As part of a new series, each week we typically conduct a DCF on one of the companies in our screens. This week we thought we’d take a look at one of the stocks that are not currently in our screens, Berkshire Hathaway Inc (BRK.B).
Profile
Berkshire Hathaway is a holding company with a wide array of subsidiaries engaged in diverse activities. The firm’s core business segment is insurance, run primarily through Geico, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Primary Group. Berkshire has used the excess cash thrown off from these and its other operations over the years to acquire Burlington Northern Santa Fe (railroad), Berkshire Hathaway Energy (utilities and energy distributors), and the firms that make up its manufacturing, service, and retailing operations (which include five of Berkshire’s largest noninsurance pretax earnings generators: Precision Castparts, Lubrizol, Clayton Homes, Marmon, and IMC/ISCAR). The conglomerate is unique in that it is run on a completely decentralized basis.
Recent Performance
Over the past twelve months the share price is up 18.98%.
Inputs
- Discount Rate: 10%
- Terminal Growth Rate: 2%
- WACC: 10%
Forecasted Free Cash Flows (FCFs)
| Year | FCF (billions) | PV(billions) |
| 2024 | 27.8 | 25.27 |
| 2025 | 29.8 | 24.63 |
| 2026 | 31.9 | 23.97 |
| 2027 | 34.2 | 23.36 |
| 2028 | 37.5 | 23.28 |
Terminal Value
Terminal Value = FCF * (1 + g) / (r – g) = 478.13 billion
Present Value of Terminal Value
PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 296.88 billion
Present Value of Free Cash Flows
Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 120.51 billion
Enterprise Value
Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 417.39 billion
Net Debt
Net Debt = Total Debt – Total Cash =86.93 billion
Equity Value
Equity Value = Enterprise Value – Net Debt = 330.46 billion
Per-Share DCF Value
Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $151.31
Conclusion
| DCF Value | Current Price | Margin of Safety |
|---|---|---|
| $151.31 | $348.16 | -130.10% |
Based on the DCF valuation, the stock is currently overvalued. The DCF value of $151.31 per share is significantly lower than the current market price of $348.16. The Margin of Safety is -130.10%.
It is important to note that this valuation is based on a number of assumptions, and these assumptions could change in the future. This valuation is meant to be a back-of-the-envelope analyse that could be used as a starting point in a much more thorough valuation process. As a result, it is important to do your own research before making any investment decision.
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8 Comments on “Berkshire Hathaway Inc (BRK.B) DCF Valuation: Is The Stock Undervalued?”
If Net Debt is -86.93 (net cash position), then Equity Value is not 330.46 but 504.32
Apologies for the typo. Total Debt is 122.74B minus Cash & Equivalents 35.81B = Net Debt 86.93B. Therefore Enterprise Value 417.39B minus Net Debt 86.93B = Equity Value
Why is net cash subtracted from enterprise value to get to DCF value? Isn’t net cash in addition to the value of the business?
Apologies for the typo. Total Debt is 122.74B minus Cash & Equivalents 35.81B = Net Debt 86.93B. Therefore Enterprise Value 417.39B minus Net Debt 86.93B = Equity Value
This highlights the limitations of this type of analysis…
Re BRKBvaluation, company has net cash, I.e. negative net debt. Shouldn’t that we added to dcf result rather than subtracted?
Apologies for the typo. Total Debt is 122.74B minus Cash & Equivalents 35.81B = Net Debt 86.93B. Therefore Enterprise Value 417.39B minus Net Debt 86.93B = Equity Value 330.46B.
Where in the BRK financials can we find the Free Cash Flows (FCFs)?