Berkshire Hathaway (BRK.A): Berkshire shares are cheap in their own right and should trade around the $145,000 mark ($96 per B share), based on Berkshire's historic book value median of 1.6x. Most analysts continue to model Berkshire primarily as an insurance company, which is colorable given that we value Berkshire's insurance businesses at around $85,000 per A share.
However, the Burlington (BNI) acquisition has transformed Berkshire's earnings power to suggest a book value analysis consistent with that of a railroad for its representative part of earnings. Warren Buffett also takes his position as a financial steward, not only for shareholders but also all Americans, very seriously. In the 2009 Annual report from last spring, Buffett wrote:
We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses. When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier of liquidity and capital to the system, not a supplicant. At the very peak of the crisis, we poured $15.5 billion into a business world that could otherwise look only to the federal government for help. Of that, $9 billion went to bolster capital at three highly-regarded and previously-secure American businesses that needed – without delay – our tangible vote of confidence.
Warren Buffett stumbled through the debacle surrounding Mid-American CEO, David Sokol, and Sokol's profits off of Lubrizol's (LZ) sale to Berkshire last quarter. Investors now view Buffett with caution, and probably rightly so, even though some skepticism should have been healthy all along.
What used to be a "Buffett premium" is now a Buffett discount. On the facts, Buffett and co-chairman Charlie Munger are getting old, and the two have been awfully tight lipped about succession plans.
Buffett's pick of Todd Coombs, a relatively no-name from the Greenwich hedge fund crowd that Buffett and Munger often despise due to their high fees, still leaves us puzzled. Todd Coombs does not appear to be special. His returns are by no-means extraordinary. He does not display any clear abilities in options markets, which is frankly where Berkshire needs to head to make outsized returns. Regardless, Coombs' picks in the financial sector are underwhelming.
Gaffes and puzzles aside, Berkshire is still a stellar collection of assets that have tremendous earnings power. They are worth more together. We think Berkshire shares are undervalued; and at some point investors will forgive Buffett (or more likely realize he is the same human he was over the last several decades).
Berkshire (BRK-B, BRK-A) is objectively on sale now.