Berkshire Hathaway Stock Valuation 2021 (BRK.A & BRK.B)

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introduction

My thesis is that Berkshire Hathaway (BRK.A) (BRK.B) is reasonably valued based on a sum of the part framework.

BNSF $128 billion

I believe the market capitalization of BNSF is at least 80% of the market capitalization of Union Pacific (UNP). The 2021 10-K for Union Pacific shows 636,898,957 shares as of January 28, 2022, implying a year-end market capitalization of $160.5 based on the year-end stock price of 251 $.93.

Berkshire Hathaway Energy (“BHE”) $48.6 billion

The letter to shareholders in the 2021 annual report indicates that BHE’s profits have increased more than 30 times, from $122 million in 2000 to their peak of $4 billion in 2021. The BHE 3Q21 10-Q shows that 180 358 common shares were repurchased. in the first 9 months of 2020 for $126 million, implying a price per share of $698.61. 3Q21 10-Q shows 76,368,874 shares outstanding as of November 4, 2021, implying a market capitalization of $53.4 billion. Berkshire’s 2021 annual report says they own 91.1% of BHE, which is $48.6 billion, so non-controlling interests are $4.8 billion.

Other non-insurance subsidiaries $189 billion

The 2021 annual report presents revenue and pre-tax income by business segment in Note 25 to the consolidated financial statements:

Berkshire Industries

Berkshire Industries (Annual report 2021)

I use a pre-tax earnings multiple of 13x for manufacturing, McLane and services/retail. These amount to $9.8 billion, $0.2 billion and $4.5 billion, respectively and the sum is $14.5 billion, which rounds up to $189 billion after the multiple of 13x.

Investments

The first 5 lines of the 2021 balance sheet are a key element of the overall valuation:

Berkshire balance sheet

Berkshire balance sheet (Annual report 2021)

Cash, treasury bills and fixed maturities $160 billion

This is the sum of the first 3 lines of the balance sheet above.

Shares $351 billion

This is the 4th line of the balance sheet above. The 2021 annual report shows that Apple’s (AAPL) position has grown from $31.1 billion to $161.2 billion and now accounts for almost half of the portfolio!

Investments using the equity method $17 billion

This is the 5th line of the balance sheet above and includes Berkshire’s stake in Kraft Heinz (KHC).

Deferred tax liability ($37) billion

The annual report reports $55.4 billion in deferred taxes related to investments:

Berkshire Tax Obligations

Berkshire Tax Obligations (Annual report 2021)

It is unclear what offsetting tax assets are for investments as opposed to other factors. Additionally, Berkshire has excellent tax planning. Given these considerations, I believe the economic tax debt is only about 2/3 of the accounting tax debt or $37 billion.

Non-controlling interests outside of BBB ($6.2) billion

The Contingencies and Commitments section of the annual report indicates that it would cost Berkshire $11 billion if they were to acquire the remaining shares of all their non-controlling interests, more than the $8.7 billion we see the balance sheet. BHE represents about $4.8 billion in minority interests, leaving about $6.2 billion for others.

Other Considerations $0

The 2021 letter to shareholders says the Berkshire insurance group tops the list of their “big four” companies. He explains that the float has grown enormously from 1967 to today:

From an $8.6 million purchase of National Indemnity in 1967, Berkshire became the world leader in “float” insurance – the money we hold and can invest but don’t own. Including a relatively small sum from life insurance, Berkshire’s total float has grown from $19 million when we entered the insurance business to $147 billion.

From a sum of the parts valuation framework, I treat insurance operations and Berkshire’s huge floating liability like a wash.

Table and waterfall chart

As of December 31, 2021, there were 1,477,429 equivalent A shares outstanding and B shares represent 1/1,500th of these. Here is a summary in spreadsheet form:

Segment

Assess

Per A-share

Per B share

BNSF

$128 billion

$86,637

$58

BBB

$49 billion

$32,895

$22

[1] Other subscriptions not related to insurance

$189 billion

$127,925

$85

Cash, treasury bills and fixed maturities

$160 billion

$108,491

$72

Shares

$351 billion

$237,385

$158

[2] Investments under the equity method

$17 billion

$11,760

$8

Deferred taxes

($37) billion

($25,044)

($17)

[3] Non-majority interests

(6) billion

($4,196)

$(3)

Total

$851 billion

$575,853

$384

[1] Includes manufacturing, McLane, service and retail

[2] Includes Kraft Heinz.

[3] Other than BHE.

The chart above is near the upper end of my valuation range and is well above the book value of $506 billion on the balance sheet. Class A and Class B share prices were $479,345 and $319.24 respectively as of February 25, so I think the company is reasonably valued.

Here is a summary in a waterfall chart:

Map of Berkshire waterfalls

Map of Berkshire waterfalls (Author’s spreadsheet)

Final Thoughts

As we saw in the 2019 and 2020 annual reports, Berkshire again underperformed the S&P 500 for the 5-year period ending in December:

Berkshire performance

Berkshire performance (Annual report 2021)

This is to be expected as we have been in a bull market for many years. I expect Berkshire to slightly underperform the S&P 500 in bull markets and slightly outperform in bear markets. Berkshire Free Cash Flow [FCF] was $22.7 billion, $26.8 billion, and $26.1 billion for 2019, 2020, and 2021, respectively. The flat results from 2020 to 2021 are disappointing but the growth from 2019 to 2020 is commendable. The redemptions below of $24.7 billion in 2020 and $27.1 billion in 2021 are telling:

Berkshire FCF

Berkshire FCF (Annual report 2021)

Disclaimer: Anything in this article should not be taken as a formal investment recommendation. Never buy a stock without doing your own thorough research.

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