Warren Buffett began warning that size would inhibit Berkshire Hathaway's (NYSE: BRK-B) returns nearly 30 years ago. He's been wrong ever since.
Berkshire reported second-quarter earnings of US$4.54 billion, or US$2,763 per class-A share, this week. That was up 46% from a year ago.
Net income isn't the most reliable metric for a company like Berkshire — it focuses on growing assets, not short-term profits, and Berkshire's derivative investments can make it extremely volatile. Buffett has recommended paying attention to book value per share. And here, Berkshire's still got it:
Source: S&P Capital IQ.
An average annual growth rate of 10.4% might not sound like much. But consider that the S&P 500 (SNPINDEX: ^GSPC) returned an average of 3.2% per year during the same period, including dividends. When Buffett started his private investment partnership in 1956, his goal was to outperform the market by 10 percentage points per year. Half a century later, he's still pretty close to that goal. That's astounding for a company Berkshire's size.
Having a lot of cash when everyone else is losing their minds can be your most valuable asset. That's proved true for Berkshire. Two years ago, it bought a US$5 billion slug of preferred stock in Bank of America (NYSE: BAC) that came with warrants to purchase 700 million shares of the bank at US$7.14 per share. Today, shares trade at nearly US$15. Pricing these warrants is terribly imprecise, but playing around with a Black-Scholes options calculator shows they could be worth US$8 to US$10 each, or a perhaps as much as US$7 billion — on top of Berkshire's original US$5 billion investment. Few other companies can score these kinds of returns while taking so little risk, because few other companies can come to the rescue the way Berkshire can. Size has actually been an advantage in recent years. I suspect it will be going forward, too.
Is Berkshire still a good buy at today's prices? The most common way to value Berkshire's stock is price-to-book value. Using the most up-to-date figures from Berkshire's quarterly earnings, here's where the stock stands:
Source: S&P Capital IQ.
Up 38% in the past year, Berkshire now trades well above the 1.2 book value Buffett qualifies as cheap enough to repurchase with Berkshire's own cash. But by any historical metric, the 1.4 book value that shares currently trade at isn't expensive. Berkshire shares may never regain the two to three times book valuations it used to command — Buffett's mortality may see to that. But shareholders today can enjoy one of the best-run companies earning incredible returns while trading at a reasonable valuation. Better than a stick in the eye, as they say.
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A version of this article, written by Morgan Housel, originally appeared on fool.com.
