Greg Abel Thinks Berkshire's Stock Is Cheap -- Is He Right? Here's the Math.

Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) bought back $4.5 billion of its own stock in the second quarter, its most aggressive pace of buybacks in several years. Unlike many other companies that buy back stock, Berkshire can do so only when CEO Greg Abel and Chairman Warren Buffett agree that the stock is trading below its intrinsic value.

Are they right? Is Berkshire truly a cheap stock right now?

Of course, it's tough to do a full piece-by-piece analysis in a short article, but we can use the three main parts of Berkshire Hathaway's business to help determine if the stock is cheap or expensive.

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Berkshire: A sum of three parts

As of this writing, Berkshire's market cap is about $1.09 trillion. If the sum of the parts is worth more than that, it's trading for less than its intrinsic value.

Thankfully, two of the three parts of the business are easy to value. At the end of the second quarter, Berkshire had $365.5 billion in cash and Treasuries on its balance sheet. And as I'm writing this, Berkshire's stock portfolio is worth about $360.5 billion. Subtracting these two numbers shows that Berkshire's operating businesses are being valued at about $364 billion.

Over the past four quarters, Berkshire has produced just over $48 billion in operating earnings. After subtracting investment income from the insurance business (which is mostly the interest earned on its cash), Berkshire's operating income was $35.8 billion.

This means that Berkshire's operating businesses are trading for about 10.2 times trailing earnings. That's a very low multiple. For context, the average stock in the S&P 500 trades for about 28 times earnings. The average energy company (a big part of Berkshire's business) trades for a mid-teen multiple, and the average railroad stock (Berkshire owns BNSF) trades for about 22 times earnings, just to name a few components.

Is Berkshire a cheap stock?

Of course, there are many moving parts to consider, and not every sign points to a high valuation. For example, insurance companies are generally trading for a low double-digit earnings multiple right now, and Berkshire's GEICO has been underperforming its peers in recent years.

Having said that, there's a solid case to be made that Berkshire's intrinsic value is significantly higher than its current market value. Exactly how much higher is a tougher question to answer. If you were to ask 10 experienced stock analysts to calculate the intrinsic value of Berkshire's stock, you'd probably get 10 different answers. However, it's easy to see why Abel might have decided to step on the gas when it comes to buybacks, given the low value the market is assigning to its operating businesses.

Matt Frankel, CFP® has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.