Greenberg: This Ain't Your Father's Berkshire Hathaway

Earlier this week, Goldman Sachs analyst Christopher Neczypor initiated coverage on Berkshire Hathaway with a strong buy and a 12-month target of $152,000 on Berkshire A shares. That's about the highest it has ever been.

Warren Buffett
Warren Buffett

Here's what stopped me in my tracks as I read the 71-page report: The analyst said that going forward Berkshire will be valued more "by its consolidated operating entities, as opposed to its equity investments."

The change was sparked by the company's purchase of Burlington Northern, which ties Berkshire more than ever to the economy, rather than being ruled by insurance.

Whoa! Berkshire has historically been viewed as a closed-end fund that traded in line with the S&P 500. Now Neczypor is essentially saying Berkshire is becoming more like an operating company, and thanks to a rebalancing of the Russell 3000 a week ago, it's trading at one of the widest spreads ever between the S&P 500.

Anytime a company becomes less of what it was investors need to rethink how it's valued and why they own it. If nothing else, it's an important discussion point that takes nothing away from Berkshire or Warren Buffett.

There's little question that Berkshire has strong businesses including and perhaps most importantly it's insurance business, which Neczypor points out is like no other.

Here's the catch: He believes that Berkshire should be valued on its intrinsic value, which is the way it historically has been valued. But he also says, "We expect the catalyst to drive shares higher will be better-than-expected earnings growth."

Furthermore, in Berkshire's most recent report, Buffett wrote that when it comes to using the S&P 500 as a benchmark for Berkshire, "The big minus is that our performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue." (He italicized the word "certain.")

That, combined with the changing characteristics of Berkshire, suggests the company should be valued more like regular operating companies—even if its characteristics are somewhat different—especially as the prospect of a post-Warren Buffett Berkshire looms.

My take: Plenty of smart people are likely to disagree over how Berkshire should be valued; that's what makes markets.

But as Jeff Matthews of RamPartners has argued more times than once, this much is clear: This ain't your father's Berkshire.

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