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Shares of Berkshire Hathaway (BRK-A) fell about 12% in 2015, a year when the S&P 500 was flat. It was the worst annual decline since 2008. However, it’s not all bad news. In his annual letter to Berkshire shareholders, CEO Warren Buffett emphasized the company’s strong 6.4% gain in book value, which far outpaced the S&P.
In an interview with Yahoo Finance, long-time Berkshire investor Whitney Tilson, founder and managing partner of Kase Capital, says he sees significant upside in shares.
According to Tilson’s analysis, Berkshire has a current intrinsic value of $283,000, which represents a significant upside to its recent price of $215,740. In 12 months, 6% annual growth of intrinsic value and an $8,000/share cashbuild could send Berkshire’s price to $308,000.
Tilson said he believes that continued earnings growth along with the likelihood of meaningful acquisitions, new stock investments, and additional cash build all support the upside story.
As for last year’s underperformance? Tilson said he viewed it as a buying opportunity.
“There were a couple little pockets of weakness but overall the company is doing great,” he said.
Tilson, who has been an investor in Berkshire for 20 years, said he sees long-term potential for the company.
“There’s no one catalyst. It’s not like I think they’re going to beat their whisper number, because there is no whisper number next quarter,” he said. Instead, Tilson said he looks to buy the stock when it’s at the low end of its range of a discount to intrinsic value.
“In a world in which there aren’t a lot of safe, cheap assets particularly with the market rally in the month or so, this one’s a good solid foundation for a conservative portfolio,” he said.
In September 2011, Berkshire announced a formal share repurchase program, which was revised the following year, that has no time limit and no dollar cap. Buffett emphasized that if Berkshire traded below intrinsic value, buying back shares would be a great way to invest the company’s cash.
Tilson sees this policy as a floor for the stock price. Specifically, a floor of 1.2x book value represents just an 8% downside from its current 1.3x book value.
“Buffett a few years ago said he would buy back stock enthusiastically at about 1.2x book value which is about $187,000 per share. As recently as about a month ago, the stock was under $200,000, and so you were very close to what I call the ‘Buffett put,” he said, adding that Buffett reiterated this position on the first page of his 2015 annual letter to shareholders.
With the stock having moved up to $215,000, the “Buffett put” is now 14% below its current trading levels, but Buffett said the upside outweighs the downside. “It’s a three-to-one gain-to-potential loss ratio. That’s pretty attractive in a fairly fully valued world.”
Berkshire has $61.2 billion of cash and $26 billion of bonds, which comes to $87.2 billion. Tilson pointed out that even after Berkshire’s $32 billion Precision Castparts purchase goes through, the company would still have $55 billion along with $15.4 billion in cash flow generated in 2015.
Opportunistically putting cash to work
In his presentation, Tilson pointed to Buffett’s ability to put cash to work in a smart way drives much of Berkshire’s outperformance relative to the market.
Most recently, during the 2008 recession, Buffett got preferred shares in Goldman Sachs and General Election and made the company’s $26.7 billion purchase of Burlington Northern Santa Fe railroad. During a similar dip in late 2011, he announced large investments in chemical maker Lubrizol and Bank of America.
The bottom line: As Tilson concluded in his presentation, “Berkshire’s huge hoard of liquid assets, the quality and diversity of its businesses, the fact that much of its earnings (primarily insurance and utilities) aren’t tied to the economic cycle, and the conservative way in which it’s managed to protect Berkshire’s intrinsic value, while the share repurchase program provides downside protection for the stock.”
For more on Yahoo Finance's conversation with Tilson about Berkshire, see: Berkshire after Buffett isn't the worst thing that could happen to the company.