Nov 24, 2008
Barron’s: Berkshire Hathaway is Undervalued!
What a difference just under a year makes. If you remember, back in December of 2007 Andrew Bary at Barron’s felt that Berkshire Hathaway (NYSE:) was overvalued as it traded around $144,000 per share. Bary cited that Berkshire would face difficulties in finding appropriate investment situations for its cash horde and that there were other undervalued securities in the market:
As noted, Berkshire looks pricey relative to many financial companies. Take AIG, the world’s largest property and casualty insurer. Depressed by its exposure to subprime mortgages, AIG has seen its shares fall 21% this year, to 57. It’s now valued at eight times projected 2008 profits. AIG has two-thirds of Berkshire’s market value and 50% more earnings. It may be a better bet than Berkshire in coming years, as could Wells Fargo, American Express and Allstate.
One alternative to Berkshire is Loews (LTR), the conglomerate run by the Tisch family that also combines insurance and investments. Loews has had a great record in recent years and now trades at 47, 12 times projected 2007 profits and a discount to its net asset value of about $62 a share. Loews is sitting on $3 billion in excess cash. It’s easier for the Tisches to move the needle than Buffett because Loews has 1/10th of Berkshire’s market value.
Buffett’s investment genius is undeniable, but his talents seem well reflected in Berkshire’s rich price. Looking out a few years, Berkshire stock probably will be higher. But our bet is that financial companies like AIG, and even the S&P 500, will do even better, especially if Buffett’s glorious tenure ends. And, remember, Buffett didn’t build the Berkshire powerhouse by paying much more for acquisitions than they were worth. That’s a lesson worth pondering by anyone considering buying his stock.
Out of curiosity, I decided to check Bary’s suggestions versus Berkshire’s performance over the same period:
With the exception of Wells Fargo (NYSE:), Berkshire Hathaway has steadily outperformed the rest of the picks offered by Barron’s back in December.
Today though, Barron’s is actually recommending that you invest in Berkshire Hathaway:
THE FINANCIAL CRISIS HAS GOTTEN SO BAD, some investors are even questioning Berkshire Hathaway ‘s strength. But the worries seem overblown…
Barron’s took heat from Berkshire boosters with our bearish cover story on Berkshire last December, when the stock traded around $144,000. Berkshire has been hurt by declining profits in the auto-insurance and reinsurance markets, both of which might be bottoming. But now is probably a good time to buy. Looking out to 2009, Berkshire’s earnings could get a lift from improving conditions in the insurance market, and from some new high-yielding investments, including $8 billion of 10% preferred stock of Goldman Sachs (GS) and General Electric (GE).
If the stock market rallies in 2009, Berkshire probably will see record profits. Its operating profits this year could be about $5,400 per Class A share, excluding losses on equity and junk-bond derivatives that may cause a fourth-quarter loss. One big investor says earnings could hit $7,000 a share by 2010, a modest 13 times the current stock price.
Historically, Berkshire’s stock price is linked to its book value. We estimate that Berkshire’s book value now is around $66,000 a share, down $11,000, or 14%, since Sept. 30. Our calculation factors in Berkshire’s recent statement that its book value fell about $9 billion, or $6,000 a share, in October, on market declines. November has been about as bad for stocks, with the S&P off 17%.
True, Buffett does have less financial firepower to make investments because Berkshire’s cash probably has been halved, to about $15 billion, since Sept. 30 — in part because of its investments in GE, Goldman and Wrigley. It’ll be interesting to see if the 78-year-old Buffett is willing to issue equity or debt for a major deal, should he want to make one in the coming months.
Berkshire now trades below 1.4 times estimated book value, versus an average of around 1.5 in the past decade — and current book is depressed. If the stock market rallies 25% in the next year, the stock could hit $110,000, or 1.4 times potential year-end ’09 book value of $80,000 a share.
Bary makes a pretty good case for investing in Berkshire right now. It seems to have taken them a while to acknowledge the benefit of investing in Berkshire and its “Fort Knox”-like balance sheet, but they’ve finally come around. It makes you wonder though — did they willingly ignore the balance sheets of those other companies that they recommended back in December? Almost all of them have been absolutely obliterated by the credit crisis and represented a highly speculative investment at the time as the credit crisis took hold of the markets.
I think that in times of crisis, that’s one thing to keep in mind. Any investment you make has to be compared to the universe of opportunities around you. At the time, Berkshire may have been overvalued, but with that cash horde, AAA rating, and lack of sub-prime/CDS exposure it represented a much safer proposition than most other financials.