Berkshire Hathaway Remains an Excellent Long-Term Buy for Cost-Conscious Investors

As I was thinking about what to write about today, I came across an article discussing Berkshire Hathaway’s (BRK.A, BRK.B) sum-of-the-parts valuation. Essentially, it valued each of the company's operating segments to arrive at a per-value fair value estimate for both its Class A and Class B shares. 

I’ve long thought Berkshire was one of the cheapest ways to buy a diversified, low-cost investment portfolio. One could argue that its defensive nature makes it the only stock you need to hold for the long term.

Warren Buffett says most retail investors should own a low-cost S&P 500-linked mutual fund or ETF along with a short-duration bond fund. I argue that BRK. B might be an even better buy for the equity portion of this two-security bet. 

Here’s why.

You Can’t Beat Zero Fees

The largest S&P 500 ETF by assets under management is the SPDR S&P 500 ETF Trust (SPY), with $381 billion. It charges 0.09% annually or $9 per $10,000 invested. It will cost you more to buy a couple of fancy drinks at Starbucks (SBUX).

Berkshire charges no annual fees and has $902 billion in assets on its balance sheet along with $109 billion in cash and short-term investments, amounting to just $84 billion in net debt, or a low 12% of its market cap. 

Now, I realize the funds invested in SPY are spread across more than 500 stocks, so its diversification is ostensibly greater than Berkshire’s assets. Still, when you break down its valuation in a sum-of-the-parts exercise, you realize that it, too, has significant diversification.  

And, with many discount brokers providing commission-free stock trading these days, along wi andl shares, investors have no excuse for getting on the Berkshire bandwagon. 

Its Performance Is Respectable

In 2022, Berkshire stock is up 3.54% year-to-date, 21% higher than the S&P 500. Of the 503 stocks in the index, 165 are in positive territory for the year. If you exclude energy stocks, that number drops to 142. Of the 20 financial stocks in positive territory in 2022, BRK.B has the 17th-best performance. 

That might not seem that great, but if you exclude financials with market caps less than $200 billion, Berkshire is the only one left standing. Of the five financial stocks in the index with a market cap of $200 billion or higher, Berkshire is up for the year while everyone else is down. 

One last thing. 

Over the past five years, Berkshire stock is up 57.47%, 834 basis points better than the index. In 2008, the index lost 37%, the worst annual return since 1931. Berkshire lost 30% in 2008, more evidence that Berkshire stock brings an excellent mix of defense and offense. 

The Sum-of-the-Parts

Berkshire has six parts: Burlington Northern Santa Fe (BNSF); Berkshire Hathaway Energy (BHE); Manufacturing, Service and Retailing; Equity Portfolio; Insurance; and Cash. 

For the nine months ended Sept. 30, BNSF had revenue of $19.22 billion. On an annualized basis, that’s $25.63 billion. Canadian National Railway (CNI) is currently valued at 8.0x revenue. Apply the same for BNSF, and you’ve got $205 billion for the train business alone.  

BHE, a conglomerate in its own right, has 11 different businesses that generated a little more than $20 billion in revenue in the nine months ended Sept. 30. Annualized, that’s $26.69 billion. NextEra Energy (NEE) is America’s largest utility. It’s valued at 8.7x sales. If you apply the exact multiple -- there’s an argument to be made that NextEra deserves an excessive multiple relative to BHE and others -- you get $232 billion. 

So, that brings us to $437 billion with four components to go.

The Manufacturing, Service and Retailing segment’s annualized revenue for 2022 is $166.2 billion. Establishing a comparable for this mish-mash group of businesses is next to impossible. Based on $12.69 billion in annualized net income and a price-to-earnings multiple of 20.7x (the average S&P 500 company), we get $263 billion.    

The equity portfolio is the easiest segment to value. It’s currently $343 billion, according to CNBC’s Berkshire Hathaway’s Portfolio Tracker.  

As for the insurance business, Buffett’s long been admired for his use of his various insurance companies’ float, the difference between the premiums collected and the claims paid out. An insurer sometimes can lose money on its underwriting but still profit from its investment income. Berkshire’s insurance operations often do both.

Progressive (PGR) has a P/S ratio of 1.57 and a price-to-forward-earnings ratio of 20.58. Based on annualized net income of $5.53 billion, I get $114 billion for the insurance segment. 

As for the cash and short-term investments on its balance sheet, they were $109 billion at the end of September.  

The Bottom Line

The sum of the six parts is $1.27 trillion. If I subtract the company’s $439 billion in total liabilities, I get a market valuation of $831 billion, 21% higher than its current market cap. 

I’d have to say that the conglomerate discount continues to haunt Berkshire stock. But that’s okay because a sum-of-the-parts valuation will come to fruition over the long run.

Suppose you’re looking for one of the cheapest ways to buy a diversified, low-cost investment portfolio. In that case, Berkshire remains one of your best options regardless of whether Warren Buffett’s 92 and Vice Chairman Charlie Munger will be 99 in January.

It’s a value play if there ever were one.

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