) events in Omaha as the Warren Buffett-led company releases its annual letter.
Warren Buffett releases annual letter
2) Speaking of Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), Buffett released his annual letter last Saturday morning (the full annual report is posted here) and, as usual, it’s a great read, with lots of information for Berkshire Hathaway shareholders (it’s the only stock that’s been in my fund continuously since inception more than 15 years ago) plus good general advice for investors. My take:
a) Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) is a juggernaut firing on all cylinders. It’s easy to overlook, but what’s going on here is truly extraordinary. Has there ever been a business that combines Berkshire’s size, stability, quality, growth and shareholder friendliness? I can’t think of one.
b) Using the same methodology I’ve used for years (my BRK slides, which I haven’t updated in a while, are posted at www.tilsonfunds.com/BRK.pdf), I calculate Berkshire’s intrinsic value as of the end of 2013 at $226,000/A share, 22% above yesterday’s closing price of $185,750 (said another way, Berkshire is an 82-cent dollar).
The calculation is easy: I put a 10 multiple on Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s pre-tax earnings, which were $9,116/share in 2013 (from page 7 of his annual letter), plus I add $600/share to reflect half (to be conservative) of the $1 billion average annual underwriting profit of Berkshire’s insurance operations over the past 11 years, during which “our underwriting profit has aggregated $22 billion pre-tax, including $3 billion realized in 2013” (page 4) (or you could put a 5 multiple on the entire average pre-tax insurance earnings – take your pick).
So that’s 10 x $9,700 = $97,000, to which one adds investments per share, which Buffett says in his letter are $129,253 (page 7), to arrive at $226,000.
c) I estimate that Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s intrinsic value is growing at a rate of at least 10 percent per year (higher if the company continues to make large scale acquisitions, which I think is likely).
d) Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) is also cheap based on a multiple of book value. At year-end 2013, Berkshire’s book value was $134,973, so the stock today is at 1.38x book. Here’s what Buffett had to say (from the first page of his letter):
Berkshire Hathaway’s intrinsic value
As I’ve long told you, Berkshire Hathaway’s intrinsic value far exceeds its book value. Moreover, the difference has widened considerably in recent years. That’s why our 2012 decision to authorize the repurchase of shares at 120% of book value made sense. Purchases at that level benefit continuing shareholders because per-share intrinsic value exceeds that percentage of book value by a meaningful amount. We did not purchase shares during 2013, however, because the stock price did not descend to the 120% level. If it does, we will be aggressive.
So even at a 20% premium to book ($162,000), Buffett is willing to buy back shares “because per-share intrinsic value exceeds that percentage of book value by a meaningful amount.” My interpretation of this is that Buffett thinks Berkshire’s intrinsic value is at least 1.6x book and probably 1.8x book. This is consistent with my estimate above of $226,000, which is 1.67x book.
e) Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) is not only one of the lowest-risk companies I can think of, due to its Ft. Knox balance sheet, well-diversified steams of free cash flow, and Buffett’s conservative management, but its stock is also one of the lowest risk I can think of because of the very firm “Buffett put” at $162,000 (and rising, in line with Berkshire’s book value), the price at which Buffett will be “aggressive” in buying back stock, a mere 12.8% below today’s price.