Alive – definitely alive.
This question – more than any other – dogs every discussion of Berkshire Hathaway (BRK.B). It isn’t immediately visible to those arguing on either side (“Berkshire is overvalued”, “No! Berkshire is undervalued”) but it underlies their arguments all the same.
What do I mean when I say Berkshire Hathaway is worth more alive than dead? I mean that Berkshire as a continuing whole is more valuable than a Berkshire that is dismembered into its constituent parts this very day – a Berkshire that is cut up and dished out like a Christmas ham.
A lot of people value Berkshire as a closed-end investment fund. Peter Lynch wouldn’t make that mistake. He’d see that Berkshire fits the bill as one of his stalwarts:
“Stalwarts are companies such as Coca-Cola, Bristol-Myers, Procter and Gamble…and Colgate-Palmolive. These multibillion-dollar hulks are not exactly agile climbers, but they’re faster than slow growers…When you traffic in stalwarts, you’re more or less in the foothills: 10 to 12 percent annual growth in earnings”.
(From Lynch’s One Up On Wall Street)
That’s what Berkshire is – not a lifeless closed-end investment fund, but a living, breathing stalwart – a mega-cap company that needs to be compared to (and valued like) other mega-caps.
I tried to make this point in the comments section of an earlier post, when I wrote:
“So, now the question isn’t whether Berkshire can compete with its past (it can’t). But, whether Berkshire can compete with similarly sized public companies such as Nestle, Unilever, Google, Microsoft, General Electric, Johnson & Johnson, HSBC, AT&T;, Wal-Mart, Bank of America, and the big oil companies. Can it? I think it can. So, relative to its peers (in terms of size) Berkshire isn’t overpriced. Is it overpriced compared to the Berkshire of twenty or thirty years ago? Yes. But, so is just about every asset on planet earth. So, that’s not the right yardstick to use. You have to compare Berkshire (the stock) to other stocks you can buy today – and Berkshire the company to other companies with similar size constraints. On both counts, I think a valuation of about $140,000 a share is appropriate and fair.”
Berkshire’s value is every bit as dependent on growth as the value of those other corporate behemoths – more so, in fact, because Berkshire doesn’t pay out dividends. You need to value Berkshire based on its likely intrinsic value growth rate, because that rate will determine what the stock is worth in 3, 5, and 10 years’ time – just as it will at Microsoft and Bank of America and Wal-Mart and Google.
Berkshire is a growth stock. And how fast is it growing? Since 1995, I estimate intrinsic value has grown a little more than 15% a year. Of course, when I assign a value to Berkshire shares, I don’t assume it can keep up that kind of intrinsic value growth. Rather, I assume it could grow at a still stalwart …Read more