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Morningstar Increases Fair Value Estimate on Warren Buffett's Berkshire Hathaway

Morningstar increased its Berkshire Hathaway valuation Wednesday with a sum of the parts methodology. For the Class A shares, it increased its fair value estimate to $265,000 per share and for its Class B shares, it increase it to $177 per share. Berkshire Hathaway ( NYSE:BRK.A ) ( NYSE:BRK.B ) closed Wednesday at $194,479 per Class A share and $129.16 per Class B share.

Berkshire brands from Tilson Fund presentation

Increased estimates

Morningstar increased its outlook for Berkshire's manufacturing, service, retail operations, finance and financial products divisions (excluding Precision CastParts ( NYSE:PCP )). These divisions include Clayton Homes, CORT Business Services, Marmon and Lubrizol, among others. They are also accounting for the $7 billion noncash gain from Berkshire's investment in Kraft Heinz ( NASDAQ:KHC ).

Decreased estimates

Morningstar decreased its outlook for Berkshire's insurance businesses, which include Geico, General Re, Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group. For Geico it cited an increase in Geico's loss ratio as a reason to decrease the unit's value estimate.

The loss ratio is the ratio of claims paid to the earned premiums. Buffett has posited that car accidents have increased in the last five years because of drivers who are distracted by their smartphones. Morningstar cites weak pricing and increased competition as reasons for a lowered outlook on the other insurance units.

Its forecasts for Burlington Northern Santa Fe have also been lowered due to weakness in coal and crude oil prices , which they anticipate will lower freight volume.

Putting it all together

Morningstar expects Berkshire's book value to increase by 6% by the end of the year. That would add up to $160,372 per Class A share and $106 per Class B share. Buffett has said that he would reconsider purchasing shares of the company if it hit the milestone of 1.2 times book value. With Morningstar's end-of-the-year book value estimates, that would come out to $192,446 per Class A share and $128 per Class B share.

The updated analysis from Morningstar's fair value estimate is summarized in the table below.

Berkshire Sum of the Parts Class A Class B
Kraft Heinz 14,300 10
Precision Cast Parts 20,600 14
Burlington Northern Santa Fe 58,300 39
Berkshire Energy, Mfg, Svc, and Retail 79,900 54
Financial Products 8,800 6
Insurance 83,100 55
Total $ 265,000 $ 177

Another perspective

Whitney Tilson (Trades, Portfolio) published his intrinsic value estimate of Berkshire in August in which he gave a current value to the company's Class A shares of $275,000 per share and forecast a $305,000 per share value for next year. You can see his presentation here.

Disclosure: I am long BRK.B

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This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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