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HEROES

Networking products firm Bay Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> advanced $2 1/2 to $26 1/2 despite announcing late yesterday that it expects third quarter earnings to fall below expectations due to weaker-than-anticipated customer demand during its seasonally slow sales period. The company expects third quarter revenue to be down about 10% from second quarter sales of $645 million and gross margins to decline to about 49.5%. Using this guidance, EPS for the quarter is expected to come in around $0.12 (excluding a charge for writing off in-process R&D). The announcement was somewhat tempered by a book-to-bill well above one and favorable performance test results for some of its products. Some investors are betting that the worst is over and that a new line of high-speed switches will help boost Bay Networks' fourth quarter profits.

American Business Information <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABIIA and ABIIB)") else Response.Write("(Nasdaq: ABIIA and ABIIB)") end if %>, which provides business information products, sales leads, market research, and marketing services, has offered to pay $33 per share in cash for direct-marketing firm Metromail Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ML)") else Response.Write("(NYSE: ML)") end if %>, topping Britain's largest catalog retailer Great Universal Stores' bid of $31.50 a share. The offer sent Metromail shares up $2 11/16 to $34 9/16. Both ABI and Great Universal are after Metromail's database that includes information on 95% of U.S. households. ABI, which already owns about a million Metromail shares, also has filed a lawsuit in the Delaware Chancery Court to enjoin consummation of the merger agreement between Great Universal and Metromail, alleging that certain Metromail officers and directors failed to hold a fair auction of the company.

Cement producer Medusa Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MSA)") else Response.Write("(NYSE: MSA)") end if %> surged $6 5/8 to $58 7/8 after announcing that it has agreed to be acquired in a $1 billion transaction by competitor Southdown Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SDW)") else Response.Write("(NYSE: SDW)") end if %>, creating the nation's second largest cement maker. Based on yesterday's closing price, stock deal values Medusa at $61.22 a share (which is a 17% premium). The cement industry is consolidating at a time when demand and prices for cement are rising. Last week the U.S. Senate passed a $214 billion budget for road construction and mass transit projects, which translates into annual expenditures of roughly $30 billion per year. Currently, U.S. cement making capacity trails demand by roughly 15%. In the deal, Southdown gets an 18% marginal return on its acquired assets, which represents an 80% increase over its returns as separate company. In addition, Southdown will be able to increase cement production at a cost of $100 per ton compared with $200 per ton if it were to build new facilities. These favorable economics have led to speculation that other players may get acquired, such as Lone Star Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LCE)") else Response.Write("(NYSE: LCE)") end if %> and Giant Cement Holding <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GCHI)") else Response.Write("(Nasdaq: GCHI)") end if %>.

QUICK TAKES: Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> gained another $3 3/8 to $138 1/8 after rising $6 7/16 yesterday on announcing a $510 million+ (pre-tax) restructuring that would involve cutting, through attrition, 4,500 jobs, or about one in fifteen jobs within its base global workforce. The country's largest commercial bank says the $360 million charge (after-tax) it will take will result in annual savings of $460 million... Meanwhile, securities firm Merrill Lynch & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> rallied $7 1/7 to $87 in heavy trading on rumors of a possible takeover by Chase at $100 a share... Coca-Cola Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> rose $2 3/8 to $74 13/16 amid expectations that its first quarter beverage sales may exceed estimates. The world's largest beverage company has been boosted this week by positive comments by billionaire investor Warren Buffett.

Limited-service motel operator Supertel Hospitality <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPPR)") else Response.Write("(Nasdaq: SPPR)") end if %> shot up $2 7/8 to $14 on announcing that it expects first quarter earnings to exceed year-ago results and be in the range of $0.08 to $0.10 per share thanks to higher occupancy rates and a higher average daily room rate. The First Call mean estimate was $0.05 per share. The company also announced that it is engaged in possible merger talks... Red chip minibus manufacturer Brilliance China Automotive Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBA)") else Response.Write("(NYSE: CBA)") end if %> sped ahead $1 5/8 to $10 7/8 after reporting year-end earnings of 9.9 renminbi ($1.20) per share, triple the 1996 earnings of 3.3 renminbi ($0.40). Sales totaled $293.7 million, up from $138.3 million the year before, mainly due to strong sales of the company's mid-priced minibuses and increased sales of the Deluxe Minibus.

