Berkshire Hathaway Is Undervalued By 16%

Summary

• Since Berkshire had operating earnings of $24 billion over the previous 12 months from June 30, 2021, all of Berkshire’s businesses are being valued by the market at less than 15 times earnings.
• If Berkshire’s businesses were conservatively valued at 20 times operating earnings, then they would have an enterprise value of $480 billion.
• Subtracting the float of $142 billion would then result in an equity value of $338 billion.
• Adding $338 billion (businesses) to $452 billion (stock portfolio plus cash) results in an overall equity valuation of $790 billion.
• Then Berkshire’s current market valuation of $660 billion represents a 16% discount from my calculation of its intrinsic value.

As of June 30, 2021, Berkshire Hathaway’s (BRK.A) (BRK.B) stock portfolio ($308 billion) plus cash ($144 billion) equal $452 billion. Its current market value, as of August 10, equals $660 billion. Subtracting $452 billion (stock portfolio plus cash) = $208 billion. Adding its insurance float (expected future claims on its insurance policies) of $142 billion (June 30) results in an “enterprise value” of $350 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 (trailing 12 months from June 30), all of Berkshire’s businesses are being valued by the market at less than 15 times earnings. Currently, the S&P 500 is being valued at approximately 30 times earnings. If Berkshire’s businesses were conservatively valued at 20 times operating earnings, then they would have an enterprise value of $480 billion. Subtracting the float of $142 billion would then result in an equity value of $338 billion. Adding $338 billion (businesses) to $452 billion (stock portfolio plus cash) results in an overall equity valuation of $790 billion. Then Berkshire’s current market valuation of $660 billion represents a 16% discount from my calculation of its intrinsic value, which translates into a Class A share price of approximately $524,000. Berkshire’s closing price on August 10 was $434,610.

If Berkshire’s businesses were valued at 25 times operating earnings, then they would have an enterprise value of $600 billion. Subtracting the float of $142 billion would then result in an equity value of $458 billion. Adding $458 billion (businesses) to $452 billion (stock portfolio plus cash) results in an overall equity valuation of $910 billion. Then Berkshire’s current market valuation of $660 billion represents a 27% discount from this equity valuation which equates to a Class A share price of approximately $604,000.