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!

On Saturday Warren Buffett released his annual letter on Berkshire Hathaway.  If you are an investor it is a must read.  Here are the best quotes from the letter.

On Berkshire’s Investments

… stock repurchases at Coca-Cola, American Express and Wells Fargo raised our percentage ownership of each. Our equity in Coca-Cola grew from 9.1% to 9.2%, our interest in American Express increased from 14.2% to 14.8% and our ownership of Wells Fargo grew from 9.2% to 9.4%. And, if you think tenths of a percent aren’t important, ponder this math: For the four companies in aggregate, each increase of one-tenth of a percent in our ownership raises Berkshire’s portion of their annual earnings by $50 million.

On BNSF Railroad

BNSF, like all railroads, also moves its cargo in an extraordinarily fuel-efficient and environmentally friendly way, carrying a ton of freight about 500 miles on a single gallon of diesel fuel. Trucks taking on the same job guzzle about four times as much fuel.

Elephant Hunting or Tuna Fishing?

In past letters Buffett has said he is elephant hunting for new businesses.  He is now fishing.

With the acquisition of Van Tuyl, Berkshire now owns 9 1⁄2 companies that would be listed on the Fortune500 were they independent (Heinz is the 1⁄2). That leaves 490 1⁄2 fish in the sea. Our lines are out.

Investing Wisdom

… my experience in business helps me as an investor and that my investment
experience has made me a better businessman. Each pursuit teaches lessons that are applicable to the other. And some truths can only be fully learned through experience. (In Fred Schwed’s wonderful book, Where Are the Customers’ Yachts?, a Peter Arno cartoon depicts a puzzled Adam looking at an eager Eve, while a caption says, “There are certain things that cannot be adequately explained to a virgin either by words or pictures.”

For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.

Funny

The gecko, I should add, has one particularly endearing quality – he works without pay. Unlike a human spokesperson, he never gets a swelled head from his fame nor does he have an agent to constantly remind us how valuable he is. I love the little guy.

When I was a teenager– in my one brief flirtation with honest labor – I tossed about 500,000 papers.

Benjamin Franklin Wisdom

Buffett always has some common sense wisdom in his letters.

It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone.

In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives.

Market forecasters will fill your ear but will never fill your wallet.

We’ve found that if you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels.

… never underestimate the man who overestimates himself.

Dividend?

Buffett has always said Berkshire won’t pay a dividend but hints that they might in the future.

Eventually – probably between ten and twenty years from now – Berkshire’s earnings and capital resources will reach a level that will not allow management to intelligently reinvest all of the company’s earnings. At that time our directors will need to determine whether the best method to distribute the excess earnings is through dividends, share repurchases or both.