A No-Brainer Investment

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Berkshire Hathaway (NYSE: BRK-A) is one of the most admired corporations in the world. Two of the most legendary investors in the world, Warren Buffet and Charlie Munger, have managed to create long term value for their shareholders. For over 40 years, shareholders have enjoyed the annual compounded return of around 20%.

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Recently, the company just announced its Q3 earnings results. Its third quarter revenue was $41 billion, 22.8% higher than the same quarter last year, of $33.74 billion. The higher revenue was due to a 15% increase in the insurance segment, a 7.7% increase in Railroad, Utilities and Energy, and especially, a 95% gain in derivatives’ revenue. The third quarter EPS was $2,373, a 72% growth compared to Q3 last year, $1,380. The significant growth in Berkshire’s profit was due to the growth of the infrastructure business and the investment gains from its derivatives position. The biggest gain in derivatives was from equity index put options. A loss of $2 billion in these put options in Q3 2011 has been narrowed down to only $534 million in this quarter. These options are European style options on four major equity indexes. The company said that it had not written any new contracts since Feb. 2008.

As of September, Berkshire Hathaway’s book value was $189 billion; notes payable and other borrowings were $35.7 billion. The biggest item in total liabilities was losses and loss adjustment expenses, of $63.4 billion. The two largest items in the company’s assets are cash, $41.8 billion, and investments (including fixed maturity, equities and others), $133 billion. In the Equity investment segment, $23.9 billion went to commercials and industrials; $18 billion went to financial companies, and only $8.1 billion went to consumer products. However, consumer products experienced the largest unrealized gains, of $15.6 billion, whereas unrealized gains of banks, insurance, and commercial industry were $14.36 billion and $8.1 billion respectively. Berkshire Hathaway has been adding shares of good businesses in the stock market such as dialysis service provider Davita (NYSE: DVA) and Wells Fargo (NYSE: WFC). More Davita shares were added even when the stock reached its multi-year high. In the last 10 years, the company has continued to climb, delivering shareholders a 560% gain. Several days ago, the company just acquired a medical office operator, HealthCare Partners for $4.4 billion and changed its name to Davita Healthcare Partners. At the current price of $114.98, Davita is trading at 20.8x P/E and 4.3x P/B. For Wells Fargo, Buffett first invested in this bank in 1989 and 1990, helped by a banking crisis. He bought it cheap then, for less than 5 times after-tax earnings. It is one of the biggest positions in of Berkshire's portfolio now. The bank has recently announced to expand its wholesale banking services including lending, treasury management and trade services throughout Canada. Wells Fargo is trading at $34.32 per share, with 11.3x P/E and 1.3x P/B valuation. 

While waiting for a big elephant to shoot, Warren Buffett has made a series of small acquisitions. He purchased more than 60 local newspapers from Media General, for the newspapers’ strong influences in the community they serve. Recently, the company just announced that it would buy Oriental Trading, the toy and party supply providers for around $500 million. Certainly, in the near future, a series of new acquisitions will allow the company to use its $41.8 billion cash to grow the company’s book value.

Currently, Berkshire Hathaway is trading ~ $129,770 per share. The total market capitalization is $214.92 billion. The market is valuing Berkshire at 1.14x P/B and 16x P/E. It was a little lower than the company’s historical valuation of 1.4x P/B and 19.9x P/E. It is just relative valuations, in order to properly estimate intrinsic value of Berkshire Hathaway; investors need to break down the company into several segments such as controlling companies, insurance segments and non-controlling equity interests. 

My Foolish Take

One year ago, Buffett has said that the first time in history, Berkshire Hathaway would buy back its shares at no more than 10% premium of its book value. The company is now valued at 1.14x P/B, nearly fall into the buyback range that Buffett announced. Berkshire Hathaway is not a stock for getting rich quickly.  However, the stock has worked wonderfully for their shareholders on the compounding effect. There is no wonder that Berkshire Hathaway is a long term holding for any value investors. Led by the most successful investor of all time, and managed by a lot of talented managers, Berkshire Hathaway is a no-brainer for everyone.

Know What You Own

You'd be hard pressed to find a track record better than Warren Buffett's. With the Oracle of Omaha at the helm, Berkshire Hathaway has grown book value per share at a compounded annual rate of 19.8%! Despite an incredible historical track record, investors have to understand the key issues to watch moving forward. To help investors, The Fool's resident Berkshire Hathaway expert Joe Magyer has created this premium research report on the company. Inside you'll receive ongoing updates as key news hits, as well as reasons to both buy and sell the stock. Claim a copy by clicking here now.

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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