BERKSHIRE HATHAWAY (BRK/B) - Check Capital Management

BERKSHIRE HATHAWAY (BRK/B)

August 14, 2019

Stock Price: $196

OVERVIEW: Berkshire Hathaway has been our largest holding for years, and we've been well rewarded. Nevertheless, Berkshire's stock has gone nowhere for the last 18 months, while the S&P 500 has risen. We believe the stock is now cheap and could appreciate 80% over the next five years.

Key variables to monitor: Intrinsic Value Growth; Book Value Growth; Stock Price to Book Value.

THE CASE FOR BERKSHIRE HATHAWAY

Since January 2018, Berkshire Hathaway's share price has essentially gone nowhere, despite its book value rising more than 10% to $156 during that period. As a result, the stock is selling at around 1.26x book value, an extremely low level that BRK historically doesn't trade at for long. In fact, over the last six years, Berkshire has traded at less than 1.3x book value on only a few occasions (see chart below).

Price/ Book Value

1.6 1.5 1.4 1.3 1.2 1.1 1.0

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19

We believe Berkshire Hathaway is worth at least 1.5x book value, or $236 per share. Using our two-pronged approach, we calculate the value of Berkshire's 1) investment portfolio (net of liabilities), and 2) wholly owned businesses. Then we add up the parts and divide by shares outstanding to arrive at BRK's approximate fair value.

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Investment Portfolio

Cash Stocks Bonds Total Investments

Less Float*

$122 $201 $20 $343

$125

Net Investments

$ Figures in billions.

$218

Wholly Owned Businesses After-Tax Operating Earnings (E 2019)

Insurance underwriting

$2.0

Investment income on float

$2.5

Railroads, utilities and energy

$8.2

Other businesses (retail, etc.)

$9.9

Other (Kraft Heinz, Flying J, etc.)

$1.4

Operating Earnings

$24.0

*Float is the premiums the insurance businesses collect and hold until paying out claims. We calculate investments net of float, because float is cash that's temporarily held and invested but doesn't actually belong to the company.

1. Wholly Owned Businesses 2. Net Investments

Total

Shares outstanding

Intrinsic value per share ($578B ? 2.45B)

Book value per share Intrinsic value ? book value ($236 ? $156)

E 2019 $24.0B $218B

Multiple P/E of 15

-

Fair Value $360B $218B $578B

2.45B

$236

$156 1.5x

Berkshire's wholly owned businesses include Burlington Northern Santa Fe, GEICO, Dairy Queen, Duracell, See's Candies, and many more. We value this segment using a price-toearnings (P/E) ratio of 15. However, this is quite a conservative multiple. Most railroads and utilities trade at 20x or more, and such companies account for one-third of Berkshire's operating earnings.

Not only is Berkshire selling at a large discount to our estimate of its intrinsic value, but we expect it to grow this value 8% to 10% annually over the long term. In addition, if the current discount narrows (i.e., BRK trades up from 1.26x to 1.50x book value), shares could be worth about $360 in five years, equivalent to a compound annual return of 13%.

Given the firm's excellent management, diverse collection of leading companies, FortKnox balance sheet and cheap valuation, it's easy to see why BRK is our highestconviction investment and, consequently, our largest holding.

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Berkshire Hathaway

$235 $215 $195 $175 $155 $135 $115

$95 $75

Stock Price

1.5x Book Value

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19

CCM Research Reports are for informational purposes only and are not an offer to sell or a solicitation to buy. They are not personal recommendations for any particular investor and do not take into account the specific financial circumstances of any investor. Check Capital and/or one of its officers may have a position in the securities discussed and may occasionally purchase or sell such securities. CCM Research Reports are created using third-party data. While Check Capital believes this data is reliable, we do not guarantee its accuracy, timeliness or completeness. There are a number of risks and uncertainties that could cause results to differ materially from those anticipated. We also caution the reader that undue reliance should not be placed on any forward-looking statements. We undertake no duty or responsibility to update any of these statements to reflect events, circumstances or actual outcomes that arose after we completed our research report or about which we were not informed.

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