Valuing Berkshire Hathaway using cash flows

We have looked at Berkshire Hathaway many times in this blog. BRKA/B is always a good stock to analyze as it is run by the best investor in the world - Warren Buffettt. In this segment, we estimate the current value of Berkshire Hathaway using its book value and its cash flows.

For the purposes of this analysis, we will take 2005 annual report as the basis. Taking the 2005 report gives us a conservative basis as the company was impacted by massive gulf hurricanes - Karina, Rita and Wilma.

Total berkshire hathaway share holder equity at the end of 2005 was 91,484 million dollars. The share holder equity is up significanly this year and is likely increase by 10% or more this year.

The next thing to look at is the cash flows. The cash flows in Berkshire balance sheet is divided into three segments. Cash flows from operating acitivities, cash flows from investing activities and cash flows from financing activities.

Cash flows from operating activities in 2005 was 9446 million dollars. The cash flows from operating activities were 7311 million dollars and 8341 million in the previous two years respectively. The average cash flow for the past three years is 8344 million dollars. We will take this value for our analysis purposes.

We are going to leave the cash flows from investing activities alone as this should be in the negative territoty for a while as Warren Buffett and Charlie Munger find home for the boatloads of cash on Berkshire balance sheet.

Earnings from financing activities is expected to be the positive category in the future for Berkshire Hathaway. We will take the low end of this figure and estimate gains of about a billion dollars per year till perpetuity.

Adding these two figures gives a net cash flow per year of 9344 billion dollars a year. Using the infinite geometric series with a discount rate of 11%, the intrinsic value of Berkshire Hathaway through cash flows is 94180 million dollars.

Adding the book value and the value of future cash flows gives an intrinsic value of 185664 million dollars to Berkshire Hathaway. This puts Berkshire Hathaways current stock price at a 25% discount to its intrinsic value.

This valuation puts Berkshires intrinsic value at 119750 as per the financial statements from the 2005 annual report. The cash flows used for this valuation are extremely conservative. Giventhe growth and improvement this year, the intrinsic value is significantly higher - more likely in the 130-140K range by end of 2006.