Wandel & Goltermann Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WGTI)") else Response.Write("(Nasdaq: WGTI)") end if %> jumped $2 3/16 to $15 5/16 after the network analysis solutions provider announced that it has agreed to be acquired by its majority shareholder, privately held Wandel & Goltermann Management Holding GmbH (WG Holding), for $15.90 a share in cash... Eco Soil Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESSI)") else Response.Write("(Nasdaq: ESSI)") end if %> leapt $1 7/16 to $8 15/16 after reporting fourth quarter sales of $8.4 million compared with $2.9 million for the year-earlier period. The turf maintenance products company reported a fourth quarter loss of $0.15 per share versus a loss of $0.27 in Q4 1996... Specialty chemicals maker Aceto Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACET)") else Response.Write("(Nasdaq: ACET)") end if %> charged ahead $2 3/8 to $22 7/8 on announcing a 3-for-2 stock split and a cash dividend of $0.13 per share, which represents an 8% increase in the company's regular semi-annual dividend.

National Bancorp of Alaska <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NBAK)") else Response.Write("(Nasdaq: NBAK)") end if %> added $17 7/8 to $143 after the holding company for the National Bank of Alaska announced a regular quarterly cash dividend of $0.50 per share and a 4-for-1 stock split to reduce the share price to a "more favorable trading range" and broaden the distribution of the company's stock... Schuff Steel Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHUF)") else Response.Write("(Nasdaq: SHUF)") end if %> gained $1 3/4 to $12 3/8 after the structural steel fabrication and erection services company announced that it has signed a letter of intent to acquire privately held Addison Structural Services Inc., based in Albany, Ga. The undisclosed purchase price would be paid primarily in cash... Internet search and retrieval software provider Verity Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRTY)") else Response.Write("(Nasdaq: VRTY)") end if %> climbed $3/4 to $8 after reporting a third quarter loss of $0.05 per share, compared with a loss of $0.64 per share for the second quarter and a loss of $0.07 (before charges) per share for the year-earlier quarter.

Schering-Plough Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %> jumped $4 to $85 1/2 after the pharmaceutical company said 1998 would be "another good year of earnings growth" in a private meeting with analysts. According to Reuters, the company also predicted that its cancer and hepatitis drug, Intron A, would win extended life through an expected new patent... Mobile communications software maker Geoworks Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GWRX)") else Response.Write("(Nasdaq: GWRX)") end if %> added $3/8 to $7 1/2 after announcing that its graphical, communications-centric GEOS operating system is used in the new Nokia 9110 Communicator for GSM 900 markets... Hotel franchisor U.S. Franchise Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USFS)") else Response.Write("(Nasdaq: USFS)") end if %> rose $5/8 to $13 5/8 after announcing that NorthStar Capital Investment Corp. and Lubert-Adler Real Estate Opportunity Funds are investing in the newly established $100 million USFS Development Fund, which will provide debt and equity to local developers building USFS branded hotels in hard-to-develop markets.

GOATS

Manufacturer of circuit board assemblies Jabil Circuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JBIL)") else Response.Write("(Nasdaq: JBIL)") end if %> slumped $4 11/16 to $34 25/32 after saying that weakened demand and transitions by its customers to new products will cause slower sales and lower operating income over the next two quarters. However, the company's president told CNBC that the outlook will improve later in the year, possibly leading to 30% growth in EPS for the year. Meanwhile, fiscal Q2 EPS came in at $0.52, up 79% from a year ago and $0.01 ahead of estimates. The company's shares have plummeted 36% from a closing price of $53 13/16 on Feb. 26 and now trade at 18.4 times trailing earnings and 13 times 1999 estimates of $2.65 per share. Although the segment does not trade at market multiples, Jabil's present valuation looks compelling. The company has grown EPS at a compound rate of 250% over the last three years, generating a whopping 34% return on invested capital in the process. Today, investors should weigh the $70 billion industry's projected growth rate of 25% against the risk associated with Jabil's concentrated customer base of rapidly growing companies that are prone to blow-ups -- Jabil's top five customers account for 70% of revenues.

Telecommunications network synchronization products and integrated circuits maker SymmetriCom Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYMM)") else Response.Write("(Nasdaq: SYMM)") end if %> tumbled $2 1/16 to $7 11/16 after saying it expects a fiscal Q3 loss of $2 to $3 million due to lower sales in its Linfinity Microelectronics semiconductor subsidiary. The First Call mean estimate called for breakeven earnings for the quarter. The company will also take an $8 to $12 million charge to account for semiconductor inventory produced over the quarter in anticipation of higher sales that have not been realized. The company added that chip sales will remain low in Q4 "and perhaps beyond." Unfortunately, SymmetriCom has been increasing its emphasis on its analog and mixed signal chips during a period of slackening demand. The chip business accounted for about 43% of total revenues in Q2, compared with 39% the year before. In the first quarter of 1998, the gap was even wider -- 45.5% versus 37.5% a year ago.

