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 is 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 companies 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 20.75%.
BRK.B data by YCharts
Inputs
Forecasted Free Cash Flows (FCFs)
| Year | FCF (billions) | PV(billions) | | 2024 | 29.68 | 27.48 | | 2025 | 30.96 | 26.54 | | 2026 | 32.29 | 25.63 | | 2027 | 33.68 | 24.76 | | 2028 | 35.13 | 23.91 |
Terminal Value
Terminal Value = FCF * (1 + g) / (r – g) = 597.21 billion
Present Value of Terminal Value
PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 406.45 billion
Present Value of Free Cash Flows
Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 128.32 billion
Enterprise Value
Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 534.77 billion
Net Debt
Net Debt = Total Debt – Total Cash = 90.25 billion
Equity Value
Equity Value = Enterprise Value – Net Debt = 444.52 billion
Per-Share DCF Value
Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $206.18
Conclusion
| DCF Value | Current Price | Margin of Safety | | --- | --- | --- | | $206.18 | $396.73 | -92.42% |
Based on the DCF valuation, the stock is overvalued. The DCF value of $206.18 share is lower than the current market price of $396.73. The Margin of Safety is -92.42%