The June 30, 2011 edition of Value Investor Insight includes an interview with Tom Gayner, the President and Chief Investment Officer of Markel Corporation. Gayner is a highly respected value investor.
In the interview, Gayner explains his approach to valuing Berkshire Hathaway. Per GuruFocus.com, Markel has a 7.15% equity weighting in BRK.B and a 6.39% equity weighting in BRK.A. Combined, Berkshire Hathaway is Markel’s largest equity position.
Gayner uses a sum-of-the-parts analysis and looks at the company in three parts: 1) the investment portfolio, 2) insurance operations, and 3) non-insurance operating businesses.
Gayner’s approach is of particular interest not only because he is a great value investor, but also because of his expertise in the insurance business.
For the investment portfolio, he considers a range of values. On the low end, he figures it will earn 3% up to a high-end of 10-12%.
For the insurance premiums, he considers a low case where Berskhire does not earn an underwriting profit, a middle case where its earns a 4 to 5% profit on insurance premiums, and a high case where it earns 8 to 9%.
Finally, he calculates his estimate of normalized earnings for the non-insurance operating businesses. He does this by looking at Berkshire’s cash flow over the past three years and then trying to estimate what this will look like over the next few years.
He then sums the earnings from the three parts and applies a 10x, 14x and 18x multiple. This gives him a range for his estimate of Berkshire’s intrinsic value.
I used Gayner’s general approach to value Berkshire and came up with a intrinsic value range for BRK.B of $55 to $208 with an average value of $128. Here is my data (click to enlarge).
I used Berkshire’s investment portfolio value from the 2011, first quarter 10-Q. To calculate insurance earnings, I used Berkshire’s 2010 insurance premiums. For normalized operating earnings, drawing upon Buffett’s own estimate of normalized earnings given in the 2010 shareholder letter, I used $9 billion as my estimate of normalized after-tax earnings for the non-insurance operating businesses.
I stress that this is my own estimate of intrinsic value based on Gayner’s approach as put forth in the interview. I am not privy to Gayner’s input data, particularly his estimate of Berkshire’s future cash flows for the operating businesses.
In the interview in Value Investor Insight, Gayner stated that based on his estimates, “At even the low ends of the range, the resulting value is significantly higher than today’s share price.”
The absolute low of my range, $55, is actually lower than Berkshire current share price of around $76. However, Berkshire is certainly selling near the bottom of my range of intrinsic value.
In closing, Gayner made an interesting observation that, although Berkshire is widely known, many don’t get around to actually analyzing the company. There are Buffett devotees who are “all in” because of Buffett, and those who dismiss the stock because they’ve already made up their minds without looking at the facts.
Perhaps that creates opportunity for those of us willing to do a little math.