If you read Berkshire’s annual letter, you can gain a lot of insight as to what Buffett thinks of Berkshire. So based on the 2014 annual letter, does Buffett think Berkshire’s stock is undervalued, overvalued or just right?
First, Buffett has always said, over time Berkshire’s stock price will reflect the intrinsic value of the business. Calculating Berkshire’s intrinsic value is not a precise exercise but a lot of analysts do it, including Buffett and Munger.
In his 2014 annual letter, Buffett points out several times that the value of an asset on the books is a lot less than the true or intrinsic value of the asset. For example, when discussing Berkshire’s insurance float he says
Charlie and I believe the true economic value of our insurance goodwill – what we would happily pay for float of similar quality were we to purchase an insurance operation possessing it – to be far in excess of its historic carrying value. Under present accounting rules (with which we agree) this excess value will never be entered on our books. But I can assure you that it’s real. That’s one reason – a huge reason – why we believe Berkshire’s intrinsic business value substantially exceeds its book value.
When discussing the businesses that make up Berkshire, Buffett says
Furthermore, the intrinsic value of these businesses, in aggregate, exceeds their carrying value by a good margin, and that premium is likely to widen. Even so, the difference between intrinsic value and carrying value in both the insurance and regulated-industry segments is far greater. It is there that the truly big winners reside.
And finally, Buffett points out that the peculiarities of Marmon’s rail car business which causes Marmon’s book value to be undervalued.
One further fact about our rail operation is important for you to know: Unlike many other lessors, we manufacture our own tank cars, about 6,000 of them in a good year. We do not book any profit when we transfer cars from our manufacturing division to our leasing division. Our fleet is consequently placed on our books at a “bargain” price. The difference between that figure and a “retail” price is only slowly reflected in our earnings
through smaller annual depreciation charges that we enjoy over the 30-year life of the car. Because of that fact as well as others, Marmon’s rail fleet is worth considerably more than the $5 billion figure at which it is carried on our books.
Based on these quotes is Buffett hinting that book value is substantially under intrinsic value? And since Buffett believes stock price will eventually be the same as intrinsic value, does Buffett believe Berkshire’s stock price is undervalued?
I think the answer is a yes!