In Warren Buffett's 2010 Letter to Shareholders released on February 26, 2011, Buffett states that he uses the "understated proxy for intrinsic value -- book value" to measure Berkshire Hathaway's (BRK.A) performance. His annual reports every year highlight Berkshire's annual percentage change in book value per share vs. the S&P 500 with dividends included. He also disparages the use of income per share since Berkshire's net income can vary greatly depending upon when he decides to realize gains or losses in Berkshire's investment portfolio. Therefore, instead of comparing Berkshire's current price to earnings ratio with its historical average to determine if Berkshire is undervalued, a better comparison would be to focus on its price to book value ratio.
In the table below I show, for each year from 1985 through 2010, Berkshire's book value per share and market price per share of its class A shares, as well as its annual price to book value ratio. From this table it can be seen that Berkshire's 2010 yearend price to book value ratio of 1.25 is 23% below its average of 1.63 over the past 26 years, and 44% below its peak value of 2.23 achieved in 1995. Indeed, in only two of the past 26 years has this ratio been lower than its 2010 value of 1.25. (In 2009 the ratio equaled 1.17 as the economy was beginning to recover from the financial crisis, and in 1987 the ratio equaled 1.19 after the Stock Market Crash of 1987.)
Utilizing Warren Buffett's preferred proxy of intrinsic value of book value per share, the yearend price to book value per share of Berkshire indicates that it is undervalued. (Using Berkshire's closing price of 127,550 on February 25 and the 2010 yearend book value of 95,453, the current price to book value ratio would equal 1.34, which still represents an 18% discount from its historical average of 1.63. Of course, the current book value of Berkshire can also be assumed to exceed the 2010 yearend level, which in turn would lower this ratio.)
Year | Book Value | Price | P/Book Value | ||||
2010 | 95453 | 119100 | 1.25 | ||||
2009 | 84487 | 99200 | 1.17 | ||||
2008 | 70530 | 96600 | 1.37 | ||||
2007 | 78008 | 141600 | 1.82 | ||||
2006 | 70281 | 109990 | 1.57 | ||||
2005 | 59377 | 88620 | 1.49 | ||||
2004 | 55824 | 87900 | 1.57 | ||||
2003 | 50498 | 84250 | 1.67 | ||||
2002 | 41727 | 72690 | 1.74 | ||||
2001 | 37920 | 75600 | 1.99 | ||||
2000 | 40442 | 71000 | 1.76 | ||||
1999 | 37987 | 56100 | 1.48 | ||||
1998 | 37801 | 70000 | 1.85 | ||||
1997 | 25488 | 46000 | 1.8 | ||||
1996 | 19011 | 34100 | 1.79 | ||||
1995 | 14426 | 32100 | 2.23 | ||||
1994 | 10083 | 20400 | 2.02 | ||||
1993 | 8854 | 16325 | 1.84 | ||||
1992 | 7745 | 11750 | 1.52 | ||||
1991 | 6437 | 9050 | 1.41 | ||||
1990 | 4612 | 6675 | 1.45 | ||||
1989 | 4296 | 8675 | 2.02 | ||||
1988 | 2975 | 4700 | 1.58 | ||||
1987 | 2477 | 2950 | 1.19 | ||||
1986 | 2073 | 2870 | 1.36 | ||||
1985 | 1644 | 2470 | 1.5 | ||||
Avg. = 1.63 | |||||||
Disclosure: I am long BRK.B.
If the stock were to trade at 2x book, it would mean that investors are willing to pay twice the value of Berkshire's assets just to essentially have Buffett select stocks for them. I don't think 25% over book is too much to pay given Buffett's acumen and ability to get the best deals, but 1.63x book is, in my opinion, ridiculous. Especially when considering that Buffett is already 81 years old and he has no clear successor, if anything at all happens to Buffett, this stock will easily trade down to 1x book.
To be clear, is isn't that I think your strategy will not be profitable, as I believe the price to book ratio will probably converge to the long-term average over time, but I think the risk of it not happening outweighs the reward.
You are living in lala land if you think the break up value of BRK is less that twice its current price.
It is OK to treat his share as a mutual fund, the same we treat GE as one.
Any one has the stock performance (including any dividends) of the last 3 years?
1. Any increase in goodwill (i.e. intangible value in excess of tangible assets) since purchase isn't included in book value. Many of Berkshire's subsidiaries are so good that their true economic goodwill is now easily ten times the goodwill showing in the balance sheet.
2. Insurance float, while not owned by Berkshire is nigh-on permanent (in fact growing) capital and has maintained negative cost-of-float averaged over long periods. Provided you anticipate that zero-cost float is to be expected for decades to come (and I do, given the structural advantages at play) it makes sense to consider this as part of the capital that is at work earning money for Berkshire shareholders.
To my mind, therefore, Price to (Book Value + Float) is a better valuation metric that P/BV alone, and still understates IV (but only for a business of the quality of Berkshire).
Float at YE2010 was $65.8bn. With 1,648,000 class-A equivalent shares outstanding that amounts to
Float/share = $39,947
BV/share = $95,453
(Float + BV)/share = $135,400
Price/(Float+Book) ratio = 0.942 using Friday's closing price above.
This is still a crude metric, and it's far better to make a range of estimates of complete intrinsic value then demand a discount before purchasing, but I think it sheds some more light on what you're getting thrown-in for free at current prices.
BRK is more about supporting Buffett's ego rather than returning cash to shareholders.
I have never understood his thinking on this.
What's he going to do for his opus, take Exxon private?
No innovation, just ego stroking. At least his tax free foundation is supporting innovation.