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Berkshire Hathaway 2nd Q Report


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At $103,400 per Class A share, the valuation is 1.4 times the June 30, 2009 book value.  In recent years, the stock has tended to gravitate toward 1.5 times book value – while trading in a wide band around that level.  Some would have us believe that this makes  Berkshire overvalued.  In contrast, I believe that book value understates the intrinsic value of Berkshire since the company has many terrific operating businesses that were purchased a long time ago.  Buffett’s valuation methodology is to separate the business into two parts, insurance and other.  He values the insurance business at a level equal to the value of the cash and investments that it holds (currently $83,530 per share).  For the operating businesses, he uses an unspecified multiple of pre-tax operating earnings (excluding investment income).  For the 12 months ended June 30, 2009, pre-tax earnings were $3,070 per share.  This means that the market is applying a 6.5 times multiple to these operations, which is certainly too low (103,400 less 83,530 divided by 3,070).  A level between 10 and 13 times is probably appropriate given the high quality and unlevered nature of the select group of businesses – with even higher multiples warranted when earnings are cyclically depressed as they are now.  This means that they stock is worth at least $114,000 (10 times) and likely in the neighbourhood of $123,000.  So I believe Berkshire is still very good value at today’s price. 



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