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Berkshire Hathaway Is Worth Substantially More Than Book Value

Float is deducted in full on the balance sheet, but it is actually a revolving fund.

BNSF, Berkshire Hathaway Energy, and GEICO are worth far more than book value.

The gap between book value and intrinsic value widens as equities become a smaller percentage of market cap.

Note: Throughout this article, I use "letter" to mean "letter to shareholders."

Since 1979, Berkshire's (NYSE:BRK.A) (NYSE:BRK.B) stock has been between one and two times book value most of the time.

One of the factors that has changed book value over the years is the way in which equities are carried. Beginning in 1979, equities held by insurance companies started being carried at market value as opposed to the lower of aggregate cost or aggregate market value. In 1993, this expanded to equities at all subsidiaries, not just the equities held by insurance subsidiaries.

Float is more valuable when interest rates are high, but the 1979 letter points out that high interest rates and high inflation can make things difficult. Specifically, it is mentioned that Berkshire's book value at the end of 1964 would have bought about one-half ounce of gold and fifteen years later it would buy about the same amount.

Buffett started shifting from Ben Graham's cigar butt approach many years ago, and this switch has been one of the reasons why intrinsic value has grown nicely. In 1979, Buffett is feeling the influence of Charlie Munger when he says it is better to have a good business at a fair price than a poor business at a bargain price.

GAAP restrictions are pointed out in the 1987 letter. They require Berkshire to fully value marketable securities on the balance sheet, but to understate earnings from them on the income statement because only dividends count. The opposite is true when companies are acquired - all the earnings are shown but the balance sheet is not adjusted when the book value of the acquired company increases.

Instead of relying on third-party financial sites, I go straight to the 10-K/10-Q/annual report balance sheet when looking at book value.

Looking at the consolidated balance sheets on page 48 of the 2014 annual report, we see that Berkshire Hathaway's shareholders' equity (book value) is $240.17 billion for 2014 and $221.89 billion for 2013.

The financial data press release for 2014 says the book value per Class A equivalent share is $146,186 for 2014 and $134,973 for 2013.

We just need to know the number of shares outstanding to come up with the denominator for the per share calculation. We find this in the Notes to Consolidated Financial Statements in the annual report. Honing in on (19) Common stock on page 77, it says there were 1,642,909 shares outstanding at the end of 2014 and 1,643,954 outstanding at the end of 2013.

Here is the breakdown:

240,170,000,000/1,642,909 = $146,186

221,890,000,000/1,643,954 = $134,973

Looking at more recent numbers, the balance sheet for the 2015 Q2 10-Q filing shows that book value is $246.043 billion. Note 17 of the filing says there were 1,643,190 shares outstanding as of June 30, 2015.

Here is the breakdown:

246,043,000,000/1,643,190 = $149,735, which matches the per share book value in the press release for Q2 2015.

Note: Class B shares are 1/1,500th of Class A.

Purchase Accounting

The 1983 letter has an appendix that talks about economic goodwill versus accounting goodwill. It notes that as of November 1970, goodwill created by purchases must be amortized within 40 years. Note that the FASB 142 Summary explains how this requirement stopped in June of 2001 (but goodwill must be checked regularly for impairment). See's is used as an example. Blue Chip Stamps bought See's in 1972 for $25 million when it had roughly $8 million of net tangible assets. The $17 million over net tangible assets went to a goodwill account that shrank each year with amortization. Book value shrank each year as accounting goodwill shrank. Meanwhile, intrinsic value grew over the years as economic goodwill actually increased.

The 1983 appendix goes on to explain why some companies are better at building intrinsic value than others. See's with $2 million of earnings on $8 million of net tangible assets is compared to a fictional company that also has $2 million of earnings but $18 million of net tangible assets. The comparison uses inflation and it shows that Buffett is thinking independently of traditional wisdom and thinking a bit differently than Ben Graham. He still mentions many of Graham's teachings like the irrational Mr. Market, but he has his own thoughts with respect to intrinsic value.

Among other letters, the 1986 letter shows how income statements and balance sheets can diverge after an acquisition. GAAP can paint a picture that differs from the fundamental economics. The appendix to the 1986 letter uses Scott Fetzer as an example to show what happens with purchase price accounting rules at that time. Berkshire acquired...