Berkshire Hathaway Inc Is Undervalued By 20%

Berkshire Hathaway Inc (NYSE:BRK.B) (NYSE:BRK.B)’s stake in Apple as of August 21 ($125 billion), plus its cash as of June 30 ($147 billion), plus its stock portfolio less Apple as of June 30 ($113 billion) equal $385 billion. Its current market value equals $495 billion.  Subtracting $385 billion (stock portfolio plus cash) = $110 billion.  Adding its insurance float (expected future claims on its insurance policies) of $130 billion (June 30), results in an “enterprise value” of $240 billion for all of its 60+ businesses including the major segments of insurance, BNSF Railroad, and Berkshire Hathaway Energy.

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Berkshire Hathaway Inc's Market Value

Since Berkshire Hathaway Inc had operating earnings of $24 billion in 2019, all of Berkshire’s businesses are being valued by the market at only 10 times earnings.  Currently, the S&P 500 is being valued at approximately 20 times earnings.  If Berkshire’s businesses were conservatively valued at 15 times operating earnings, then they would have an enterprise value of $360 billion. Subtracting the float of $130 billion would then result in an equity value of $230 billion.  Adding $230 billion (businesses) to $385 billion (stock portfolio plus cash) results in an overall equity valuation of $615 billion. Then Berkshire’s current market valuation of $495 billion represents a 20% discount from my calculation of its intrinsic value, which translates into a Class A share price of approximately $380,000.  Berkshire’s closing price on August 21 was $311,126.

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If Berkshire Hathaway Inc's businesses were valued at 20 times operating earnings approximating the S&P 500, then they would have an enterprise value of $480 billion. Subtracting the float of $130 billion would then result in an equity value of $350 billion. Adding $350 billion (businesses) to $385 billion (stock portfolio plus cash) results in an overall equity valuation of $715 billion. Then Berkshire’s current market valuation of $495 billion represents a 30% discount from this equity valuation which equates to a Class A share price of approximately $445,000.

Stake In Apple

Berkshire Hathaway Inc's stake in Apple as of August 21 ($125 billion), plus its cash as of June 30 ($147 billion), plus its stock portfolio less Apple as of June 30 ($113 billion) equal $385 billion. Its current market value equals $495 billion.  Subtracting $385 billion (stock portfolio plus cash) = $110 billion.  Adding its insurance float (expected future claims on its insurance policies) of $130 billion (June 30), results in an “enterprise value” of $240 billion for all of its 60+ businesses including the major segments of insurance, BNSF Railroad, and Berkshire Hathaway Energy.

Since Berkshire Hathaway Inc had operating earnings of $24 billion in 2019, all of Berkshire’s businesses are being valued by the market at only 10 times earnings.  Currently, the S&P 500 is being valued at approximately 20 times earnings.  If Berkshire’s businesses were conservatively valued at 15 times operating earnings, then they would have an enterprise value of $360 billion. Subtracting the float of $130 billion would then result in an equity value of $230 billion.  Adding $230 billion (businesses) to $385 billion (stock portfolio plus cash) results in an overall equity valuation of $615 billion. Then Berkshire’s current market valuation of $495 billion represents a 20% discount from my calculation of its intrinsic value, which translates into a Class A share price of approximately $380,000.  Berkshire’s closing price on August 21 was $311,126.

If Berkshire Hathaway Inc's businesses were valued at 20 times operating earnings approximating the S&P 500, then they would have an enterprise value of $480 billion. Subtracting the float of $130 billion would then result in an equity value of $350 billion. Adding $350 billion (businesses) to $385 billion (stock portfolio plus cash) results in an overall equity valuation of $715 billion. Then Berkshire’s current market valuation of $495 billion represents a 30% discount from this equity valuation which equates to a Class A share price of approximately $445,000.

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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.