QUICK CUTS: Electronics design and manufacturing concerns were down on the Jabil warning. DII Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DIIG)") else Response.Write("(Nasdaq: DIIG)") end if %> dropped $1 15/16 to $21 5/16 while SCI Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCI)") else Response.Write("(NYSE: SCI)") end if %> tumbled $2 13/16 to $37. Two printed circuit board fabricators were down as well -- Hadco Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HDCO)") else Response.Write("(Nasdaq: HDCO)") end if %> fell $2 31/32 to $36 31/32, and Sanmina Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SANM)") else Response.Write("(Nasdaq: SANM)") end if %> dropped $6 3/8 to $72 1/8... ADFlex Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AFLX)") else Response.Write("(Nasdaq: AFLX)") end if %> lost $1 1/4 to $15 1/4 after Needham & Co. downgraded the maker of flexible circuit-based interconnect products to "buy" from "strong buy"... Golf apparel designer Sport-Haley Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPOR)") else Response.Write("(Nasdaq: SPOR)") end if %> slid $1 to $10 1/8 after being downgraded to "neutral" from "buy" by Needham & Co... Valassis Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VCI)") else Response.Write("(NYSE: VCI)") end if %> dropped $2 3/16 to $37 15/16 after Merrill Lynch downgraded the printer of newspaper advertising inserts to "accumulate" from "buy."

Electronic components distributor Arrow Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARW)") else Response.Write("(NYSE: ARW)") end if %> fell $3 to $30 3/4 after announcing that it expects fiscal Q1 earnings of between $0.40 and $0.45 per share due to inventory adjustments in the channel, lower prices, and slowing growth in certain markets. The Street had been expecting EPS of $0.56... Air freight and transcontinental trucking firm CNF Transportation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CNF)") else Response.Write("(NYSE: CNF)") end if %> dropped $3 5/16 to $37 after reporting that lower-than-expected revenues at its Emery Worldwide air freight unit and start-up costs from a new postal contract will cause fiscal Q1 earnings to come in between $0.27 and $0.32 per share. That's below the First Call mean estimate of $0.42 per share.

Clothing retailer Urban Outfitters <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: URBN)") else Response.Write("(Nasdaq: URBN)") end if %> slid $3 to $20 after reporting Q4 EPS of $0.21, missing the First Call mean estimate by a penny... Knoxville, Tennessee-based apparel retailer Goody's Family Clothing <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GDYS)") else Response.Write("(Nasdaq: GDYS)") end if %> sank $2 3/32 to $40 13/16 after reporting Q4 EPS of $1.02, beating the First Call mean estimate of $0.94. However, the company said the late Easter holiday and cold weather will cause a drop in same-store sales for March while leading to higher sales figures in April.... Rofin-Sinar Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RSTI)") else Response.Write("(Nasdaq: RSTI)") end if %> was off $2 3/8 to $17 after Deutsche Morgan Grenfell downgraded the maker of industrial laser products to "hold" from "buy"... Cascade Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAE)") else Response.Write("(NYSE: CAE)") end if %>, which makes hydraulic lift attachments for trucks, dropped $2 to $16 after saying its Q4 earnings would come in "significantly below" the Street's estimates of $0.30 per share.

Dairy products processor and distributor Dean Foods Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DF)") else Response.Write("(NYSE: DF)") end if %> slid $3 11/16 to $51 1/4 after reporting Q4 EPS of $0.60, missing the First Call mean estimate by a penny. The company said operating earnings for its dairy segment declined during the quarter due to changes in butterfat prices and lower income from its extended shelf life operations... Heating and air conditioning services company American Residential Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARS)") else Response.Write("(NYSE: ARS)") end if %> slipped $1/2 to $8 1/2 after reporting Q4 EPS of $0.02, down from the $0.16 earned a year ago and below the Street estimate of $0.09 for the quarter... Eatertainment purveyor Planet Hollywood International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHL)") else Response.Write("(NYSE: PHL)") end if %> slid $9/16 to $11 7/16 after Standard & Poor's assigned the business a "single-B" corporate rating, saying the outlook is "negative." The company's planned offering of $250 million of 7-year senior subordinated notes was rated "triple-C-plus," in the junk bond range.

