Disclaimer: I’m kind of retarded and am down half a bottle of Jack. Make your own investment decisions
Alright boys and girls, I’m going to try to keep this (relatively) brief, at least compared to some of the other DD on here. I’m not going to write about the history of the company because I’m assuming that anyone with a modicum of investment sense is already plenty familiar with Berkshire Hathaway. If you’ve never heard of this company, or are a MrBeast subscriber, please stop reading now – this is not for you.
Ok, so this write-up started with a thought I had while in the shower: If you were to breakdown Berkshire into each of its income-generating components, what would be the fair market value? As a second disclaimer, I think there was another post on here a week or two ago, but I don’t have it saved and thus haven’t linked it.
To do this, I copied BRK’s quarterly statement of operations from their latest 10-Q and converted it into TTM format (Q1-20 + YE-19 – Q1-19). I then grouped it by operating segment to derive operating net income applicable to each business segment. If you’re unfamiliar with Berkshire – the company, not daddy Buffett – their two main operating segments are Insurance (and other, $200bn TTM revenue) and Railroad, Utilities, and Energy ($41bn TTM revenue). When grouped by operating segment, we can see that Insurance netted ~$18bn in net income over the TTM, and railroad activities netted ~$8bn. I didn’t include non-operating items like derivative contract gains(losses) or income tax expense, because honestly I don’t give a fuck about those. If you’re really concerned, just shave like 10% off the valuation. Go crazy.
Now, I don’t know know shit about insurance or railroads. But I do know a little thing about multiples (emphasis on little; like I said, I’m kind of retarded). So rather than creating a super intricate financial model with lots of terminal values and shit, I compared the net earnings of each operating line to the average P/E ratios of other publicly traded companies operating in those industries to derive an estimated fair market value for each component (See Comps, 10-year data downloaded from StockRow).
As you can see in the attached image, multiplying BRK Insurance by the average TTM insurance industry P/E ratio (8.69) yields an estimated FMV of ~$157bn. Similarly, adjusting net earnings by the average TTM P/E for railroads yields a FMV of ~$189bn (ignore the 10-year figures, we’ll get to that later). In aggregate, this means that the fair value of BRK’s operating segments based on TTM data is approximately $347bn, or 75% of their current market cap.
The remainder, I believe can be attributed to BRK’s investment portfolio. Something that caught my eye, and sparked the idea for this DD, was this. Notice the divergence in each company’s share price? Me too. Granted, I wouldn’t expect BRK to be perfectly correlated to AAPL, but I would expect their beta to be at least somewhat similar considering BRK’s AAPL holdings alone are worth 20% of it’s own market cap. But I digress.
In this back-of-the-envelope model, I attribute the remainder of BRK’s FMV to its investment portfolio. To estimate the investment portfolio’s FMV, I created a little reconciliation (which you can view here) to recalculate current FMV values of investments based on share-counts disclosed in BRK’s most recent 13-F filing. Investment values as of the report date are recalculated, but these are just for comparison. I used May 1st (the date the report was filed with the SEC) as the base period to capture value at issuance, but this is extremely optimistic. The investments were more than likely valued in early-mid March and thus are likely to be severely understated on the final report.
Recomputing the current FMV of investments (shares x closing price as of today) for BRK’s 6 largest holdings – AAPL, AXP, BAC, KO, WFC, and KHC – gives us coverage of approximately 76% of BRK’s total investment portfolio. For the remaining 24%, I just relied on the numbers reported on their Form 13-F since I’m a lazy POS and all about that copy/paste life. You can view them here.
Ok, so now we have FMV estimates for BRK’s operating segments and investment portfolio – now it’s time to see how much the company is worth (as a warning, I’m ignoring the conversion of market cap for BRK-A & BRK-B shareholders. Honestly I just don’t give enough of a shit to recalculate it. % upside numbers are based on market cap though, not share price, so it is captured).
- Using TTM multiples for the insurance and railroad segments gives us a FMV for BRK-B of ~$238 – a 26.12% upside. But should we really be using TTM multiples? I mean, by doing so we’re capturing the already depressed share prices of our industry comps. What if this return to (relative) normalcy, and we see industry multiples revert back to their 10-year mean?
- Using multiples equal to the 10-year average for each of our comparable industries, we get a FMV for BRK-B of ~$266.26 – 40.65% upside.
- Just for fun, I also calculated an estimated FMV using share prices for investments as of May 1 (the report date). This gave me an estimated share price of ~$217 – a 20% upside.
Tldr/Conclusion; Berkshire should be worth between $230 – $260 without even considering factors beyond operations or the investment portfolio. Anything below $210 is severely under-priced IMO. Berkshire was trading well above a $500bn market cap before the pandemic, and I doubt their core operations were impacted nearly enough to warrant the lower valuation. Hell, their operating segments are under-priced compared to peers using current multiples. The only justifiable reason I could see for them having a lower valuation would be if Warren enters into any more “risky” derivative contracts or buys any more shitty O&G companies, but frankly I don’t (or at least hope it won’t) see that happening.
Tldr;Tldr; BRK-B $250 01/21/22 LEAPs are looking mighty cheap.
Edit: In my drunken stupor I accidentally mis-keyed a couple numbers. Projected share price is actually higher now.