Fire Sale on Buffett
Berkshire Hathaway (symbol BRK-B) has long been synonymous with its chairman and chief executive officer, Warren Buffett. Yet as Buffett ages (he celebrates his 82nd birthday on August 30), the question of what the company will look like -- and what its shares will be worth -- once the oracle of Omaha is no longer at the helm becomes only more pressing. But investors can find plenty of reasons to like Berkshire stock even if Buffett is out of the picture.
Chief among them: The price is right. The stock is the cheapest it has been in about 15 years (other than in the darkest days of the 2007-09 bear market), says Whitney Tilson, co-manager of the Tilson Focus Fund (TILFX). At last word, Tilson Focus had almost 6% of its assets in Berkshire stock, making it the fund’s third-largest holding. The current price is in part due to concerns about Buffett’s inevitable departure, Tilson says.
David Winters, manager of the Wintergreen Fund (WGRNX), agrees. “The stock used to have a Warren Buffett premium, and that premium no longer exists,” says Winters, whose fund recently had 4.6% of its assets in Berkshire. The Class B shares, which closed at $81.33 on June 26, have lagged Standard & Poor’s 500-stock index by an average of 2.1 percentage points per year over the past three years. Berkshire is also attractive because investors are undervaluing high-quality blue-chip companies across the board, Winters says.
How cheap is Berkshire? Tilson estimates that the Omaha company is worth $186,000 per Berkshire Class A share (BRK-A). One A share equals 1,500 B shares, so the estimate works out to about $124 per B share. That suggests the B shares trade at 35% below their intrinsic, or actual, worth. Tilson says his estimate doesn’t include extra value for the Buffett touch.
Berkshire’s core businesses are strong. Premiums earned by the firm’s group of insurance companies -- including Geico, which sells policies directly to consumers, and its reinsurer units, which generally sell policies to other insurers as protection against catastrophic losses -- increased by 7.8% in the first quarter of 2012 compared with the same quarter in 2011. Earnings before taxes among its noninsurance lines of business -- including Burlington Northern Santa Fe railroad and MidAmerican Energy Holdings, which owns utilities and natural gas pipelines -- were up 25% over the same period. “You’ve got dozens of highly talented entrepreneurs, who have already built and run very successful and large companies, currently managing Berkshire’s operating businesses,” says Keith Trauner, co-manager of the Goodhaven Fund (GOODX), which recently had 4.3% of its assets in Berkshire. In other words, say Berkshire bulls, even if Buffett retired tomorrow those underlying businesses would continue marching along.
There is some evidence that the company itself thinks its stock is cheap. In September 2011, Berkshire’s board of directors authorized a program to buy back shares should the stock fall to 110% or less of book value (assets minus liabilities). The Class B shares had a book value of $71 at the end of March, putting the 110% mark at $78. In this year’s annual report Buffett reiterated that the program would continue, implying that a price at or below the 110% mark would represent a significant discount to Berkshire’s worth. However, he also noted that Berkshire wouldn’t use buybacks to prop up its stock if the market tanked and that it would stop purchases if Berkshire’s cash holdings -- $38 billion at the end of the first quarter -- dropped below $20 billion.
On top of all of that, the fact that Buffett is still in charge, and still thriving, is gravy. “He can make investments that nobody else can, because he is Warren Buffett,” says Tilson, who believes that, given Buffett’s apparently good health and commitment to the company, there’s an 80% chance he’ll remain in charge for at least another five years. “He still has some more rabbits to pull out of his hat.”
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