“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 $17,877 in adjusted pretax earnings per share in 2021, to which I apply a multiple of 11 times to arrive at a value for the operating businesses of $197,000 per share.
Now add the $330,000 in cash and investments per share to arrive at a total intrinsic value of $527,000 per A-share (or $351 per B-share).
With the A-shares closing yesterday at $476,000, that means the stock is trading 10% below my estimate of its intrinsic value.
My friend and former partner, Glenn Tongue, has come up with a second methodology:
“There is another viable way to look at Berkshire’s valuation by looking at the economic earnings of the stock portfolio rather than the accounting treatment.
In his annual letter, Buffett notes that while Berkshire owns 5.6% of Apple (AAPL), the only thing that appears in Berkshire’s income statement related to this stake is the $786 million in dividends Berkshire received from Apple last year. But in reality, Berkshire owns 5.6% of Apple’s total net income, equal to $5.6 billion of what Buffett calls “look-through earnings.”
Applying the same calculation to all of Berkshire’s stock holdings (including Apple) results in look-through earnings of at least $15 billion.
Adding this to Berkshire’s after-tax operating earnings of $27.5 billion yields total economic earnings of $42.5 billion.
If we compare this to Berkshire’s current market cap of $702 billion, less roughly $100 billion of excess cash, we can see that Berkshire is currently trading at a price-to-earnings (P/E) ratio of 14.2 times trailing earnings.
Given that the S&P 500 is currently trading at 23.8 times trailing earnings, Berkshire’s multiple is downright cheap, especially given that it’s a far-above-average collection of businesses.”
Thank you, Glenn!
In summary, Berkshire Hathaway is incredibly safe and growing at a healthy rate. And its stock, any way you look at it, is undervalued – enough that the world’s greatest investor is buying it back in size. What’s not to like?”