Investment Thesis Berkshire Hathaway is a holding company headquartered in Omaha, Nebraska. Berkshire’s subsidiaries engage in various lines of business including property and casualty insurance and reinsurance, utilities and energy, finance, manufacturing, services, and retailing. Berkshire has consistently demonstrated an ability to generate exceptional returns on capital. In addition, the company has thrived in prior periods of economic turmoil and has created tremendous value for its shareholders as a result. Berkshire’s constant focus on prudent capital allocation and acquiring businesses that possess sustainable competitive advantages will allow the company to prosper for decades to come. When shares of this type of company are trading at a discount to intrinsic value, as Berkshire’s shares currently are, it is a tremendous opportunity for the long-term investor to purchase a stake in a company that will generate a consistent and reasonable return for decades to come.

Summary Berkshire Hathaway’s strengths include:

• $35.6 billion in cash that will allow the company to capitalize on opportunities presented by the current economic climate.

• Minimal leverage, a AAA credit rating, and consistent generation of sizeable free cash flow.

• Zero “Buffett premium” built into the current price, and potentially even a “Buffett discount.”

• The opportunity to capitalize on the eventual turnarounds of the financial and housing sectors without assuming the risks associated with pure-play companies in these sectors.

NYSE: BRKA

Recommendation: Buy

Current Price: $123,970 Target Price: $145,000

Analyst Information:

Analyst: Nate Palmer

Fisher College of Business

The Ohio State University

Columbus, Ohio

Contact: 614.599.6017

E-mail: Palmer.298@osu.edu

Updated: May 26, 2008

Fund: OSU SIM (BUS FIN 824)

Manager: Royce West, CFA

Stock Information:

Sector: Financial

Industry: Insurance

Market Cap: $192.004 billion

Shares Outstanding:1.5 million

52 Week High: $151,650

52 Week Low: $107,200

YTD Return: -12.45%

Beta: 0.30

Berkshire Hathaway Inc.

Earnings Per ShareIn dollars per share

$2,795

$5,309

$4,753

$5,538

$7,144

$8,548

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

2002 2003 2004 2005 2006 2007

2

Table of Contents1

Investment Thesis……………………………………………………………………………………….…1 Summary…………………………………………………………………………………………………...1 Company Overview………………………………………………………………………………………..3 Macroeconomic Analysis and Outlook…………………………………………………………………....4 Financial Sector Analysis and Outlook……………………………………………………………………5 Financial Sector Valuation………………………………………………………………………………...6 Berkshire Relative to Financial Sector…………………………………………………………………….7 Berkshire Absolute Valuation……………………………………………………………………………..8 How Buffett Values Berkshire…………………………………………………………………………….8 Investment Portfolio……………………………………………………………………………………….9 Operating Businesses……………………………………………………………………………………..10 Comparative Analysis: Berkshire Relative to Conglomerates…………………………………………....12 Comparative Analysis: Berkshire Relative to Insurers………………………………………………...…13 Discounted Cash Flow Analysis………………………………………………………………………….14 Income Statement Projection……………………………………………………………………………..14 Discounted Cash Flow Model………………………………………………………………………….....14 Risks and Concerns……………………………………………………………………………………….15 Key Manager Risk .. …………………………………………………………………………….………..15 Insurance Industry……………………………………………………………………………...…………16 Derivatives………………………………………………………………………………………....…...…17 Conclusions………………………………………………………………………………………………..17 Appendix 1: Berkshire Hathaway Financial Statements from Company10-K…………………….……...19 Appendix 2: Berkshire Hathaway Income Statement Forecast and Discounted Cash Flow Model………22

1 Data in all absolute and relative valuation tables was provided by StockVal

3

Company Overview2

Headquartered in Omaha, Nebraska, Berkshire Hathaway Inc. is a holding company owning

subsidiaries that engage in a number of diverse business activities including property and casualty

insurance and reinsurance, utilities and energy, finance, manufacturing, services, and retailing. Included

in the group of subsidiaries that underwrite property and casualty insurance and reinsurance is GEICO,

one of the four largest auto insurers in the United States. This group also includes two of the largest

reinsurers in the world, General Re and the Berkshire Hathaway Reinsurance Group. Other subsidiaries

that underwrite property and casualty insurance include National Indemnity Company, Medical Protective

Company, Applied Underwriters, U.S. Liability Insurance Company, Central States Indemnity Company,

Kansas Bankers Surety, Cypress Insurance Company, BoatU.S., and several other subsidiaries referred to

as the “Homestate Companies.”

