It seems that all the majors “value” companies are just swimming in cash and have, as a group, decided that the best companies to buy are… Themselves!
For quite some time Berkshire Hathaway has been a bargain at less than $85,000 a share for most of 2005 and, even though it has shot up 12.5% since September to $89,500, it still has a long way to run.
BRKA has a Market Cap of $139Bn but is sitting on an estimated $197Bn in assets. The company is bringing in eps of $5,190 per share (sounds crazy right?). 2005 earnings are expected to be right around $9Bn for a forward p/e of just over 15.
For perspective, in 1965 Warren Buffet took over Berkshire Hathaway when it was a textile company and had a market cap of $22M ($15 per share). Eddie Lampert take note!
In his 1999 Annual Letter to Shareholders, Buffet stated: Â?A repurchase of, say, 2% of a company’s shares at a 25% discount from per-share intrinsic value…We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated…Recently, when the A shares fell below $45,000, we considered making repurchases.Â?
A conservative intrinsic value for the company this year would be about $118Bn, even with all the insurance payouts expected this year. That means that at a price below $89,000 Mr. Buffet can be expected to take some of the $41Bn in cash he has laying around and start buying back shares.
There are not all that many shares to buy, with a float of just 1.54M shares, Mr. Buffet has to buy slowly and carefully so as not to tilt the market…
Contrary to popular opinion, Berkshire did very well during the .com boom but, more importantly, outperforms the indexes by leaps and bounds during recessions and (here’s a biggie) just after Sept. 11, 2001 – it was one of the few stocks that went up, growing from $70K to $80K in 6 months.
If the economy starts going downhill, it will be time for Buffet to go shopping. He recently added Bill Gates to the board to ensure continuity for the next generation as well as to corral a potential competitor in global monopoly.
The bottom line is that if you give Mr. Buffet $85,000 of your money, he is going to earn $5,000 CASH (7%) on your investment in 12 months – plus the stock may go up too! That’s some pretty nice earnings!
If you don’t have $89,500 to spare, there are “B” shares available for about $3,000. This stock is a great hedge against an economic downturn that will, in part, be caused by companies buying back their own stocks rather than investing and putting that money to work!
