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Berkshire Buying Opportunity

Greggory Warren, CFA

Gregg Warren: We continue to be impressed by wide-moat-rated Berkshire Hathaway's (BRK.A) (BRK.B) ability to generate high-single-digit to double-digit growth in its book value per share, believing it will take some time before the firm finally succumbs to the impediments created by the sheer size and scale of its operations.

We also believe that the ultimate departure of chairman and CEO Warren Buffett and vice chairman Charlie Munger will have far less of an impact on the business than many believe it will.

For much of the past fifty years, Buffett and Munger have been focused on building and acquiring businesses that would fit seamlessly into their organization, which has evolved into the purest form of conglomerate we've ever seen.

A big part of the success of the company's business has come from the fact that the firm's operating companies are managed on a decentralized basis. This eliminates the need for layers of management control and pushes responsibility down to the subsidiary level, where managers are empowered to make their own decisions. We don't expect much of that to change once Warren and Charlie depart the scene.

Where the firm could be lacking longer term is in having capital allocators of their caliber with the knowledge and connections that they have acquired over the years, overseeing the allocation of capital to future endeavors.

That said, we are encouraged to see Buffett's two lieutenants, Todd Combs and Ted Weschler, getting far more involved in the operating subsidiaries, as opposed to just focusing on the stocks they are investing in for the insurer's equity portfolio.

We also like the fact that the two front runners for the CEO job--Ajit Jain, who heads up Berkshire Hathaway Reinsurance Group, and Greg Abel, who runs Berkshire Hathaway Energy--have bountiful amounts of capital-allocation experience.

Regardless of who succeeds the pair longer term, though, the managers who run Berkshire will not need to do anything heroic, as long as they continue to earn more than the firm's cost of capital, which is extremely low to begin with.

We're also encouraged by the fact that Berkshire has plenty of cash on hand and a disciplined share repurchase program in place, allowing them to step in and by back meaningful levels of stock in the event that something does happen to drive the value of Berkshire's shares below 1.2 times book value.

With the company currently trading at 83% of our fair value estimate--which is at $252,500 per Class A share or $168 per Class B share--Berkshire is not only one of the best near-term opportunities in the financial-services sector, it's also priced at the best entry point we've seen in quite some time for long-term investors.