MidAmerican Energy Holdings Company (“MidAmerican”) is an international energy holding

company owning a wide variety of operating companies engaged in the generation, transmission and

distribution of energy. Among MidAmerican’s operating energy companies are Northern Electric,

Yorkshire Electricity, MidAmerican Energy Company, Pacific Power, Rocky Mountain Power, Kern

River Gas Transmission Company, and Northern Natural Gas. In addition, MidAmerican owns

HomeServices of America, a real estate brokerage firm. Berkshire’s finance and financial products

businesses primarily engage in proprietary investing strategies (BH Finance), commercial and consumer

lending (Berkshire Hathaway Credit Corporation and Clayton Homes), and transportation equipment and

furniture leasing (XTRA and CORT). Shaw Industries is the world’s largest manufacturer of tufted

broadloom carpet. McLane Company is a wholesale distributor of groceries and nonfood items to

convenience stores, wholesale clubs, mass merchandisers, quick service restaurants and others.

Numerous business activities are conducted through Berkshire’s other manufacturing, service,

and retailing subsidiaries. Benjamin Moore is a formulator, manufacturer, and retailer of architectural

and industrial coatings. Johns Manville is a leading manufacturer of insulation and building products.

Acme Building Brands is a manufacturer of face brick and concrete masonry products. MiTek Inc.

produces steel connector products and engineering software for the building components market. Fruit of

the Loom, Russell, Vanity Fair, Garan, Fechheimer, H.H. Brown Shoe Group, and Justin Brands

manufacture, license, and distribute apparel and footwear under a variety of brand names. FlightSafety

International provides training to aircraft and ship operators. NetJets provides fractional ownership

programs for general aviation aircrafts. Nebraska Furniture Mart, R.C. Willey Home Furnishings, Star

Furniture, and Jordan’s Furniture are retailers of home furnishings. Borsheims, Helzberg Diamond

Shops, and Ben Bridge Jeweler are retailers of fine jewelry.

2 Adapted from Berkshire Hathaway 2007 10-K

4

In addition, other manufacturing, service and retail businesses include: Buffalo News, a publisher

of a daily and Sunday newspaper; See’s Candies, a manufacturer and seller of boxed chocolates and other

confectionery products; Scott Fetzer, a diversified manufacturer and distributor of commercial and

industrial products, the principal products of which are sold under the Kirby and Campbell Hausfeld

brand names; Albecca, a designer, manufacturer, and distributor of high-quality picture framing products;

CTB International, a manufacturer of equipment for the livestock and agricultural industries; International

Dairy Queen, a licensor and service provider to approximately 6,000 stores that offer prepared dairy treats

and food; The Pampered Chef, the premier direct seller of kitchen tools in the U.S.; Forest River, a

leading manufacturer of leisure vehicles in the U.S.; Business Wire, the leading global distributor of

corporate news, multimedia, and regulatory filings; Iscar Metalworking Companies, an industry leader in

the metal cutting tools business; TTI, Inc., a leading distributor of electronic components, and Richline

Group, a leading jewelry manufacturer.

Operating decisions for the various Berkshire businesses are made by managers of the business

units. Investment decisions and all other capital allocation decisions are made for Berkshire and its

subsidiaries by Warren E. Buffett, in consultation with Charles T. Munger. Mr. Buffett is Chairman and

Mr. Munger is Vice Chairman of Berkshire’s Board of Directors.

Macroeconomic Analysis and Outlook

The macroeconomic outlook for 2008 has weakened significantly in the past 6 months as the

effects of the global credit crunch and current housing crisis are being felt throughout the entire domestic

and global economy. Although a recession seems eminent, consensus seems to be that the recession will

be relatively short and shallow in nature. I disagree with the consensus and believe that the recession will

be both longer and more severe than consensus estimates. Both George Soros and Warren Buffett, two of

the greatest macroeconomic minds of their generation, are on record saying that they believe the recession

will be longer and deeper than most people are currently forecasting. Soros has even called this “the

worst economic crisis in 75 years.”3 I agree with these individuals that the collapse of housing prices in

combination with the large-scale contraction in lending will prove detrimental to the overall economy in

2008. I currently forecast single digit negative GDP growth in 2008. Because this outlook is

significantly below the consensus, if it materializes, there could be sizeable declines in stock prices as

investors adjust their expectations.

Macroeconomic Impact on Berkshire Hathaway

Because Berkshire Hathaway’s operating businesses and investment portfolio are diversified over

numerous industries and lines of business, the risk of a downturn in any single sector of the economy

3 Schurenberg, Eric. "Big-Picture Guy." Money June 2008: 114.

5

having a major impact on Berkshire is minimal. Due to its size and diversification, Berkshire is a

defensive play for most investors. Nonetheless, Berkshire has significant exposure to both the financial

and housing sectors. With 2007 earnings per share of $8,548, a 19.7% increase from 2006 EPS, it would

seem that Berkshire was running on all cylinders. However, as detailed in the Company Overview above,

the performance of several of Berkshire’s operating businesses is directly tied to the housing sector.

Acme Brick Co., Clayton Homes, Jordan’s Furniture, RC Wiley Home Furnishings, Shaw Industries, and

Star Furniture were all adversely affected in 2007 by the downturn in the housing sector. In addition,

Berkshire’s investment portfolio was hurt by significant exposure to financials as well as slight exposure

to the housing sector. The market value of investments in American Express, Moody’s Corporation, U.S.

