Premium ContentMouse over Home then click on Premium Content for information.If Warren Buffett says his company's stock price is too low, who is Brian Gongol to argue?
The Des Moines sales consultant has been buying shares of Berkshire Hathaway Inc. all summer while its price dropped along with most of the stock market.
"It was a silly valuation throughout the year," Gongol said. By last week, when the price slipped for a time to below $100,000 per Class A share and $66 per Class B share, he figured the stock was "a fantastic deal."
Then Monday, Buffett announced that he may use some of Berkshire's $48 billion in cash to buy Berkshire's own shares because the company is worth "considerably more" than its recent stock price reflects.
The announcement, Gongol said, was "like having Warren Buffett whispering in my ear, 'You've been doing the right thing.' "
Other investors also latched on to Buffett's idea that Omaha-based Berkshire is worth more, trading about twice the average daily volume. The announcement drove up the stock price by 8.1 percent to $108,449 per Class A share and by 8.6 percent to $72.09 per Class B share.
That's close to the limit that Berkshire said it would pay for the shares, so it remains to be seen how many shares Berkshire will purchase, if any.
Many stock analysts and Berkshire shareholders have believed the stock has been undervalued in recent months, and Monday's surprise announcement means Buffett agreed.
It's the first time in Berkshire's 56-year history of public stock ownership that its board of directors, which is led by Chairman and CEO Buffett, adopted a formal buyback plan. Whether Berkshire follows through will depend on what other deals are available, the price of Berkshire stock and the amount of cash it has to buy the stock, the announcement said.
At last count, Berkshire had about $48 billion in cash on hand. Berkshire said it would keep at least $20 billion in cash to preserve its financial strength and "redundant liquidity."
That means Berkshire could buy up as much as 15 percent of Berkshire's stock, taking those shares off the market and making the remaining shares worth even more if Berkshire continues to earn profits and gain value.
A buyback is a step many shareholders thought Buffett would never take, although some investors like to see three stock-related actions by publicly traded companies: buying back shares, splitting stock and declaring dividends.
While none of the three generate actual profits, they can move stock prices higher by boosting investor confidence. Buying back shares is an indication that a company's directors and management believe it is worth more than the current price, although some buybacks have been criticized as being gimmicks to artificially pump up stock prices.
Buffett had done none of those three actions until last year, when he split Berkshire's Class B shares in an effort to be fair to small shareholders during the acquisition of BNSF Railway (His creation of Class B shares in 1996 technically wasn't a split but rather allowed Class A shareholders to convert stock into the cheaper Class B shares.)
Buffett has yet to declare a dividend, holding fast to the view that profits from Berkshire's 75 operating companies and investments are best used to expand the company.
But the buyback is now a real possibility and may take place for an indefinite period, Berkshire said, either through purchases on the open market or through private transactions.
In the 1990s, Buffett talked about buying back Berkshire stock, but his comments prompted investors to push up the price and Berkshire ended up not buying shares. Asked recently about a buyback, Buffett said it would be unlikely because the same thing would happen, raising the stock price to the point where it was fairly valued.
That made Monday's announcement "pretty unexpected," said George Morgan, a former stockbroker and longtime Buffett watcher who teaches at the University of Nebraska at Omaha.
Morgan said companies that buy their own stock either think it's a good buy or they don't have a better place to put their money, or a combination of both.
If a better use for the excess cash comes along, Berkshire would go after that instead and buy fewer shares or none at all, Morgan said. The company this month completed its $9 billion acquisition of Lubrizol Corp., an industrial chemical company, and made a $3.25 billion offer for Transatlantic Holdings Inc., a reinsurance company.
In its press release, Berkshire said it would buy shares at prices up to 10 percent higher than its book value, which would indicate purchases up to about $108,000 for Class A shares and about $72 for Class B shares. But Berkshire also said that estimates of the stock's true value are "necessarily imprecise," so the price limit of the buyback plan isn't certain.
Book value is the total assets of a company minus its debts, or about $98,700 for Berkshire's Class A stock and $65.80 for its Class B Stock. Buffett also uses an estimate called "intrinsic value" that takes into account the future earnings of a company and other factors.
The question, then, is where the price of Berkshire stock will end up after having dropped as much as 17 percent in recent months.
Forbes magazine staff member Robert Lenzner wrote Monday that Berkshire's stock price likely wouldn't reach its recent $130,000-per-share high until financial markets and global insurance industry prices strengthen.
Gongol, the Des Moines investor, said he thinks that Berkshire's price was pushed down by the "tidal wave" of the overall market without taking into account its own value and that $75 or $80 for Class B shares would still be cheap. "This is a solid American company that for no good reason has been beaten down by panic. I don't see it going anywhere but up from here."
Contact the writer: 402-444-1080, steve.jordon@owh.com
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