# Berkshire Hathaway Value - A Thought Experiment

6/17/20

Summary

• Using market multiples and observable inputs to calculate "sum of the parts" Berkshire valuation.
• To simplify analysis, a simplifying assumption is made with regard to the insurance segment valuation, and then it is valued independently.
• Results indicate Berkshire to be undervalued by some 15% at current market cap of approx. \$430 Bln.

As you may know, Berkshire (NYSE:BRK.A) (NYSE:BRK.B) is a conglomerate. The intermixing nature of the insurance business with its securities holdings creates a complicating factor in valuing the company using "sum of the parts" methods. Nevertheless, I propose this approach aided by a "simplifying assumption" about the insurance unit as described below.

I will start by proposing we divide Berkshire into two value "buckets" and a third factor or bucket that turbocharges the whole thing.

Berkshire breaks out the earnings of different subsidiaries grouped by industry segment. This allows us to select similar publicly traded companies or direct competitors and use their valuation multiples to estimate the value of these Berkshire subsidiaries.

Bucket one - controlled subsidiaries:

Berkshire has many controlled subsidiaries and reports their performance in three categories:

• Utilities and Energy
• Manufacturing, Services and Retail (MSR)

Using Q1 earnings and multiplying by four, we can get a rough estimate of the earning capacity of each of these segments. See table below for resulting annualized earnings. We can then note the P/E ratio of peers and use this to estimate the value that Mr. Market, with all his flaws, would assign to each segment. For the Railroad segment, I looked at Union Pacific (UNP) and Canadian National (CNI) and noted a P/E of about 16 on average. For Utilities and Energy, the P/E average is also about 16 looking at Duke (DUK), Dominion (D), National Grid (NGG), and Sempra (SRE). For the MSR segment, I simply chose a conservative multiple of 14, which is well below any diversified market index P/E.

 Berkshire segment earnings earnings (Bln) multiple Valuation (\$Bln) Railroad** \$4,76 16,0 \$76 Utilities and Energy* \$2,24 16,0 \$36 Manufacturing, Service, Retail \$8,15 14,0 \$114 Value of Bucket 1 \$226

Estimated value of Bucket one: \$226 Bln

Bucket two - equity securities and non-controlled subsidiaries:

Berkshires owns non-controlling stakes in other companies, some of which are publicly traded and others are not. Together with the stock holdings, these stakes offer another observable input for this valuation exercise.

Berkshire reports its equity security holdings at the quarter end market value. It had stock portfolio worth \$181 Bln and \$248 Bln as of March 31, 2020 and December 31, 2019, respectively, according to the recent 10-Q. Due to the depressed (and largely reversed) dip in stock prices during February and March, I will use the midpoint of the two values.

For the larger stakes in non-controlled subsidiaries that are carried at cost/equity method, I will use an arbitrary value of \$10 Bln. This should be conservative and is lower than the \$17 Bln reported in the 10-Q. I believe Kraft Heinz (NASDAQ:KHC) may be further impaired and hence the extra margin.