Warren Buffett, renowned investor and CEO of Berkshire Hathaway (ticker: BRKb), is often associated with his shift from deep-value investing to an appreciation for growth stocks. However, at his core, Buffett remains a true value investor who rarely overpays for stocks or businesses.
Pilot Lawsuit Reveals Berkshire Hathaway’s Valuation Strategy
In a recent lawsuit filed by Pilot, a truck-stop operator, against Berkshire Hathaway, it was revealed that the conglomerate agreed to acquire the company at a modest 10 times annual earnings before interest and taxes. This translates to approximately 15 times after-tax earnings. The lawsuit is centered around the calculation method used to determine the payment for the remaining 20% stake held by the Haslam family, who sold 80% of the company to Berkshire Hathaway in two stages for a total of around $11 billion.
This disclosure provides a rare glimpse into how Buffett values private businesses he seeks to acquire, shedding light on his valuation strategy as Berkshire Hathaway’s long-standing CEO.
A Value Approach to Stock Investments
Buffett’s investment portfolio at Berkshire Hathaway currently holds approximately $350 billion worth of stocks. While he primarily adopts a value approach when buying stocks, there are a few exceptions.
Take Apple (AAPL), Berkshire Hathaway’s largest holding. Although the stock currently trades at around 27 times earnings, Buffett acquired his stake between 2016 and 2018 at a price equivalent to less than 15 times earnings. At the time, Apple was predominantly seen as a cyclical hardware company, but Buffett recognized its potential as a stable consumer franchise.
Notably, Berkshire Hathaway owns 915 million Apple shares valued at $165 billion, constituting roughly half of the conglomerate’s equity portfolio.
Historical Examples of Value Investing
Coca-Cola (KO), another longstanding holding in Berkshire Hathaway’s portfolio, has historically traded between 20 and 30 times earnings. However, when Buffett purchased the stock in the late 1980s, he paid closer to 15 times earnings, once again exemplifying his value-oriented approach.
Within the past decade, Buffett also acquired shares of Bank of America (BAC), Chevron (CVX), and Occidental Petroleum (OXY) at less than 15 times earnings, all of which have become significant holdings in Berkshire Hathaway’s portfolio.
Despite occasional deviations from his value investing methodology, Warren Buffett’s core principles and approach to investing remain firm, making him one of the most revered figures in the world of finance.
Berkshire Hathaway’s Value Stock Purchases
Berkshire Hathaway, the renowned investment conglomerate led by Warren Buffett, has made strategic acquisitions of value stocks in recent times. Notable among these purchases are Citigroup (C), HP (HPQ), and Paramount Global (PARA), all bought for under 15 times earnings since the beginning of 2022.
However, it has not always been a smooth ride for Buffett and his team. In 2016, Berkshire Hathaway bought Precision Castparts, a prominent aircraft parts manufacturer, for over $30 billion. Unfortunately, this deal did not yield the expected results. The conglomerate acquired the company for more than 20 times after-tax earnings, but the investment did not perform as anticipated.
Precision Castparts faced significant challenges as Berkshire Hathaway seemed to have bought it during a period when margins were at their peak. Moreover, the company’s performance was adversely impacted by the aerospace downturn that occurred during the global pandemic.
The revenue and earnings of Precision Castparts have declined to levels below what was generated in 2015. As a result, Berkshire Hathaway has taken approximately $10 billion in write-downs on the company, which is estimated to be worth around $20 billion today based on projected pretax earnings of $1.6 billion for this year. It is worth noting that the S&P 500 has experienced significant growth since the purchase was made in 2015, having doubled in value.
In addition to their focus on value stocks, Berkshire Hathaway also holds some high-price stocks in its equity portfolio. Notable among these are Amazon.com (AMZN), Visa (V), Mastercard (MA), and Snowflake (SNOW). Investment managers Todd Combs and Ted Weschler are likely responsible for the acquisition of these smaller holdings, each valued at under $2 billion. Combs and Weschler together manage about 10% of the equity portfolio within Berkshire Hathaway.
In a previous talk at Columbia Business School, Todd Combs shared insights into his investment approach, which aligns with that of Buffett. While the details of the talk were off-the-record, one account posted on the internet shed some light on their investment philosophy. Combs allegedly mentioned that he regularly meets with Buffett to discuss stocks. During these discussions, Buffett inquires about S&P 500 companies trading at 15 times forward earnings and their potential for a 7% annual earnings expansion over the next five years with reasonable confidence.
Despite the challenges faced with Precision Castparts, it seems that Buffett’s inclination towards buying undervalued stocks remains intact. His tried and tested investment strategies continue to guide Berkshire Hathaway’s approach in the market.
