“It is better to be roughly right than precisely wrong.”
– John Maynard Keynes
“Intrinsic value is an estimate rather than a precise figure.”
– Warren Buffett
$243 billion – Berkshire Hathaway’s total shareholder equity on December 31, 2014.
+ $20 billion – Adjustment for GEICO’s economic goodwill. This is roughly consistent with the 97%-of-premium-volume valuation yardstick Buffett established in the 2010 shareholder letter. Paul Lountzis, founder of Lountzis Asset Management and a respected investor, suggested in a March 2, 2015 WSJ article that GEICO could be worth as much as $25-$45 billion.
+ $50 billion – Adjustment to properly value BNSF. BNSF comprises approximately $51 billion of Berkshire’s equity, per BNSF’s 2014 10-K. Stripping out $15 billion of accounting goodwill leaves $36 billion of tangible equity. At 3x tangible book, BNSF would be worth approximately $108 billion. Union Pacific, a good comp with similar revenue and assets, has a market cap of about $100 billion and sells at 4.9x book, according to Morningstar. Union Pacific’s 5-year average price/book is 3.1.
+ $37 billion – Adjustment to properly value Berkshire Hathaway Energy (BHE). Berkshire’s Railroad, Utilities, & Energy segment had assets of $159 billion and liabilities of $71 billion, as of December 31, 2014, leaving equity of $88 billion. Netting out $51 billion for BNSF leaves $37 billion of equity for BHE. Here I assume a valuation of 2x book which I based on industry valuation figures maintained by NYU. BHE deserves at least a market multiple given 1) the quality of it’s assets, 2) it’s growth rate, 3) it’s access to and capacity to reinvest capital and 4) it’s management’s skill.
+ $84 billion – Adjustment for Berkshire’s float. Buffett is on record as saying that $1 of float is worth more than $1 dollar to Berkshire. Investors will need to make their own assessment of whether this adjustment overstates the float’s true economic value as Buffett has recently commented that float could decline in the future, albiet at a slow rate. At the 2010 Markel breakfast in Omaha, Tom Gayner was asked if insurance float should be treated as a true liability. Gayner argued that if you’re given $1 to hold and you never need to give it back it should be worth more than $1.
+ $30 billion – Adjustment for half of Berkshire’s deferred tax liabilities. Although GAAP accounting treats deferred taxes (both from unrealized capital gains and investments in fixed assets) as a liability, from an economic standpoint (and using the same logic Markel’s Gayner applied to insurance float), they function as an interest-free loan for Buffett to invest. This approach is consistent with Berkshire’s Owner’s Manual and comments made by Charlie Munger in Wesco’s annual reports, although neither gives a precise valuation formula. This figure may be low given Berkshire’s massive core permanent equity holdings and continued and increasing capex spending in the Railroad, Utilities, & Energy segment. Each investor will need to make their own estimate of when and how much of Berkshire’s capital gains will be realized and when the deferred taxes on Berkshire’s massive investments in BNSF and BHE will reverse, if ever, given Buffett’s characterization of their future opportunities/requirements for substantial amounts of capital. I think the present value of this float in the hands of Buffett and his successors is large.
Total – $464 billion*. This equates to a price/book ratio of 1.9 or a value per A share of $282 thousand. This is broadly consistent with Buffett’s comment in the 2014 shareholder letter, “If an investor’s entry point into Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares have occasionally reached – it may well be many years before the investor can realize a profit.”
The reasonableness of this estimate can be crosschecked against the two-column valuation of Berkshire. Assuming an intrinsic value of $282 thousand per share and netting out the current $140 thousand per A shares in investments leaves a value of $142 thousand. This is about 13x Berkshire’s pre-tax earnings per share of $10.8 thousand. This figure would appear fully valued but not unreasonable, considering the quality of Berkshire’s businesses and that it does not include any earnings from insurance underwriting ($24 billion pre-tax over the past twelve years).
According to this estimate, at $220 thousand per A share, Berkshire is trading at approximately 80% of intrinsic value.
I remain long Berkshire Hathaway.
* this estimate of intrinsic value did not make an adjustment for noncontrolling interests. This amount is immaterial given the relative small size of the interests and the huge size and imprecision of the above adjustments.
* No attempt was made in this estimate of intrinsic value to assess whether the economic goodwill of Berkshire’s other businesses – insurance operations ex-GEICO, IMC (Iscar), Lubrizol and Marmon et al. – exceeds that of their accounting value, but this seems likely given the success of these businesses along with Buffett’s unwillingness to overpay when they were acquired.