By Michael Hooper
Looking at Berkshire Hathaway (BRK-A, BRK-B) over the past 25 years, I have paid close attention to its Price/Book Ratio. This is the price of the stock divided by its book value. Most banks trade around book value, which is assets minus liabilities. Berkshire Hathaway is not a bank nor a pure play financial company. It is a conglomerate with 100 different companies in insurance, transportation, energy, aviation, manufacturing and retail, plus a large portfolio of stocks like Apple (AAPL) and Coca-Cola (KO).
Over the past five years, Berkshire Hathaway's price to book ratio has ranged between 1.196 times book value to 1.58 times book value, with the average at 1.4 times book, according to Ycharts.
Over the past five years, Berkshire Hathaway's price to book ratio has ranged between 1.196 times book value to 1.58 times book value, with the average at 1.4 times book, according to Ycharts.
During the past 13 years, the highest P/B Ratio of Berkshire Hathaway Inc was 1.90. The lowest was 1.03. And the median was 1.35, according to GuruFocus.
Currently the price of Berkshire Hathaway Class A stock is trading around $300,000 per share, and the Class B Shares are $200 per share. The book value per share is $218,350 per class A share or about $145.56 for the B share at end of second quarter 2018.
$300,000/$218,350=1.373
B shares are worth 1/1500 of A share.
B shares are worth 1/1500 of A share.
During my years of observation, Berkshire stock always seems to be a buy when it is trading around 1.3 times book value, the stock usually recovers to around 1.4 to 1.5 times book. If the stock were to recover to 1.45 times book value, the stock would trade at $316,607 per A share or $211 per B share.
In the Berkshire Hathaway owners manual, Warren Buffett talks about the important measure of book value and how it relates to the intrinsic value of the company. Buffett closely watches the intrinsic value of the company because he believes that is a true representation of the company's value.
He says intrinsic value is the discounted value of the cash that can be taken out of a business during its remaining life.
Buffett calls the book value figure as a "rough albeit significantly understated tracking measure for Berkshire's intrinsic value." A percentage change in book value in any given year is likely to be reasonably close to that year's change in intrinsic value. Buffett has been able to grow book value of the company at an average annual increase of 19% since he took over management of the company in 1965.
Last summer Berkshire Hathaway made its buy back policy more liberal to buy back shares trading above 1.2 times book value.
It wouldn't surprise me to see Berkshire Hathaway buy back shares below $200 per B share or below $300,000 per share on the A shares.
Third quarter earnings for Berkshire Hathaway will be hampered by hurricane damage, but I expect large gains in railroad, manufacturing, retail and energy.
Keep in mind, Price/Book value is just one way to measure a company. Price/Earnings ratio is a popular way to measure a company.
Third quarter earnings for Berkshire Hathaway will be hampered by hurricane damage, but I expect large gains in railroad, manufacturing, retail and energy.
Keep in mind, Price/Book value is just one way to measure a company. Price/Earnings ratio is a popular way to measure a company.
Currently Berkshire's P/E ratio is about 10.4. J.P. Morgan analyst Sarah DeWitt's B-share Dec. 2019 price target is $250, giving the stock about an 18% upside potential, according to this article at Seeking Alpha.
Disclosure: The author owns shares of Berkshire Hathaway, and recently purchased more shares of the stock, and may buy more below $200 per B share.
Mike...
ReplyDeleteWarren Buffet is the man. Need to get some more B shares myself.
You need to tell the story about the dentist from Stromsburg who turned down a chance to invest with a young man who seemed particularly bright. Today, that dentist would have been a millionaire if he would have invested with Warren Buffet.
Yes, as I recall, the dentist, upon hearing about a bright young man, went to Buffett's home in the mid 1950s, waited outside for him to get home, but did not wait long enough, and left before Buffett arrived. The dentist missed out, but I believe the dentist did OK financially anyway. I will be looking to buy more B shares under $200 per share
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