Dorsey: Berkshire Shares Are Cheap

Note: Pat Dorsey is the former director of equity research at Morningstar. He is now the president of Sanibel Captiva Investment Advisers.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser at the 2012 Berkshire Hathaway Annual Meeting. I am joined by Pat Dorsey. He is the president of Sanibel Captiva Investment Advisers.

Pat, thanks for joining me.

Pat Dorsey: Always happy to be hanging out and talking about Berkie.

Glaser: So, let's start off with share buybacks. A lot of questions about it. There were some questions specifically about, does it put a floor, does it put a ceiling on the stock. What's your take on that?

Dorsey: Buffett pretty much dismissed the idea that there is a ceiling--the stock won't go up--because he says he think it's cheap and he will buy it below 1.1 times book.

But I think he also did very clearly state that that is going to be a floor probably going forward. Now, that doesn't mean that the stock can't go through that floor, but it does mean that there is a willing buyer there; if it were to stay below 1.1 times book for a lengthy period of time, there would be a buyer willing to step up to the plate and commit capital.

Glaser: One of the things Buffett has been doing over the last few years is getting these somewhat great terms on investing in financial companies that needed the capital. When his successor takes over, any insight on if they'll be able to still execute those deals?

Dorsey: A shareholder asked him this question, and Buffett's opinion was that his successor might have a little more trouble getting the terms of those deals in the way that he has. But he did point out that those kinds of deals have not added a ton to Berkshire's earnings power or value in the manner that, say, purchases of Burlington Northern and deals like that have, and he also, of course, noted that his successor might very well be a little more aggressive and be willing to do things that he is not.

Glaser: Oftentimes in the meeting, it seems that we get very similar questions, very similar answers. Was there anything that surprised you at all in the first half today?

Dorsey: So, we've had far more questions about the value of Berkshire stock than before, and in the past, Buffett has always really avoided these questions, and said, "Well, I ... talk about how I think about intrinsic value, and it will take care of itself in time." But today he specifically said in response to a question that he would buy--i.e., would buy [which implies] a price below fair value--a collection of businesses with similar economic characteristics to Berkshire's at nine times pretax earnings. A-ha! Now we know that Buffett thinks Berkshire is worth, guys.

So, basically, Berkshire earned about $4.50 in pretax earnings per B share last year--nine times that, you get about $42. He had about $65 in cash and investments at the end of 2011, and so that gets you to about $107 per share. But of course that implies that the insurance business is worth nothing whatsoever, which he said today is actually not correct even though in the past he's said it's just worth the float that it generates. But today in response to an analyst question, he said, "No, I would actually value them differently. GEICO is worth a lot because it's growing quickly, has high returns on capital."

And of course, that value he just placed on the businesses of about $42 for a B share, that's the price at which he said he would buy them, not a fair value price. So, I think the net-net of all this is that he is saying, without saying, Berkshire is really cheap.

Glaser: Well, Pat, thanks so much for your thoughts today; we really appreciate it.

Dorsey: Thank you, Jeremy.