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Berkshire Shares Look Attractive

Jeremy Glaser
Greggory Warren, CFA

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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Glaser: So, when you do add this all up, how much do you think Berkshire is worth right now?

Warren: Right now, we are looking at a fair value of about $252,500 for the Class-A shares and $168 for the Class-B shares. That's about a 7% increase from our last fair value estimate. Overall, we ran through each of the businesses, updated for the 2014 annuals, also for our projections for the businesses going forward, as well as a couple of the deals that were announced this year--Kraft-Heinz being the major one. We also made an adjustment to cost of equity for all the different firms. That's been sort of a global review process we have been doing here at Morningstar for all the companies we cover.

Glaser: So, you see this increase. When you look at where shares are trading right now, does this look like a reasonable entry point for Berkshire?

Warren: Yeah, it's a pretty good entry point. The stock is trading at about a 15% discount to our fair value estimate right now. It was doing the same the last time we were really sort of recommending and pushing it. We think that there is generally a little bit of a runup in the stock prior to the meeting, generally starting about mid-April until the meeting actually happens. So, I think investors are looking at a good entry point.

Glaser: And when you think about the uncertainty or some of the risks around this, what do you think are the major parts? Is it just what happens after Warren leaves or are there some other factors investors should keep in mind?

Warren: Well, I think, for anybody investing in Berkshire, there are two things that are going to be impediments longer term. One is just the size of the business. It's really going to be harder for them to generate the kinds of returns they've had historically. The business is so big at this point. And the other [concern] is just Charlie and Warren. Charlie is going to turn 92 at the beginning of next year. Warren turns 85 in August. So, succession-planning is really key and critical to the long-term health of the business.

Glaser: Well, Gregg, thanks for the update on valuations today.

Warren: Thanks for having me.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.