Tuesday, April 13, 2021

Berkshire 5 "groves" update

2 years ago I calculated a 5 "groves" valuation of Berkshire at between $227 per B share. Since then the price per B share has increased from $201 to $268 but the 5 "groves" value has increased as well in large part due to equity investments in general and Apple in particular. 

To keep things simple, to avoid not seeing the forest for the trees, Warren Buffett in his 2018 Letter tot Shareholders wrote that they should consider Berkshire Hathway as 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 2020 $16,5 billion x 15 (Peter Lynch) Multiple = $247 billion value

Grove Number 2: Collection of public equities (stocks) = $281 billion value (December 31st 2020)

Grove Number 3: Shared control companies: Kraft Heinz, Berkadia, Electric Transmission Texas, and Pilot Flying J:
After Tax Operating Earnings: $1,3 billion ($665m+611m impairment) x 15 multiple = $19,5 billion

Grove Number 4: US Treasury bills, cash equivalents and bonds:
$135 billion + $20 billion = $155 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 2020 was $138 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 = $247b controlled business + $281b equities + $20b Shared control + $155b Cash equivalents = $703b - $40b Deferred capital gains taxes =

Berkshire Hathaway intrinsic value -> $ 663 billion

Berkshire Hathaway Market Cap @$268 per B share = $615b

B share intrinsic value: ($663b company intrinsic value / $615 market cap) * $268 = 

$289 intrinsic value per B share

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