This post is written at 23 March 2020.

I think many of you know Berkshire Hathaway, the company managed by Warren Buffet. The company has a lot of subsidiaries, ranging from insurance, freight rail transportation, utility, to real estate brokerage services, and many others.

According to the 2019 annual report, the compounded annual gain from 1965 to 2019 is 20.3% while that of S&P500 with dividend reinvested is 10%. Under the current market situation, the price of BRK.B drops heavily. Is it a good time to buy?

BRK.B

Valuation

As usual, I will do a valuation on the company using free cash flow which is cash flow from operations net CapEx. It should be noted that free cash flow does not include any gain/loss in investment but only earnings from companies with 50% or more interest and dividends paid by companies with less than 50% interest.

Below table is 5-year free cash flow of BRK:

US BillionYear 1Year 2Year 3Year 4Year 5
Cash Flow From Operations31.4932.5437.438.6938.69
CapEx16.0812.9511.7114.5415.98
Free Cash Flow15.4119.5925.6924.1522.71

Using the median value and 10% required rate of return, the value of BRK.B is 164.5 per share.

Median Free Cash Flow22.71
Shares Outstanding1.38
Discount Rate0.1
Value164.5652174
Current Price170

If we just look at the valuation, it is a good signal of buy because the current price of 170 is properly valued under our assumptions.

But, like any other valuation model, the implicit assumption is that the market is inefficient in the short run and efficient in the long run and therefore, the deviation of value will be corrected. This may be wrong, especially when the company is weak and the price may not be corrected.

Another valuation metric is Book Value Per Share. In the year 2019, Book Value Per Share is 174.35. If you buy BRK.B now, you are buying at 1x book value. This happened once on 2012 (2010-2019 history) where BK.B traded at 93% book value.

Other Factors

Strong Companies

Here are the top 10 holdings of BRK which represent more than 80% of the total portfolio size. All of them are big names and have good track records of revenue.

TickerCompanyIndustryMarket Cap $MilSharesValue ($1000)Weighting %YTD Change %
AAPLApple IncHardware1,003,035.04245,155,56671,989,93329.740.0201
BACBank of America CorpBanks171,616.25925,008,60032,578,80313.46-16.61%
KOCoca-Cola CoBeverages – Non-Alcoholic164,437.28400,000,00022,140,0009.150.0103
AXPAmerican Express CoCredit Services59,891.97151,610,70018,874,0167.8-8.19%
WFCWells Fargo & CoBanks108,369.05323,212,91817,388,8557.18-49.80%
KHCThe Kraft Heinz CoConsumer Packaged Goods27,212.78325,634,81810,462,6474.32-29.41%
JPMJPMorgan Chase & CoBanks256,677.0559,514,9328,296,3823.43-39.45%
USBU.S. BancorpBanks49,547.48132,459,6187,853,5323.24-45.07%
MCOMoody’s CorporationCapital Markets32,911.1224,669,7785,856,8522.42-25.72%
DALDelta Air Lines IncTransportation13,666.0170,910,4564,146,8441.71-62.80%

A Large Amount of Cash

Currently, Berkshire Hathaway’s cash is at a record high, nearly double the amount 5-year ago. Under the current market situation, this can be a strength since Mr. Buffet can use the cash to purchase more stocks. For example, Mr. Buffet had purchased 45.3 Billion Delta Air Lines shares.

US BillionYear 1Year 2Year 3Year 4Year 5
Cash and Cash Equivalents56.61223.58125.4627.74961.151
Short-term Investments in U.S. Treasury Bills4.56947.33878.51581.50663.822
Total61.18170.919103.975109.255124.973

Covid-19

You may argue that the assumption of free cash flow may not be correct since those companies are affected by Covid-19. Yes, it is true if the timeframe is 1 to 2 years. But, if you ask yourself, whether this will continue in 5 years, I think the probability is low.

Conclusion

To conclude, since the valuation of BRK.B is at its fair value. Given that the top positions in the portfolio are strong and BRK has a large amount of cash which gives an advantage in the current market situation, I feel comfortable in investing in BRK.B.

Leave a Reply

Hey, wait!

Before you go, let us offer you a 10% discount coupon for your next purchase.

%d bloggers like this: