By Carla Fried
While Facebook (NASDAQ:FB) saw its share price soar above Morningstar's estimate of fair value in the third quarter-and thus got kicked out of the value driven Van Eck Wide Moat Focus ETF (NYSEARCA:MOAT) -- Berkshire Hathaway (NYSE:BRK.B) moved in the other direction.
The Moat ETF holds companies deemed to have developed high barriers to entry to deter competition, the very sort of company Warren Buffett looks to invest in. Some of the stocks in the ETF are also Moats with big dividend yields.
The Berkshire conglomerate started the third quarter selling at a 12% discount to Morningstar's estimate of fair value. Back in June that earned Berkshire the last spot in the Van Eck Wide Moat Focus ETF that holds the 20 stocks in Morningstar's Wide Moat index that have the biggest discount between fair value and current price at the time of the quarterly rebalancing.
Fast forward to last week, when the index was rebalanced for the fourth quarter, and Berkshire is now the fifth cheapest stock in the bunch, selling at an 18% discount to its per share fair value estimate. (For the record, the four cheaper stocks in the ETF at the beginning of the quarter are Exelon Corp (NYSE:EXC), Western Union (NYSE:WU), Express Scripps (NASDAQ:ESRX), and Weight Watchers International (NYSE:WTW).)
Berkshire's widening discount wasn't a function of a falling stock price in the third quarter. That said, Berkshire's standout 2013 slowed a bit relative to the S&P 500 in the third quarter:
BRK.B data by YCharts
Still, year-to date Berkshire's 26% price gain is eight points ahead of the S&P 500.
The reason Berkshire now shows up at a steeper discount to fair value is because Morningstar just raised its fair value estimate on the B shares from $138 to $144. Morningstar uses a "sum of the parts" methodology to assign values to Berkshire's disparate business units. The insurance unit got a small bump-up in its worth based on Morningstar upping its assumptions on the expected investment returns for that slice of the Berkshire pie over the near and medium term.
The railroads/utilities/energy side of Berkshire's business is the big catalyst to the higher fair value estimate. Morningstar boosted its valuation for that broad segment by nearly 10%, including a 22% spike in the expected contribution from MidAmerican Energy Holding Company.
Morningstar's new fair value price works out to 1.7x book value on the B shares, a steep climb from the current level:
BRK.B Price / Book Value data by YCharts
The last time Berkshire sold at that valuation was prior to the financial crisis. On a few important metrics, Berkshire has moved well ahead of where it was five years ago, suggesting 1.7 isn't exactly a stretch.
BRK.B EPS Diluted TTM data by YCharts
Rather, Berkshire Hathaway seems to have a legacy cloud hovering over it. Sure, there's the question of who will handle the capital allocation decisions after Buffett and Charlie Munger. But both gentlemen have spent the past few years adding on important pieces -- think MidAmerican, BNSF and Lubrizol -- that will continue to spit out earnings long past any individual's retirement or expiration date. And right now the sum of all those parts is trading at a share price that is just 1.3 times book value.