Barron's Pans Berkshire

After pitching Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) for years, Barron's cover story takes a decidedly bearish stance on the now-overpriced stock, saying investors looking for a sound financial bet may be better off looking elsewhere. Shares have surged 30% since August; at $220 billion Berkshire is now the sixth richest company in America. Barron's notes that it's admittedly difficult to put a value on the complex company, compounded by the fact that Buffett refuses to divulge its "intrinsic value" - the discounted value of its cash flow. Investors are thus forced to rely of book value, which undervalues intrinsic value, but no one knows by how much. Berkshire now trades at about 1.8x book value - at the high end of the 1 to 2 times it has traded between over the past two decades. It also trades at a rich 23x earnings. After a deal-less 2007, Wall Street awaits Buffett's next move, though it is becoming increasingly difficult for him to find acceptable investments for its huge cash holdings.

At 78, it's not clear how many CEO-years Buffett has left in him. When he leaves, longtime shareholders are likely to cash out, while other investors may sit on the sideline to gauge his successor's prowess. Barron's notes Berkshire has not always been a great investment. Shares topped $80,000 in 1998, and traded there as recently as 2005. Credit Suisse's Charles Gates has a $125,000 target on the shares (Fri: $143,000). "We consider the stock fully priced."

Barron's says better choices include AIG (AIG - 8x 2008e earnings), Wells Fargo (WFC), American Express (AXP), Allstate (ALL). The Tisch family's Loews (LTR) is a similar company with a great record that trades at 12x 2007 earnings and a discount to NAV. Its market cap is 1/10 of Berkshire's, making it much easier to "move the needle." Barron's says would-be investors may want to ponder the following: "Buffett didn't build the Berkshire powerhouse by paying much more for acquisitions than they were worth."

Additional Reading: What Makes Warren Buffett Successful? • Have You Read Your Classic Buffett?

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Comments

[Lisa]

I'd love to see Whitney Tilson's response to this: he's a big fan of the stock, and owns it in his funds.

[pleniv01]

I was at the BRK meeting last year and of course the question of
succession arose. WB said he was looking for not one but several
successors, each of whom might handle a chunk of investing. This
company is a winner, long term, and I think in this environment trying
to figure out the value of anything is, actually, the problem. I do
agree that if the writer had any real expertise on company valuation,
he would not be working as a Barron's journalist. And, in my mind, I
will put my money where WB puts his money. If someone credible has a
better suggestion, let me know.

[MickWeinstein]

Whitney Tilson and Glenn Tongue have made the slides from their presentation at the Value Investing Congress last month on the EMC stub, Resource America and Berkshire Hathaway available to Value Investor Insight readers and, now, Seeking Alpha readers at: www.designs.valueinves...