Berkshire Hathaway Is Undervalued On A Price/Book Value Basis

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Berkshire Hathaway Is Undervalued On A Price/Book Value Basis
 

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Summary

Berkshire Hathaway is undervalued on a price/book value basis.

Berkshire’s price/book value is compared over the past 30 years.

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Berkshire’s current price/book value of 1.31 is 17% below its 30-year average of 1.58.

This article is an update to my 2011 Seeking Alpha article, “Berkshire Hathaway Is Undervalued on a Price/Book Value Basis.”

In Warren Buffett’s 2014 Letter to Shareholders released on February 27, 2015, Buffett states that his measure of performance for Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), book value, is an understated proxy for intrinsic value. Furthermore, he states that in earlier decades, the relationship between book value and intrinsic value was much closer than it is now. That was true because Berkshire’s assets were then largely securities whose value was marked to market.

However, in recent years, Berkshire has focused on owning and operating large businesses that are worth far more than their book value. “Consequently, the gap between Berkshire’s intrinsic value and its book value has materially widened.” This would imply that Berkshire’s price/book value should be increasing in recent years if it is approximating its intrinsic value.

In the table below, I show for each year from 1985 through 2015, Berkshire’s book value per share and market price per share of its class A shares (year-end values except for 2015), as well as its annual price to book value ratio. From this table, it can be seen that Berkshire’s current (September 4, 2015) price to book value ratio of 1.31 is 17% below its 30-year average of 1.58. Indeed, in only five of the past 30 years has this ratio been lower than its current value. (In 2009, 2010, 2011 and 2012, the ratio was lower as the economy was recovering from the 2007-9 Financial Crisis, and in 1987, it was lower after the Stock Market Crash of 1987.)

Warren Buffett has previously stated that he would buy back shares when Berkshire’s price to book value is below 1.20. With the current price to book value of 1.31, Berkshire is only 9% above its effective “floor.” Since Berkshire’s price to book value ratio is also substantially below its historical average of 1.58, and with the gap between its intrinsic value and book value widening over time, Berkshire Hathaway is undervalued.

Year Book Value Price Price/Book Value
2015 149,735 (June 30) 196,501 (Sept. 4) 1.31
2014 146,188 (Dec. 31) 226,000 (Dec. 31) 1.55
2013 134,973 177,900 1.32
2012 114,214 134,060 1.17
2011 99,860 114,755 1.15
2010 95,453 119,100 1.25
2009 84,487 99,200 1.17
2008 70,530 96,600 1.37
2007 78,008 141,600 1.82
2006 70,281 109,990 1.57
2005 59,377 88,620 1.49
2004 55,824 87,900 1.57
2003 50,498 84,250 1.67
2002 41,727 72,690 1.74
2001 37,920 75,600 1.99
2000 40,442 71,000 1.76
1999 37,987 56,100 1.48
1998 37,801 70,000 1.85
1997 25,488 46,000 1.80
1996 19,011 34,100 1.79
1995 14,426 32,100 2.23
1994 10,083 20,400 2.02
1993 8,854 16,325 1.84
1992 7,745 11,750 1.52
1991 6,437 9,050 1.41
1990 4,612 6,675 1.45
1989 4,296 8,675 2.02
1988 2,975 4,700 1.58
1987 2,477 2,950 1.19
1986 2,073 2,870 1.36
1985 1,644 2,470 1.50
Average 1.58
David I Kass Clinical Associate Professor, Department of Finance Ph.D., Harvard University Robert H. Smith School of Business 4412 Van Munching Hall University of Maryland College Park, MD 20742-1815 Phone: 301-405-9683 Email: [email protected] (link sends e-mail) Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Accelerated Finance Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), Fox TV, American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by Bloomberg News and The Wall Street Journal, where he has primarily discussed Warren Buffett and Berkshire Hathaway. He has also launched a Smith School “Warren Buffett” blog. Dr. Kass has accompanied MBA students on trips to Omaha for private meetings with Warren Buffett, and Finance Fellows to Berkshire Hathaway’s annual meetings. He is an officer of the Harvard Business School Club of Washington, DC, and is a member of the investment and budget committees of a local nonprofit organization. Dr. Kass received a Smith School “Top 15% Teaching Award” for the 2009-2010 academic year.
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