$Berkshire Hathaway(BRK.B)$, Warren Buffets Holding company has become one of the best performers of 2022. While the S&P500 is down -8%, Berkshire is up 20% this year, outperforming by a huge margin.
While the stock is at a Market Cap of 800 B, I have determined that the stock is still undervalued and the market hasnt realised its full potential yet.
As you know, a diversified conglomerate like Berkshire is extremely hard to evaluate. However, I have managed determine it accurately as I know their operations inside out.
In this article, I will be sharing how to calculate Berkshire Hathaway's intrinsic Value.
Warren Buffet has mentioned before that Intrinsic Value is the Value you get from discounting a company's future cash flow for a certain period.
For Berkshire, there is 3 main things we have to consider.
●Float (Money Available to Invest)
●Stock Portfolio
●Free Cash Flow
As of 2021, Berkshire had a Total Float of 144B in cash. The reason why they hold so much of cash is that they havent been able to find good deals and undervalued price. Out of the 144B, Berkshire will only be able to use 114B. 30B is always kept as a backup to ensure liquidity and to keep the company "financially impregnable", as Buffet puts it.
As of 2021, Berkshire total Portfolio (Including Foreign holdings like BYD, $Diageo PLC(DEO)$ & Itochu) amount up to 350B.
In 2021, Berkshire made 26.6B in Free Cash Flow.
For those who dont know, free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the non-cash expenses of the income statement and includes spending on equipment and assets as well as changes in working capital from the balance sheet.
Now here comes the calculation to find intrinsic value:
Its current Market Cap is 800B. We first take the 800B market cap and deduct the 350 B worth of stocks and the 114B of cash as this 2 components will yield different over time. You will get a balance of 336B. This 336 B of net market cap will be yielding in the 26.6 B of FCF. Berkshire has been growing their FCF at a CAGR of 8.43% since 2010.
Based on a conservative 6% FCF Growth Rate for the next 10 years, with a discount rate of 15% (I use more than 10% because my goal is to beat the S&P500), We will get a value of 366.23B. You can view this calculation in the picture.
366.23B will be the present value of the cash flow of BH for the next 10 years. So now, we add back the 114 B and 350 B, we will get a value on 830B. Which is 3.78% undervalued then its current market cap.
By using this valuation method, we can estimate that the stock's intrinsic value is $374.50 (Outstanding Share: 2216144003
While most people would buy stocks at 15-20% undervalued, I believe Berkshire Hathaway does not need a margin of safety. Berkshire's business is extremely solid and has been a really amazing compounder for the past 60 years and it will continue to do so. With so much of cash in their hands, there will be so much of acquisition opportunity coming up for Berkshire which will increase their Free Cash Flow.
Recently, they acquired $Alleghany(Y)$ for 11.8B which will consolidate 2.5B into Berkshire's Hathaways Free Cash Flow annually.
What do you think of this valuation method? And Is anyone buying Berkshire? Let me know!
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