Berkshire Hathaway released the 2008 Annual Report and Warren Buffett’s annual letter to shareholders on February 28, 2009. As a longtime Berkshire shareholder, I closely follow developments at the company and attempt to come up with an estimate of the intrinsic value of Berkshire based on business fundamentals. At a time when volatility in the financial markets is at dizzying levels, it is useful for a value investor to simply look at the business fundamentals and come to an independent conclusion on intrinsic value.
I believe that the intrinsic value of Berkshire Hathaway is approximately $142,000 per A share. This intrinsic value estimate also considers events that have taken place since the end of 2008. The series of posts below provide further details regarding the letter to shareholders and the annual report:
Part 1: Comments on Warren Buffett’s letter to shareholders
Part 2: Description of Evaluation Process
Part 3: Insurance Subsidiary Valuation
Part 4: Non-Insurance Subsidiaries Valuation
Part 5: Berkshire’s Intrinsic Value Estimate: $142,000
The valuation approach I’m using is known as a “float based” approach because significant weight is attached to the fact that Berkshire is free to invest large amounts of policy holder float for long periods of time. The float based valuation model is one that I consider logical but it is highly sensitive to the variables that are used. I have attempted to be conservative in my float valuation as well as my evaluation of the operating companies. It is better to be conservative in order to build a large margin of safety into investment decisions.
Even with very conservative assumptions, it appears that Berkshire is severely undervalued as of today (February 28, 2009). At $78,600 per share, the market has assigned a valuation of under $122 Billion to the company. This does not seem logical using a sum of the parts analysis and it does not give much if any value to the strong insurance franchise Berkshire has built over the years.