Valuing Berkshire Hathaway

Warren Buffett is one of the great value investors, and his Berkshire Hathaway company is a great company. But is it always a great stock? Over the past 5 years, buyers of BRK have done well or badly depending on when they bought—at 45,000 or 95,000. Valuing this company is tricky—although its main business is insurance, it owns furniture stores, gas pipelines, jewelers, World Book Encylopedia, and has major stockholdings including American Express, Coke, etc. I'm not nearly smart enough to value this company, but I know one guy who is--Warren Buffett himself. Buffett talks a great deal about intrinsic value (IV) of Berkshire, or what the company is really worth based on the net present value of future cash flows.
At the 1998 Berkshire Hathaway annual meeting, Mr. Buffett defined intrinsic value as follows: "In order to calculate intrinsic value, you take those cash flows that you expect to be generated and you discount them back to their present value - in our case, at the long-term Treasury rate. And that discount rate doesn't pay you as high a rate as it needs to. But you can use the resulting present value figure that you get by discounting your cash flows back at the long-term Treasury rate as a common yardstick just to have a standard of measurement across all businesses."
A value investor like Buffett would want to buy companies, even a great company like Berkshire, at some discount, a margin of safety (MOS) to intrinsic value.
Though he's never publicly stated what he thought Berkshire's IV was, at one point in the recent past, however, Buffett telegraphed, with a big wink and nudge, just what he thought IV-MOS was.From the 1999 Chairman's letter (March 2000), "Recently, when the A shares fell below $45,000, we considered making repurchases. . . we will make them if and when we believe that they represent an attractive use of the Company's money."I believe one can safely infer that Buffett believed IV-MOS in March 2000 was $45,000 per A share and thus $1500 per B share(the shares are convertible at a rate of 30:1). What is it now? Assuming MOS is a constant percentage of IV, the question becomes how much has IV changed since then. As always, we return to scripture for the answer. From the 2000 Chairman's letter (March 2001), "we believe Berkshire's gain in per-share intrinsic value moderately exceeded its gain in book value"--and book value gain was 6.5%. Moderately exceeded means 7%, 8%? This gives a range of $48,150 to $48,600 per A share and $1605 to $1620 per B share in March 2001.
From the 2001 Chairman's letter (March 2002), "Per-share intrinsic grew somewhat faster than book value during these 37 years, and in 2001 it probably decreased a bit less"--and book value decrease was 6.2%. Is decreased a bit less 6%, 5%? This results in a range of $45260 to $46170 per A share and $1508 B to $1539 per B share in March 2002.
From the 2002 Chairman's letter (March 2003) no statement regarding increase in intrinsic value is found, but book value grew by 10%. Using 8% to 12% as upper and lower estimates results in $48880 to $51710/A share and $1629 to $1723 /B in March 2003.
From the 2003 Chairman's letter (March 2004) the more generic statement "Despite their shortcomings, book value calculations are useful at Berkshire as a slightly understated gauge for measuring the long-term rate of increase in our intrinsic value." Book value increased by 21%. Using 22-24% for increase in intrinsic value gives an IV-MOS estimate of $59633 to $64120/A and $1988 to $2137 /B for March 2004.
What about since then? As a WAG, I'll add 0.25%-0.5% per month to estimate IV gains till the next chairman's letter. This is roughly $150 to $300/month for A's and $5 to $10/month for B's. Thus, for February 2005, I get a range of $61283 to $67420/A and $2043 to $2247 /B. Remember this is a "fire sale" price that is so much below IV that even a tightwad like Buffett would spend shareholders' cash to buy back stock. It would represent a "back up the truck" opportunity.
For me, I'll look at buying more BRK below $75000 A/$2500 B; below $67500A/ $2250 B that beep-beep-beep is my truck in reverse; below $63000A/ $2100 B, its margin, home equity loans, hock the kids, put it all down on Buffett. Will we see these prices again? My view is that if other great companies can get put on sale in a market decline, so can BRK--I don't think it is any more immune to the vagaries of Mr. Market than any other publicly traded entity. I think the opportunity will present itself.
This Saturday, March 5 will be the release date of the 2004 Berkshire Annual Report and Chairman's letter. In all likelihood, some statement about intrinsic value/book value will be made, and I will update my assessment accordingly.