Inside Wall Street: Legendary Buffett continues to rule

As the stock market wobbles, one way to thrive is to buy Berkshire Hathaway shares.

By Gene Marcial May 21, 2012 2:27PM

"The beauty of stocks is that they do sell at silly prices from time to time. That's how Charlie [Munger] and I got rich," said Warren Buffett at the recent annual meeting of Berkshire Hathaway (BRK.A, BRK.B) shareholders in Omaha in early May.


The "Oracle of Omaha" was referring to how stocks at times fall to absurdly low levels and become compelling buys. That pretty much defines Buffett's investing principle: Don't buy and sell stocks. Buy companies and hold. 

Buffett repeated this advice to investors at the annual meeting, adding that he feels very comfortable repurchasing Berkshire shares at 1.1 times their book value. Like Berkshire's stock, said Buffett, "many of the businesses we own are worth far more than we carry them for."


Buffett said he would buy Berkshire shares "in a big scale," in particular, Berkshire Class A: "We know its intrinsic value is significantly above $110,000." The stock is trading Monday afternoon at $119,860 a share, down from its 52-week high of $123,861. Berkshire's Class B stock is trading at $79.32 a share, not far from its 52-week high of $82.59, and way up from its 52-week low of $65.35.


Buffett and Berkshire Vice Chairman Charles Munger believe the Class A stock, with a current market cap of $200 billion, will eventually climb to $400 billion. They have put to work some of Berkshire's ample cash stash by buying assets they consider inexpensive, among them most of the newspaper properties of Media General (MEG) for $143 million in cash. Berkshire also purchased 10 million shares of General Motors (GM) and 1.59 million shares of Viacom (VIAB).


"Berkshire shares continue to be very attractive investment bet," says Edwin Walczak, who heads and manages the U.S. investment portfolio of Swiss bank Vontobel. The carrying value on the books of several of the businesses in Berkshire's investment portfolio "would be worth much more in the open market, as Buffett and Munger suggest," says Walczak. "That reinforced our sense that the stock is undervalued," he adds.


Indeed, the invigorated additions to Berkshire's portfolio reflects Buffett's continued activism at the helm of the company, and reflects his savvy stock choices.


Jay Gelb, analyst at Barclays Capital, who rates Berkshire stock as "overweight," has a price target of $142,500 a share for the Class A stock, and $95 a share for the Class B, based on 1.2 times his year-end 2012 estimated book value per Class B share of about $77, and $115,500 for the Class A share.


"Berkshire is poised to benefit from an earnings recovery in its non-insurance businesses as the economy improves and rising property-and-casualty prices in its reinsurance business," he says. Berkshire has a "robust balance sheet with $34 billion in cash," he notes, and annual operating earnings power of $12 billion to $14 billion. The company could buy back its stock if its valuation falls below 1.1 times book value, says Gelb, which should provide a strong support level for the stock.


Gelb expects Berkshire to generate strong earnings growth from the Burlington Northern railroad and its manufacturing, service, and retail holdings. Earnings could also be augmented by acquisitions. The company typically seeks acquisitions in the $5 billion to $20 billion range, which appears reasonable based on the $34 billion in current cash holdings. Berkshire expects its cash position to grow organically by roughly $10 billion to $12 billion annually, says Gelb.


Part of the insurance-based conglomerate's appeal is the attractive asset holdings in its portfolio, the largest of which include Coca-Cola (KO), International Business Machines (IBM), Wells Fargo (WFC), American Express (AXP), and Procter & Gamble (PG). Operating revenues in 2011 totaled $144.1 billion, up from $133.2 billion in 2010. Its insurance holdings generate a large part of operating revenues, led by GEICO, which accounts for 11%; Berkshire Hathaway Reinsurance Group, 6%; and General Re, 4%. Burlington Northern Santa Fe accounts for 14% of revenues, and McLane Co., 23%.


What about the succession issue? Since the 81-year-old chairman and CEO of Berkshire was diagnosed with stage 1 prostate cancer, concerns have been reignited. But as his condition isn't life-threatening and the survival rate from the disease is 99.5% over 210 years, it hasn't become an overriding worry right now. A successor, while still unnamed, has been selected, along with two back-up candidates.

Gene Marcial

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.


May 21, 2012 3:25PM
I don't think they even knew what cancer was 210 years ago... Back then it was called "Natural Causes"... Odd, one dies of that any more.
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