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Stock Strategist

Boosting Our Berkshire Valuation

Updating our operating segment assumptions and including Precision Castparts increases our fair value estimate.

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We recently increased our fair value estimate for  Berkshire Hathaway (BRK.A)/(BRK.B) to $265,000 per Class A share from $252,500 and to $177 per Class B share from $168 to reflect new assumptions about growth and profitability for the firm's different operating segments, as well as the impact of the Precision Castparts acquisition. Our new fair value estimate is equivalent to 1.8 times Berkshire's reported book value per Class A (Class B) share of $149,735 ($100) at the end of the second quarter. With book value expected to expand in the back half of the year, augmented by a noncash gain on Berkshire's stake in Heinz (which merged with Kraft at the start of July), our new fair value estimate is equivalent to 1.7 and 1.5 times our projected book value for the firm at the end of 2015 and 2016, respectively.

We use a sum-of-the-parts methodology to value Berkshire. We believe the company's insurance operations are worth $83,100 ($55) per Class A (Class B) share, down 15% from our previous valuation because of lowered near- to medium-term projections for underwriting and investment results, as well as the extraction of capital to be used to complete the Precision Castparts deal. Berkshire's investments in Kraft Heinz (KHC) and Precision Castparts (PCP) (which we value separately from the insurance operations) are worth $14,300 ($10) and $20,600 ($14) per Class A (Class B) share, respectively.

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Greggory Warren does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.