Friday, January 06, 2006

Berkshire Hathaway (BRKA/BRKB) Analysis

There has been interest in Berkshire. Bill Gates has bought about $30million worth of shares in the open market recently. We did observe earlier that Berkshire had a strong third quarter inspite of the hurricanes. Let us do some analysis of the numbers to see how things look like and if some money should be put into Berkshire or not.

There are a couple of very good resources on the net that enables us to do this analysis. First is the berkshire hathaway website and the second one is the intrinsic value calculator available online We observed Berkshire had a strong third quarter in this section.

First, let us check out the intrinsic value calculator. Running the calculator gives us the following values for class A share.

Optimistic Value 162473
Cost of Capital Value 126677
Conservative Value 105011
Liquidation Value 80684

The interesting price is the liquidation value as the class A shares are trading closer to that value as opposed to the Conservative Value at present. 89,900 as of this morning. At the end of 2004, the liquidation value was 76264/share. The liquidation value at present is 80684. This means that for the first nine months of 2005, the liquidation value rose by 5.7%. If the same rate holds, the year over year growth in liquidation value is 7.727%. It is likely that the liquidation value will be somewhere in the 9% range year over year. Given this, it is likely the current liquidation value of BRKA is somewhere around 83,100. BRKA ( and consequently BRKB ) is a very strong buy at prices between 83,100 and 86,000.

Growth will be higher in 2006 compared to 2005 for a couple of reasons. The interest rates from the U.S treasuries is higher in 2006 compared to 2005. In addition, the insurance premiums will be adjusted for the hurricanes. The operating revenues are growing at the rate of 7-8% year over year.

If we assume a growth rate of 10% in liquidation value, the stock will be worth about 91,500 at the end of 2006. The stock typically trades close to the conservative intrinsic value. The current intrinsic value of BRKA is 105011. If the same growth rate holds, we will have a conservative intrinsic value of 115,500 by end of 2006. This means that Berkshire has an upside in 2006.

The traditional analysts get carried away with the P/E ratios without really analyzing the underlying financials. The financials look very sound and solid. Given that it is highly unlikely that the company will ever be sold at liquidation value, it is safe to say that Berkshire provides a good safe base and alternative to SP500 index. In a diversified portfolio, one should consider having Berkshire in the mix.

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