Berkshire Hathaway Cl. B (BRK.B) acts more like a professionally managed investment portfolio than an operating company. As such, it needs to be judged more by NAV-like, book value growth over time, than by using P/E multiples.
Year-end 2002 book value of $27.84 /share grew to $68.23 by the end of 2011. It is estimated to reach about $75 by December 31, 2012. If it attains that level the 10-year cumulative growth will have been quite good at greater than 169%.
Berkshire Class B shares did not come close to mirroring that nice increase. BRK.B closed at $48.67 on August 30, 2002 and finished just 72.6% higher exactly one decade later. Why was that?
The previous ten years started with Berkshire's Class B shares at a pricey 180% of book value. BRK.B is now at just trading for just about a 12% premium to asset value. That's equivalent to a stock that saw multiple compression from an 18 P/E to just 12x earnings.
That was bad news for buyers a decade ago. It's created real opportunity today.
At the outrageous depths reached in March of 2009 Berkshire could be had for just 86% of book value. The severe summer low of 2011 bottomed out at a 2% discount to net assets.
At the three worst times to have bought (the red stars on the chart) Berkshire shares averaged 195% of NAV. Those who bought in early 2004 watched their shares decline more than 18% over a 19-month period. Irrationally exuberant buyers in late 2007 and in the pre-Lehman crisis period of 2008 also paid too high a price.
From the 2007 top to the 2009 trough BRK.B dropped 55.7%. Since then it's up 87.5%. Thursday's close puts us squarely back in the bargain-priced valuation range. True net worth is up about > 50% since the $101 top print in 2007 yet the shares are offered at 17% less than they were back then.
The four best buying opportunities of recent years (see green stars on the chart) saw average levels @ 115% of book value.
Berkshire's management has excelled at creating value over time. Your job is to buy it only when you get good value for your money. History tells us that today's price/book value represents a solid entry point. With any patience at all you could never have lost money buying BRK at such a slight premium to NAV.
Down the road, book value will be higher. At some point you'll likely get a chance to sell at 150% - 190% of that increased book value. Berkshire's BV grew at 19% compounded over the most recent decade. It advanced by 6% annually from 2007 - 2012 right through the Great Recession. At an 8% average future growth rate; assets would double to about $150 per share by 2021.
A normalized 50% premium to BV brings me to a $225 target price by then. I could live with 168% in nine years (with no taxes due along the way). If your time horizon is more in the one-year than nine-year range; check out Morningstar's rating and 'fair value' estimate.
Their $100 suggested value appears conservative at approximately 33% above estimated YE 2012 book value.
Buffett can't live forever. Berkshire pays no dividend.
To the first concern I say that succession plans are already in place.
The lack of yield may actually be one of the main reasons you can now buy Berkshire Hathaway at such a nice price. It hasn't stopped intelligent investors from owning these shares in the past and it won't inhibit them in the future.
Whatever happens with our changing tax system capital gains will almost certainly get favorable treatment versus dividend income.
Take advantage of this temporary lull in Berkshire's shares to reflect their full underlying value. Buy Berkshire Hathaway Class B at $84.01.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BRK.B over the next 72 hours.