Mar 1 2014, 8:00pm CST | by Forbes
Throughout Warren Buffett’s 2014 letter to Berkshire Hathaway shareholders he drops all kinds of suggestions about the potential value of those shares, which have made fortunes for so many astute long term followers of the 49 years of the Buffett-Munger wealth producing era. My tentative conclusion is that BRKA shares may well be worth eventually a good deal more than the $173 per share they closed at on Friday.
First, Buffett made it clear he was prepared to repurchase Berkshire Class A shares at 120% of book value just as he did during 2012. Well, presently, 120% of book value of $135,000 a share would total $162,000 a share. Since the shares traded above $173,000 on Friday, or 7.5% higher than 120% of book, Buffett is not repurchasing Berkshire right now.
Ah, but to my way of thinking Buffett is enticing us in the letter to consider whether the intrinsic value of his company’s shares are actually a premium that places their value at more than $173,000 a share, or 15 times earnings and 127.5% above the book value plus 20% he suggested would be his buy-in price.
Here’s how I get to this conclusion. The float or excess capital in Berkshire’s insurance operations should be counted as book value, but isn’t for accounting purposes. Right now ” the full amount of our float is deducted as a liability, just as if se had to pay it out tomorrow and could not replenish it,” Buffett writes. Yes, there is $15.5 billion of goodwill that is in book value and must be subtracted from the “ float” of $77 billion to come to a truer $62 billion of float or potential book value.
” Charlie and I believe the true economic value of our insurance goodwill… to be far in excess of its historic carrying value,”($77 billion), Buffett writes in his letter to shareholders. And here’s the punch line; ” The value of our float is on reason– a huge reason– why we believe Berkshire’s intrinsic business value substantially exceeds its book value.” Best read that line over; Buffett is signaling the “ float” is worth a great deal more than $77 billion.
And there’s more anticipation that the intrinsic value of Berkshire shares are going to be going quite significantly thank you very much. ” Charlie and I hope to build Berkshire’s per share intrinsic value by (1) constantly improving the basic earning power of our many subsidiaries; (2) further increasing their earnings through bolt on acquisitions; (3) benefiting from the growth of our investments; (4) repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value; and (5) making an occasional large acquisition.” (without issuing more Berkshire shares)
Succinctly, Buffett spells out ho the 4 largest portfolio stock holdings, American Express, Coca Cola, IBM and Wells Fargo will contribute to expectations of steadily higher intrinsic value. He fully expects the $39 billion unrealized gains from holding these 4 stocks to gain from dividends the 4 companies pay Berkshire every year, and from gradually increasing Berkshire’s ownership of all 4 stocks. Just an aggregate increase of 1/10th of 1 percent of the equity in the 4 companies will “ raise Berkshire’s share of their annual earnings by $30 million.” Berkshire did not report $3 billion of earnings from the Big Four stocks, which he calls “every bit as valuable to us as tghe portion Berkshire records.”
Then, too, buying in the minority interests in Iscar, the Israeli tool manufacturer and Marmon, the Pritzker holding company, increased “Berkshire’s excess of intrinsic value over book value by… $1.8 billion.
Buffett doesn’t want to give us a figure on intrinsic value in fear the public will take it as gospel and bid the stock immediately to that level. Still, I get the feeling that there’s a very good chance over time the intrinsic value has to be a good deal more than 127.5% of book value. There are a solid number of separate reasons for believing this to be true.
Source: Forbes Business
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