Warren Buffett Screams From the Mountaintop: Berkshire Hathaway is Cheap

Forget the annual parade of Street prognosticators rolling out their 2013 forecasts. Warren Buffett just delivered a pretty telling commentary on market valuations. Berkshire Hathaway (BRK.B) announced that it will commence share repurchases when the stock trades below 120% of its book value. Last fall Berkshire first authorized a buyback, but set a threshold of 1.1x book value. To date Berkshire only repurchased $67 million worth of shares (in the fourth quarter of last year.) At 1.2x book value, it sure looks like Berkshire is going to be buying back more shares starting….now.

BRK.B Price / Book Value Chart

BRK.B Price / Book Value data by YCharts

Clearly the Street approved.

BRK.B Chart

BRK.B data by YCharts

Berkshire also announced that it had already repurchased $1.2 billion of A shares (BRK.A) from the estate of a long-term shareholder. While Buffett has been a vocal advocate of higher tax rates for the nation’s wealthy, perhaps this is one shareholder looking to make a savvy tax move ahead of the possibility that long-term capital gains tax rates might be headed to 20% next year, from their current top rate of 15%.

Buffett has long railed against companies that initiate buybacks when their stocks are trading at highs as a way to manipulate valuation. (Ex.: Fewer shares in circulation automatically gooses per-share earnings even if the company didn’t make an extra penny in profit.) So it reasons that by raising the book-value threshold for buybacks Buffett thinks Berkshire Hathaway is seriously undervalued.

That makes Berkshire a bit of an outlier. Circling back to the Wall Street prognosticators and their 2013 forecasts: What you’re hearing a lot of these days is that stocks are “rationally priced” or represent a solid value…only when stacked up against bonds. What you don’t hear is that stocks are providing a big margin of safety. “Cheap” isn’t on the lips of equity strategists right now. By raising its repurchase stock price threshold to 1.2x book value -- which is below the current price -- Warren Buffett is telling you he thinks his stock is cheap. He’s also providing a floor for the stock, backed by the wherewithal to step in and buy big.

BRK.B Cash and ST Investments  Chart

BRK.B Cash and ST Investments data by YCharts

That’s a whole lot of cash. There’s no telling how much Buffett would consider buying back. But clearly he’s not going to be cash-constrained.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.



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