Valuing Berkshire?

Berkshire Hathaway is a unique asset. On one hand it’s a private equity fund, it buys companies, usually at fair price and for the most part allows management to run them as best as possible under the care of Buffett and team. Note that mergers i.e. the acquisition of a company to combine it with another and reap synergies has not been a modus operandi for Berkshire. This reduces execution risk as well as overpaying.  And on the other hand, BRK is an investment fund that searches for the best long term stock ideas, with a tilt for value and near monopoly status i.e. low competition and high pricing power etc.

About 45% of BKRs value is in its listed portfolio: 19% Apple and 14% Listed Banks (BAC /AXP). While Insurance companies are the biggest sector (25%), all private equity. (see table below)

I see two keys to the company’s success: A) The private equity side, insurance companies mainly, provide cash for Buffet to invest, either for acquisition or for the portfolio, so BRK is always building its asset base and has cash to apply. BKR has kept about 15% of assets in cash the last 5yrs. Think of this as dividend reinvestment.  B) Warren and team have done a great job of stock selection, despite missing the boat in the Covid19 sell down or tech in general i.e. no Microsoft, Google or Nvidia and late to Apple and Amazon for example. BRK has beat the NASDAQ and SP500 over long time frames.

With so many moving parts and quite frankly poor disclosure (look at the company’s website and you may be shocked) it is very hard to make a qualified earnings model or valuation. The best one can do, in my view, is to continue to trust in the Buffett team. However, his passing along with Munger may hit the stock sharply, this cant be ruled out and continuation of the track record either.

I looked at few metrics that can help guide investors. As an investment fund, looking at PE or other operating numbers is not very helpful. The key numbers are Asset and FCF (free cashflow) growth. FCF is what BKR generates from its private equity portfolio i.e. its operating fully controlled assets, plus dividends from the listed stocks. The Asset growth comes from the stock price appreciation of its listed portfolio. Thus price/asset could be a good valuation measure. The higher and the more consistent returns the higher the market values the stock of Assets. While FCF / Assets (Invested capital) can give an idea how much the company is generating on its investment portfolio. (see table below)t

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