Morningstar's detailed BRK valuation

[netnet]

Morningstar did a 5 part valuation model or rather used 5 different valuation models on BRK

 

Part 1 http://news.morningstar.com/articlenet/article.aspx?id=593686  Earning Multiple

Part 2 http://news.morningstar.com/articlenet/article.aspx?id=593687  Book value

Part 3 http://news.morningstar.com/articlenet/article.aspx?id=593689  Two column approach

Part 4 http://news.morningstar.com/articlenet/article.aspx?id=593690  Insurance float

Part 5 http://news.morningstar.com/articlenet/article.aspx?id=593691  Discounted cash flow

 

 

  (But ultimately how do you value Fort Knox with Buffett as commander?)

 

 

http://submissions.morningstar.com/wp-content/uploads/brkvaluation5_0_1.jpg

[jeffmori7]

Thanks netnet!

[jay21]

I am scanning through this.  I was hoping they would detail the competitive positions of the subs a little more, but it is still a nice attempt.

 

I am reading Part 4 right now and one thing they have to  be careful on is the after-tax return.  A good chunk of the equity returns are deferred which makes the cash tax rate lower than the GAAP rate.  It's hard to model what the after tax return number should be. 

[zarley]

Thanks for sharing netnet. That's a nice collection of articles and a good variety of ways to look at BRK.

 

Although I take issue with a bit of what they put together, they ultimately land on a fair value estimate of $187,500 per A share ($125 per B share).  This happens to be exactly where my slightly modified two-column spreadsheet winds up for current value.  It's also right in the neighborhood of the basic two-column approach they said they didn't like.  It is also almost right on the "More Conservative" scenario for the Intrinsivaluator (http://www.creativeacademics.com/finance/IV.html). So, quibbling aside, the end result is quite reasonable to me.

 

Berkshire's shares remain slightly undervalued in a market that appears to be fairly valued*

Our fair value estimate is equivalent to $187,500 per Class A share (or $125 per Class B share), reflective of a price to fair value multiple of around 0.85 times (inferring a more than 15% gain from today's trading prices). While not as large of a margin of safety as we would normally like to see in a firm with a medium uncertainty rating, we do note that Berkshire has effectively created a floor on the company's stock price by announcing that it would buy back both Class A and Class B shares at prices up to 120% of reported book value, which stood at $111,718 per Class A share (and $74 per Class B share) at the end of the third quarter of 2012. Furthermore, we anticipate that Berkshire's book value per share increased to at least $115,000 per Class A share (and $77 per Class B share) at the end of last year, meaning that Buffett would be willing to step in and buy the company's common stock at prices up to $138,000 per Class A share (and $92 per Class B share).

[Guest longinvestor]

Morningstar did a 5 part valuation model or rather used 5 different valuation models on BRK

 

Part 1 http://news.morningstar.com/articlenet/article.aspx?id=593686  Earning Multiple

Part 2 http://news.morningstar.com/articlenet/article.aspx?id=593687  Book value

Part 3 http://news.morningstar.com/articlenet/article.aspx?id=593689  Two column approach

Part 4 http://news.morningstar.com/articlenet/article.aspx?id=593690  Insurance float

Part 5 http://news.morningstar.com/articlenet/article.aspx?id=593691  Discounted cash flow

  (But ultimately how do you value Fort Knox with Buffett as commander?)

http://submissions.morningstar.com/wp-content/uploads/brkvaluation5_0_1.jpg

 

How much of the recent flurry of smart BRK analyses is simply a result of the 120% floor announced? It seems to me that the street is rationalizing the run up in the stock price after pretty much ignoring the stock for the better part of a decade or more.

 

Funny how that happens every time, even with such a transparent shareholder friendly company like BRK.

 

There is a Warren phrase for this, C_ _ _ _ Y  C _ _ _ _ _ _ _ S. If this is not it, I don't know what is!

[Shane]

If you  believe that WEB will support the stock price at 1.2x BV that adds value, similar to a put option on a bond.

[Palantir]

It adds a catalyst, it makes Wall Street realize that management is willing to support the stock, so they pay attention. Otherwise if the stock is going to stay undervalued perpetually with no hope of reaching IV, why would you want to own it? If you want to own a stock like that, I recommend a long position in Loews (L).

[Shane]

I was referring to the price floor it might put on the stock, not the catalyst of getting wall street to realize anything.  I actually dont see a meaning increase in coverage for sell side reports on Berkshire Hathaway since the announcement.