Rental car company Avis Rent A Car <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVI)") else Response.Write("(NYSE: AVI)") end if %> skidded $1 9/16 to $33 7/8 after saying it will sell 6 million shares at a price of $34 per share, about 4% below the stock's closing price of $35 7/16 yesterday... High-density substrates, flexible printed circuitry, and flexible laminates firm Sheldahl Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHEL)") else Response.Write("(Nasdaq: SHEL)") end if %> was shelled again for a $1 3/4 loss to $11 3/4 after announcing yesterday that inventory woes and flat demand will hurt sales in the second half... Advanced Health Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADVH)") else Response.Write("(Nasdaq: ADVH)") end if %> fell $2 1/4 to $13 5/8 on reports that the physician practice management firm is the target of a federal investigation for alleged billing fraud and improper patient referrals... Wireless communications logistics services provider Brightpoint Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CELL)") else Response.Write("(Nasdaq: CELL)") end if %> fizzled $15/16 to $18 9/16 after acquiring British wireless phone distributor WAVETech Ltd. for an undisclosed sum... G&L Realty Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLR)") else Response.Write("(NYSE: GLR)") end if %> slid $1 13/16 to $17 3/16 after Sutro & Co. downgraded the real estate investment trust (REIT) to "sell" from "buy."

FOOL ON THE HILL
An Investment Opinion
by Dale Wettlaufer

More on Berkshire Value

There are numerous ways the stewards of Berkshire Hathaway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BRK.A and BRK.B)") else Response.Write("(NYSE: BRK.A and BRK.B)") end if %> have found to create shareholder value, but three of the most powerful ways are using other people's money at no cost, deferring indefinitely tax payments on the increase in the value of the company's investments, and buying entire companies with good to excellent economics.

Yesterday, we looked at one major adjustment to the company's equity base. We added back to owners' equity the conservatively calculated difference between the balance sheet value of deferred tax liabilities and the true economic value of those liabilities. Since much of the deferred tax liabilities arise from an increase in the value of Berkshire holdings such as Coca-Cola Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> and Gillette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %>, and since those tax liabilities won't be realized anytime soon, much of those tax liabilities can be looked at as a long-term credit to owners' equity made by Uncle Sam.

There is a very specific reason why Berkshire Hathaway is in the insurance business, which gets back to the idea of using other people's money. In a normal year, the average insurance company pays very little for the float it generates. The float is the cash that insurance companies use between the time they take it in as premiums and have to pay it out as insured losses and other expenses. Let's take a look at the average float Berkshire has had at its disposal:

1990         $1,637.3 
 1991          1,895.0 
 1992          2,290.4 
 1993          2,624.7 
 1994          3,056.6 
 1995          3,607.2 
 1996          6,702.0 
 1997          7,093.1

The major blip up in float occurred in 1996, when Berkshire closed on its acquisition of GEICO, the direct seller of property & casualty insurance. Yesterday, we talked about the profit margins Berkshire makes in its insurance business -- that gets to the heart of how Berkshire Hathaway builds value. If we moved this bundle of capital down to the long-term debt section of the company's balance sheet and broke out an explicit cost of the debt, the hypothetical cost of that debt would have been in the neighborhood of $500 million last year. Half a billion dollars in pre-tax interest expense would result in extra expenses of approximately $232 per A share. Going back to underwriting results at Berkshire's insurance units, we find that this capital not only costs Berkshire nothing, but the company also gets paid to safeguard it for the policyholding customers of Berkshire's insurance units.

The least profitable major unit earned an 8.1% return on premiums, before investment results. The most profitable, a reinsurance unit, earned 33% on its premiums, before investment results. A good chunk of insurance subsidiary operating earnings came from the reinsurance business, where catastrophes are rare, but can cost the company upwards of $750 million if there's a major earthquake in California, for example. Last year's operating profits for the insurance group were $461 million, or about 9.7% of earned premiums. With an average float of $7.093 billion, the company incurred negative cost of capital of 6.5% on that float.

To the insurance underwriting profits, we add the investment results that Berkshire is able to achieve on this capital. The cost of capital outlined above is a distinctly different thing than the return on capital. Normally, the cost of capital is subtracted from other earnings. In this case, though, we add it to other value that flows from this float, since the cost of capital is negative.

Berkshire's investment results have regularly beaten the market for decades running. Last year, investments grew 36%, or by $12.3 billion, but not all of that can be ascribed to the growth in float. Backing out the growth of average float as well as cash flows from operating subsidiaries, investments grew at around the rate of return of the S&P 500 last year, at approximately 31%. Ascribing the same rate of return on the float that the company achieved on its overall portfolio, we add 0.31 x float of $7,093 billion = $2.199 billion to the negative cost of capital of $461 million.

