Why Berkshire Hathaway May Be Undervalued by Almost 20%

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Very few analysts follow Berkshire Hathaway Inc. (NYSE: BRK-A). After all, it has so many moving parts and nearly 40% of its over $500 billion market capitalization can be attributed at the current time to its public equity holdings. What many investors have a hard time deciding is the value of its multiple subsidiaries under its conglomerate umbrella, and they have an even harder time projecting the potential use of its massive cash balances that can fund expansion and acquisitions.

JPMorgan’s Sarah DeWitt has used a look-through earnings analysis and is projecting that Berkshire Hathaway Inc. (NYSE: BRK-B) may be undervalued by as much as almost 20%. Her target of $250 is 19.1% higher than the pre-analyst closing price of $209.83.

One issue that is said to be holding back the call is key man risk. That’s because Warren Buffett is now 88 years old, and he has been considered one of the greatest long-term investors of the modern era by some market pundits.

By incorporating the profits of the public companies held in Berkshire Hathaway’s now $200 billion worth of stocks, the conglomerate’s shares seem cheap to DeWitt. Berkshire Hathaway as a whole held roughly $111 billion in cash at the end of the second quarter of 2018. Despite the larger equity purchases, that cash balance has risen over time since no “whale of a deal” acquisitions have been made.

Berkshire Hathaway’s latest holdings still include dozens of stocks. That said, the entire portfolio is heavily dominated by multi-billion stakes in American Express, Apple, Bank of America, Coca-Cola and Wells Fargo.

And as a reminder, 24/7 Wall St. showed at the start of October how all of Buffett’s top stock holdings had one thing in common: being undervalued.

If DeWitt can use projected earnings of those companies owned by Buffett’s Berkshire, those earnings for 2019 could rise about 50%. The figure used on this basis would be $15.44 in earnings per share, compared with the JPMorgan official estimate of $10.25 for operating profits per share.

There is something important to consider about analysts using alternative valuation metrics on big public companies. This can be a rather tricky shell game played by analysts, the financial media and institutional investors at various times. The reality is that sometimes the financial theory just never gets realized. Shareholders sometimes lose handily using alternative valuation metrics that never pan out. That said, Buffett himself has evaluated a look-through on earnings during his own views of evaluating Berkshire Hathaway as a whole.

Berkshire Hathaway’s Class B shares had been negative in morning trading on Wednesday, but they last seen up more than 0.6% at $211.07 in the afternoon. The Class A shares were trading up 0.5% at $316,450.

While DeWitt’s view for JPMorgan may be using an alternative valuation metric, she had been rather positive on Berkshire Hathaway back in July when Buffett and the team loosened up their ability to acquire their own shares after the mountain of cash not being deployed was acting as a drag on earnings and growth.