Warren Buffett’s investment vehicle Berkshire Hathaway (NYSE: BRK-B) announced that quarterly operating profits doubled from USD 3.44 billion to USD 6.88 billion (expected: 6.11 billion). But BRK also confirmed it invested USD 928 million of its cash to buy back its own shares. Buybacks are rare at Berkshire. This was the first time Berkshire repurchased its own shares in 6 years. As such, it offers a valuable insight into both what Buffett thinks about the current state of the market and what he considers “fair value” for BRK shares. Buffet obviously believes that there is nothing better around currently then Berkshire’s own stock. As Insider, no one can value BRK shares better than Warren Buffett himself.
But even better, now we can estimate what Buffett thinks Berkshire stocks are worth. We just have to do the maths. The average price Buffett paid for Berkshire’s Class A shares was USD 312,807. On September 30, the book value per Class A share was USD 228,712. Dividing the price Buffett paid per A share by its recent book value results in a Price/Book Value Ratio of 1.4. Warren Buffett will most likely repurchase BRK shares when they drop below 1.4 times book value per share. This means the target repurchase price of up to USD 320,197.
Spending $928 million to buy back shares is less than 1% of its current USD 118 billion cash reserves. Piling more cash into repurchasing stocks at or under the target price should work as a support. Considering buying BRK shares just above the 1.4 times book value price should be an excellent bet.
Sven Franssen