That's pre-tax return from underwriting and investment results of $2.66 billion. After-tax, the insurance unit's value added, including investment results, would be between $1.73 billion. Capitalizing those earnings (value added) between 20 to 30 times, capitalized equity value for just this chunk of Berkshire is worth $34.6 billion to $51.9 billion.

Let's look at this capitalized value in another way, though. Assume a zero cost of float and a 15% yearly growth rate in float, on average, over ten years. If Warren Buffett, Charlie Munger, and other investment officers at Berkshire generate a 15% return on that float, we have a net present value of all investment returns of $11.78 billion plus net present value of the residual value of 20 times year 10 investment returns of $4.8 billion, for a total net present value (using a discount rate of of 11%) of $33.8 billion + $11.78 billion, or $45.56 billion. That's right around the mid-point ($43.25 billion) of the above capitalized value of 1997 insurance earnings.

The insurance subsidiaries are extremely important, then, to the value creation capabilities of Berkshire Hathaway. Any business that regularly incurs no cost of capital is a high-quality company with the right business model or management ability. Dell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>, for instance, does so well financially and carries what looks like a large capitalized value for a PC company precisely because its cost of operating capital is very small, given that its suppliers and employees regularly finance the current assets that the company does use. The similarities between Dell and GEICO, for one, are significant. Both operate in seemingly low-margin businesses. Both cut out the middleman and market directly to their customers. Both, therefore, gain a cost advantage over competitors. More important, both employ far less capital than their competitors to achieve the same results, meaning that additional inflows of capital into these businesses generates much higher earnings growth than their competitors. Capital efficiency, and not margins, is the essence of the "light" business model with a high stock market valuation.

That's not the whole story, though. Berkshire's operating subsidiaries add significant value to the company. The company makes Ginsu knives, See's Candies, the Buffalo News, retails furniture and jewelry, trains pilots around the world at its FlightSafety subsidiary, makes H.H. Brown and Dexter shoes, Kirby vacuums, and operates numerous other niche companies that are similarly light on capital and heavy on cash flow. Not counting finance subsidiaries and investments, net operating profit after tax was $350 million in 1997. Capitalizing that at 25 times earnings adds $8.74 billion in market value.

The final piece of the valuation comes from adding the capitalized portions of the business together and adding to that the net financial assets of the business. This is an integral part of arriving at a company's enterprise value, or the economic cost an acquirer would pay. A company with lots of debt and no cash would cost more to acquire and vice-versa. To this point, we see capitalized equity value of $8.74 billion plus approximately $43.25 billion, for a total of $51.99 billion. Investments and cash of $47.546 billion net of all liabilities of $24.2 billion gets us another $23.3 billion.

Adding the three components together results in a total value of $43.25 billion + $8.74 billion + $23.3 billion, or $75.3 billion. With 1.234 million class "A" shares and equivalents outstanding, per-share intrinsic value is $61,021. The market is valuing the company's ability to keep growing beyond its stated 15% per year growth rate, which I have assumed in my valuation. That can come from a number of different variables such as higher growth in insurance float, a lower cost of float, better investment returns on the float, and higher growth rates for subsidiaries. Between the mid-point valuation of the insurance businesses and the upper end, too, there is another $7,010 per share that the public market may be taking into account that I have not, working intrinsic value up toward $68,031 per share. I may have also understated the value of the non-financial subsidiaries, but the financials on those companies are not as detailed as for the financial subsidiaries.

The key to Berkshire, then, is that the company is a light business. It makes use of others' capital and generates a huge return on that capital. The value does not all flow through the income statement. An increase in the value of investments is not a income statement item until investment gains are realized. So, we have to look more eclectically at the way Berkshire builds value than to just look at earnings and put a multiple on those earnings. For more on the subject of valuing Berkshire Hathaway, the best place to go is the company's website at http://www.berkshirehathaway.com, and in particular, Warren Buffett's letters to shareholders, at http://www.berkshirehathaway.com/letters/letters.html.

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Dale Wettlaufer (TMF Ralegh), Fool
Alex Schay (TMF Nexus6), Fool
Yi-Hsin Chang (TMF Puck), Fool
Brian Graney (TMF Panic), Fool
Louis Corrigan (TMF Seymor), Fool
Contributing Writers

Brian Bauer (TMF Hoops), Fool
Editor