Berkshire Hathaway Still Selling At A Discount

| About: Berkshire Hathaway, (BRK.A)
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We believe Berkshire Hathaway (NYSE:BRK.A), even after its recent move, continues to represent a fantastic investment opportunity – and it remains a 20% economic interest in our fund.

Berkshire is among the fastest growing large companies in America
Let’s take a look at the 10-year profit growth rates of the 25 companies in America with the largest market capitalizations today (click to enlarge):


So the average annual EBIT growth of these 25 companies over the past 10 years is almost 15% – terrific performance to be sure. Let’s compare this to the comparable performance numbers for Berkshire’s operating businesses (the non-insurance-related businesses):


In summary, the profit growth of the operating businesses side of Berkshire Hathaway is accelerating and, over the past 10 years, places it in the very top tier of large American businesses. If Berkshire’s operating businesses were a separate company, with 2006 EBIT of approximately $6 billion, it would be worth at least $80 billion (a 13.3 multiple).

In addition, profit should grow by nearly 60% this year. How it this possible? This table shows Berkshire’s quarterly operating income data since Q1 2004, broken down by business unit (click to enlarge):


In addition to the overall explosion in profits, consider the remarkably consistent, rapid growth of the operating businesses, much of which results from Warren Buffett’s highly disciplined acquisition strategy. Note that these business range in quality from very good to some of the best in the world.

We expect a very strong 3rd quarter
We often have materially different earnings estimates relative to Wall Street’s for the companies we own (a good example discussed above is Microsoft), but rarely are we nearly 70% above consensus for a quarter that has already occurred and will be reported in about a week – but that’s the case with Berkshire this quarter. With almost no hurricane losses this season vs. the catastrophes of Katrina and Rita last year, Berkshire’s earnings should be massively higher.

To be specific, we expect the headlines to read “BERKSHIRE EARNINGS UP OVER 400% YEAR OVER YEAR” when the third quarter is reported next week (this includes realized gains, which we excluded from the table above; as you can see, operating income will be exponentially higher). We expect EPS of at least $2,000 for the quarter, whereas the Wall Street consensus estimate is a little over $1,200 per share.

So, what is it worth?
We believe Berkshire’s non-insurance operations are worth at least $50,000-$60,000 per share, plus $80,000 per share for the insurance businesses (valuing them as the sum of the cash, marketable equities and fixed income securities, giving no value to the operating profits of these units), which equals an intrinsic value of $130,000 - $140,000. This includes no “Buffett Premium” (which we believe is substantial) – it is simply the value of the businesses today.

In summary, one can buy a Fort Knox balance sheet, rapid growth and exemplary corporate governance, all overseen by perhaps the world’s greatest capital allocator, at a 30-40% discount to intrinsic value. This is why we are delighted to have Berkshire as our largest capital weighted position.

Disclosure: Author is long BRK.A