(Tilson comes on about 2 minutes in – ignore everyone on the video before him;)
One thing I didn’t mention in my previous post that I started to wish I had when I woke up in bed this morning was a couple of valuation tidbits about Berkshire Hathaway (BRK-B). On Friday, Whitney Tilson, a money manager that holds a significant portion of his funds portfolio in Berkshire, was on CNBC saying that he believed that Berkshire was worth considerably more than its current market value. Tilson admitted that Berkshire was not a stock that was going to double in the next year, but was a situation where you could buy something for $0.80 on the $1.
Tilson also correctly predicted before the split that the stock would be added to the S&P 500 and would have a jump on that addition. I added to my Berkshire position at $69 on that very supposition, and have been rewarded (so far at least) with a quick 15% jump. He knows this company very well.
Of course, Tilson is just one person attempting to value this company. Now that we have the benefit of hindsight…analysts expected Berkshire to report earnings of about $2 billion. Tilson predicted that number to be closer to $4 billion. Berkshire split the difference and actually reported just over $3 billion. Tilson predicted that their earnings beat would be a catalyst to drive the stock higher (I’ll be talking about catalysts in a future post).
What does Buffett think of his company’s valuation. He believes that Berkshire’s stock is worth more than what it’s currently being valued at. In his own words:
“In our (Burlington Northern) acquisition, the shareholders quite properly evaluated our offer at $100 per share. The cost to us, however, was somewhat higher since 40% of that $100 was delivered in our shares, which Charlie and I believed to be worth more than their market value.”
He goes on to explain why they used Berkshire stock in the deal even though they believed it was worth more than its market value. The point is, at least at the time of the deal, Buffett thought that Berkshire was worth more than its market value. We don’t know how much more. Clearly, he must not have thought that it was significantly undervalued or he would not have used it in the acquisition. So take that for what its worth.
One last point from the Whitney Tilson interview: One of the annoying CNBC interviewers asked, and I paraphrase, “isn’t buying Berkshire the same thing as simply buying an index of the S&P 500 (the broader market)?” Tilson said that he didn’t think it was. He believes that Berkshire has a better valuation than the market as a whole, as well as less risk. The lesser risk is important. If Berkshire can offer a similar return as the market as a whole but with less risk, then that’s the preferable place to be, right? I think this issue of risk is due in part to (a) the huge amounts of cash that Berkshire generates and keeps on hand and (b) the extremely low cost (almost free) of capital that Berkshire maintains from all the “float” they generate. Anyway, I just thought I would be remiss if I didn’t mention anything about Berkshire’s actual position as a stock. Take it for what it’s worth. Thanks for reading.
Disclosure: I own class B shares of Berkshire Hathaway.
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