My difference in intrinsic value calculations relative to Whitney's analytical exercise is that, given the company's size, succession issues (dilution of Buffett's contribution) and other factors (discussed earlier), the multiple of one attributed to the company's investments per share will, in the fullness of time (and as Buffett ages and delegates), become a discount as the Buffett premium evaporates -- just like any other closed-end stock fund that trades publicly. A more sizeable discount will reduce Whitney's intrinsic value. Moreover, when coupling the issues above with the still-important contribution of low-P/E-multiple insurance activities (about 40% of operating income), I would place a lower multiplier than Whitney's 10x to the non-investment earnings at Berkshire.
Bottom line: My calculation of intrinsic value, which is based on a 10% discount to Berkshire's investments per share -- Whitney used the full value -- and on a lower P/E to its non-investment income at 7x vs. Whitney's 10x, is closer to $135,000 a share, or $35,000 a share less than Whitney's calculation.
As Economic Crisis Diminishes, PIPE Opportunities Are Reduced
While this is a relatively unimportant factor, the opportunities for favored private investments in public entities are likely to diminish for Berkshire Hathaway as Buffett ages and when (and if?) the U.S. recovery becomes self-sustaining. Berkshire may no longer be sought out as an investor of last resort.
Bottom line: Based on my calculations, Berkshire's A shares have $10,000 to $15,000 per share of downside risk and about $15,000 to $20,000 per share of upside reward.
I would be a buyer of Berkshire at around $100,000 a share, but, for now, I see better opportunities elsewhere.
Doug Kass writes daily for
Real Money Pro
, a premium service from TheStreet. For a free trial to
Real Money Pro
and exclusive access to Mr. Kass's daily trades and market commentary, please click here.