Berkshire Hathaway Looks Stronger Than Ever, The Price Is Just Right

July-12-2009
(GuruFocus, July 12, 2009) There is a Barron’s article today entited “ For Buffett Fans, the Price Is Right” written by Andrew Bary.

Andrew Bary has written several articles about Berkshire in the past few years. In late 2007, when the company's "A" shares were trading near $150,000, Bary penned a front-page cover story saying Berkshire was overpriced.

Last year Bary wrote another cover story making the case that MidAmerican Energy Chairman David Sokol is the most-likely candidate to succeed Buffett. Bary wrote a more bullish piece on Berkshire last year. Here are key points he made in the recent article:

1. Berkshire Hathaway is down 12% for the year. Its shares have not participated much in the stock market’s rally since the end of March.

2. Buffett stated that book value is a good proxy of Berkshire’s intrinsic value, and historically it has been.

3. On those terms, Berkshire shares look appealing, at just 1.2 times estimated current book value of $72,000 a share. In the past decade, the stock has traded for an average of 1.6 to 1.7 times book value, a measure of shareholder equity per share. The current price-to-book ratio is near the low reached in early 2000, when Berkshire's stock bottomed at about $40,000.

4. Book Value Estimate: Berkshire 's book value, which stood at $66,250 per share as of March 31, likely has risen since then because of the market's powerful rally. That has lifted the value of the company's famed equity portfolio, which now totals more than $50 billion. The market value of Berkshire's equity and bond derivatives also has increased, and we assume the company earned more than $1,000 a share from operations in the second quarter, in line with reported first-quarter figures. That's how we arrive at an estimated book value of $72,000 a share.

5. Reasons holding Berkshire's shares back:
a) Investors recently have favored economically sensitive and other "offensive" stocks;
b) Investors remain concerned about Buffett's miscalculated sale of long-term put options on $35 billion of equity indexes, including the Standard & Poor's 500, when stock prices were much higher;
c) Berkshire has taken a big hit on some of its own equity holdings, including large stakes in ConocoPhillips (COP). d) property-and-casualty insurers are out of favor amid concerns about weak insurance pricing. e)Warren Buffett turns 79 next month. The author thinks all are insignificant except Buffett's age.

6. Even if the market tanks again this year, the downside in Berkshire stock seems limited due to its low price/book ratio and the company's earnings power.

7. The company looks stronger than ever, due to its promising portfolio and some top-flight businesses. Investors could now buy that package for a low premium to book value and get the talents of Buffett, who continues to demonstrate his incomparable investment skills.

8. The B shares look like a better buy than the A shares, because they sell at a 3% discount to their theoretical value. But the discount has persisted for some time, and could continue, as the B shares can't be converted into A shares.

Bilibala comments:
I also have concern about his age, other than that, Berkshire is a great company to invest.