## Friday, March 01, 2019

### Warren Buffett needs to update the Berkshire Hathaway Owner's Manual -> Intrinsic "5 grove" value

Today March 1st 2019 the Berkshire Hathaway Owner's Manual http://www.berkshirehathaway.com/ownman.pdf is outdated. It states:

"The five-year test should be: During the period did our (Berkshire Hathaway) book-value gain exceed the performance of the S&P?"

Is the test now as follows? : Did the increase in the intrinsic value of the sum of the 5 "groves" increase more quickly than the S&P 500 Total Return Index over 5 years?

Or is it just: Did the share price of Berkshire Hathaway outperform the S&P?

To keep things simple, to avoid not seeing the forest for the trees, Warren Buffett says investors should consider 5 "groves" of trees. If you add them up, you get an intrinsic value estimate for the whole company and can calculate the intrinsic value per share. Buffett supplies shareholders with earnings but lets shareholders pick their own multiple to get to a reasonable valuation. (Or did he mention a reasonable multiple somewhere else, maybe based on interest rates?).

Grove Number 1: Berkshire controlled non-insurance businesses:
Earnings \$16,8 billion x 15 (Peter Lynch) Multiple = \$252 billion value

Grove Number 2: Collection of public equities (stocks) = \$173 billion value (December 31st 2018)

Grove Number 3: Shared control companies: Kraft Heinz, Berkadia, Electric Transmission Texas, and Pilot Flying J:
After Tax Operating Earnings: \$1,3 billion x 15 multiple = \$19,5 billion

Grove Number 4: US Treasury bills, cash equivalents and bonds:
\$112 billion + \$20 billion = \$132 billion

Grove Number 5: A collection of insurance companies that generate "float", a source of (cost free) financing for the first four groves. The float in 2018 was \$122 billion. Float exists because insurers are paid premiums upfront, but only pay claims later. See "Unpaid losses" in the balance sheet. Unpaid losses are booked as debt, but represent "other people's money" that Berkshire can use and invest temporarily. This grove is not added or subtracted to get to intrinsic value.

Sum of Grove 1,2,3 and 4 = \$252b controlled business + \$173b equities + \$20b Shared control + \$132b Cash equivalents = \$577b - \$15b Deferred capital gains taxes =

Berkshire Hathaway intrinsic value -> \$ 562 billion

Berkshire Hathaway Market Cap @\$201 per B share = \$496

B share intrinsic value: (\$562b company intrinsic value / \$496 market cap) * \$201 =

\$227 intrinsic value per B share

The \$227 is based on stock prices at the end of 2018. Based on increased stock prices at the end of February 2019 somebody at Seeking Alpha got a number of \$246 per B share: https://seekingalpha.com/article/4243986-berkshire-hathaway-2018-valuation