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Whitney Tilson's email to investors discussing berkshire hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)'s third-quarter earnings report; updated estimate of Berkshire's intrinsic value.
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Berkshire Hathaway's Third-Quarter Earnings Report
1) Berkshire Hathaway (BRK-B), which I continue to believe is the No. 1 retirement stock in America, is up 25% this year, exactly in line with the S&P 500 Index.
The company reported its third-quarter earnings on Saturday. (Here are links to the press release and 10-Q .) As I do every quarter, I asked my longtime friend and former partner Glenn Tongue, who is the axe on the company, to share his analysis of it. Here's what he sent me:
Updated Estimate Of Berkshire's Intrinsic Value
2) Regarding Berkshire's intrinsic value , I've used a consistent and simple methodology – one that I think Buffett himself uses – to value Berkshire for more than two decades. Take cash and investments (valued at market) and add the value of the wholly-owned operating businesses, calculated by applying a conservative multiple (I use 11 times) to the pretax earnings of those businesses.
This table shows how I calculate Berkshire's investments per share as of the end of the third quarter:
Adjusting the stock portfolio upward by the 9.2% increase in the S&P 500 Index since the quarter ended on September 30 yields investments per share of $348,000 currently.
To value the wholly-owned businesses, here are the figures I use to calculate their earnings:
Note that I subtract all of the underwriting and investment profits from Berkshire's massive insurance operations but add back a rough estimate of the average insurance underwriting profits over the past decade ($1.4 billion annually).
This results in $17,557 in adjusted pretax earnings per share over the past 12 months, to which I apply a multiple of 11 times to arrive at a value for the operating businesses of $193,000 per share.
Now add the $348,000 in cash and investments per share to arrive at a total intrinsic value of $541,000 per A-share (or $361 per B-share).
With the A-shares closing Friday at $434,000, that means the stock is trading 20% less than my estimate of its intrinsic value.
The company is incredibly safe and growing at a healthy rate. The stock, conservatively valued, is trading 20% below its intrinsic value – so cheap, in fact, that two of the greatest investors of all time are buying it in size. What's not to like?
Best regards,
Whitney
P.S. I welcome your feedback at [email protected]
Updated on Nov 8, 2021, 2:47 pm
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