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By Jeremy Glaser and Greggory Warren, CFA | 04-24-2015 11:00 AM

Berkshire Shares Look Attractive

After updating our projections for Berkshire's businesses and accounting for the deals announced this year, we've raised the firm's fair value estimate by 7%.

Note: This video is part of Morningstar's coverage of the 2015 Berkshire Hathaway Annual Meeting.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Ahead of the Berkshire Hathaway Annual Shareholder Meeting, I'm sitting down with Gregg Warren--he is a senior equity analyst and our Berkshire analyst--to look at what he thinks Berkshire is worth right now and if the shares are trading at an attractive price.

Gregg, thanks for joining me.

Gregg Warren: Thanks for having me.

Glaser: So, let's start with how to value Berkshire. This obviously is an enormously complex business. What do you think is the best way to think about the value of these shares?

Warren: It's really a tough firm to get a handle on. We benefit from the fact that they do file [10-Ks and 10-Qs] for their railroad and energy operations. So, that allows us to strip those pieces out and value them separately. We lump all the insurance stuff together, and we take the other pieces--the [manufacturing, service, and retailing operations] and the finance division--and value those as well. And then we roll them all up to get to our firmwide fair value for the firm. So, it is a bit complicated, but we feel that it's sort of the best way to do it. I know there are a lot of different methodologies out there, but a lot of them are sort of based on the investments and the portfolio, which we don't think are as significant as they maybe were a decade or 20 years ago.

Glaser: Let's look, then, at some of the parts. What's the biggest piece of the business? Is it still the insurance part?

Warren: Yeah, insurance is still the biggest contributor to the overall value. It's about 42% of our fair value right now. That includes the Kraft-Heinz piece of the business. We are able now to strip it out and actually evaluate it separately, but overall that sort of still resides within the insurance piece. When we look at the rest of the businesses, Burlington Northern is about a quarter of the overall value. The energy business is a little bit less than 10%. You get to the manufacturing businesses--that's about 22%--and then the finance piece picks up the rest.

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