Berkshire Hathaway is Undervalued by 20%

Berkshire Hathaway’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 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’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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2 Responses

  1. John says:

    Is there double counting inherent in using a multiple of earning calculation on a stock holding company where the underlying stocks are already valued at multiples of their earnings ?

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