Berkshire Hathaway — A Big-Time Buy

How does one actually write in detail about the greatest public company ever? I believe the only way to truly cover Warren Buffet’s Berkshire Hathaway (NYSE:BRK.A) would be in a series of very long articles. We can’t accomplish that, but what we can do is offer a few words about why Berkshire should be a core holding for any portfolio.

Berkshire primarily is driven by its insurance business. It handles auto insurance via GEICO, reinsurance under General Re, and offers government bond insurance, as well. There’s a reason why Berkshire is all about insurance. It’s because insurance is a great business, and unless there are numerous catastrophes in succession — a highly unlikely event — then over time an insurance business is going to take in a lot more in premium payments than it pays out in claims.

Berkshire owns 80% of a massive utility and energy company; tons of apparel companies; numerous building products businesses; private-jet financing operations; manufacturing companies; jewelry operations; home and business furnishing operations; candy, snack, and drink businesses; and equipment leasing companies. And it owns shares in public companies such as American Express (NYSE: AXP), Coca-Cola (NYSE:KO), Kraft Foods (NYSE:KFT) and Wells Fargo (NYSE:WFC).

By now you should notice that Berkshire Hathaway is all about diversification. The company doesn’t do just one thing. This means that no matter how one or two individual sectors might be faring, Berkshire is diversified enough that it will always make money from one year to the next, even if none of these businesses are high-growth stories.

Indeed, stock analysts looking out five years on Berkshire see annualized earnings growth at 7%, which includes a 4% drop this year and a 25% pop next year. At a stock price of $107,000 on FY 2011 earnings of $6,900 per share, the stock presently trades at a P/E of 15.5. There are no competitors that truly compare to Berkshire.

The company carries $1.16 billion in cash, and $1.4 billion in debt at an interest rate of about 9%. Trailing 12-month cash flow was $445 million, so the debt service is no problem. However, there’s more to this story. For starters, Berkshire always keeps about $20 billion in cash on hand to pay out insurance claims. Depending on how aggressively one wants to discount that cash horde into the valuation, you arguably could place Berkshire’s current P/E as low as 4 or 5. For a business that is projected to grow 7% annually, the company potentially is undervalued by as much as 40%. There’s also an argument that the company is deserving of a premium multiple, suggesting even greater undervaluation.

Conclusion

Berkshire is 25% off its all-time high and arguably undervalued. This seems like a great time to jump in. Can’t afford $107,000 per share? No problem. Berkshire has Class B shares (NYSE:BRK.B) that trade at $71.55 per share.

I believe Berkshire is a buy for regular accounts and a buy for retirement accounts.

Lawrence Meyers owns shares of Berkshire Class B.