How do you make Berkshire Hathaway appear underpriced? Look at its earnings the way its CEO does.
Warren Buffett uses a financial measure called “look-through earnings,” which incorporates profits of companies in Berkshire’s $200 billion equity portfolio into earnings. When he does that, the shares appear cheaper, notes JPMorgan analyst Sarah DeWitt in a report. She calculates that Berkshire’s projected 2019 earnings rise 50%, to $15.44 per share, based on a look-through calculation—higher than her $10.25 estimate for operating profits, which is in line with the current consensus. Her estimates apply to Berkshire’s class B shares, the equivalent of 1/1,500 of the A shares.
Buffett often refers to look-through earnings in his shareholder letters. Using a look-through 2019 earnings estimate, Berkshire trades for just 13.6 times earnings, against 20 times using a conventional earnings calculation. Berkshire class B shares traded at $208.70 on Thursday. The class A changed hands at $312,785.