Bancorp, and Wells Fargo declined notably as a result of the current credit situation. In addition, the

market value of Berkshire’s investment in USG, which manufactures and distributes building materials

and gypsum wallboard, declined significantly due to the lack of new construction in the homebuilding

industry. So although Berkshire posted strong earnings figures in 2007, this was despite the struggles of

its businesses and investments related to the housing and financial sectors. When economic conditions

improve, it is reasonable to assume that these businesses will be able to revert to normalized earnings, and

Berkshire’s bottom line will benefit further. Thus, although its sector diversification prevented Berkshire

from being as adversely affected by the current housing and credit situation as many of its competitors,

the company will still realize substantial benefit from the eventual turnaround in the housing and financial

sectors.

Financial Sector Analysis and Outlook The financial sector is in the mature phase of the life cycle, but will continue to grow with the

overall economy since financial institutions serve as the major source of capital for economic expansion.

As the figure to the right4 illustrates, financials perform best late in bear markets and early in bull

markets. Thus, there is significant upside in financials when the current economic downturn begins to

subside, but in order to profit in the sector, investors

may need to be patient.

The financial sector was severely battered in

2007, and the carnage has continued thus far in

2008. While the sector as a whole has rebounded

slightly from its trough earlier in 2008, significant

pessimism remains. Although bargains do exist in

4 Stovall, Sam. The S&P Guide to Sector Investing.

New York: McGraw Hill, 1995.

6

the sector, it is also full of value traps. Recent capital infusions at

Washington Mutual, National City, Wachovia, and others have illustrated

how quickly shareholders can be diluted when financial institutions are

desperate to raise capital. In addition, the near-collapse of Bear Stearns

illustrated the inherent danger of highly leveraged financial institutions.

Further write-downs at many financial institutions may pose the risk of insolvency, which carries with it

the potential that existing equity holders could be completely wiped out.

Due to the risk of financials in the current economic environment, this sector as a whole is not for

the short-term investor or overly risk averse investor. However, careful selection of financial institutions

that were fearful while their peers were greedy and are now poised to be greedy while others are fearful,

could produce significant returns for the long-term oriented investor. Nonetheless, investors in financials

must realize that if economic conditions continue to worsen, things could get worse in the financial sector

before they get better.

Financial Sector Valuation

On an absolute basis, despite appearing to be fairly valued in comparison to the multiples at

which the sector has traded over the past 10 years, financials may in fact be undervalued. Because the

earnings of financial institutions are currently at cyclical lows due to the recent write-downs in the sector,

Return

Difference

Relative to

S&P500

YTD -16.05% -9.76%

2007 -20.82% -24.35%

2006 17.02% +3.41%

2005 5.12% +2.12%

Financial Sector Returns

High Low Mean Current

Percent From

Mean

Forward PE 24.40 10.30 14.20 13.20 -7.0%

Trailing PE 21.60 10.50 14.30 15.90 11.2%

Price to EBITDA 4.50 2.20 3.50 2.50 -28.6%

Price to Sales 29.50 13.76 20.09 18.92 -5.8%

Price to Book 3.40 1.30 2.10 1.30 -38.1%

Price to Cash Flow 14.20 9.20 11.80 12.60 6.8%

PEG Ratio 1.40 0.80 1.10 1.20 9.1%

Return on Equity 19.20 8.30 15.90 8.30 -47.8%

Financial Sector Valuation - Absolute - 10 years

High Low Mean Current

Percent From

Mean

Forward PE 1.35 0.52 0.71 0.91 28.2%

Trailing PE 1.05 0.49 0.71 0.96 35.2%

Price to EBITDA 0.64 0.38 0.51 0.40 -21.6%

Price to Sales 19.07 6.67 11.64 14.58 25.3%

Price to Book 0.77 0.48 0.69 0.50 -27.5%

Price to Cash Flow 1.28 0.79 1.01 1.17 15.8%

PEG Ratio 1.09 0.68 0.85 1.01 18.8%

Return on Equity 1.11 0.52 0.93 0.52 -44.1%

Financial Sector Valuation - Relative to S&P 500 - 10 years

7

as earnings revert to the mean, the current multiples will likely appear cheap. The challenge for investors

is determining how long it will take for earnings in the financial sector to revert to the mean. The three

metrics that stand out in the absolute valuation are the price to EBITDA multiple, the price to book

multiple, and return on equity. All three of these metrics are impacted by the recent write-downs that

financial institutions have been forced to take. Because of the applicable accounting principles for

financial institutions, EBITDA excludes write-downs at most of these institutions. Therefore, current

price to EBITDA multiples are artificially low for institutions that have been burdened by major write-

downs in recent quarters since EBITDA excludes these write-downs (and thus EBITDA is artificially

high). The seemingly low price to book value multiple is also a function of write-downs in the financial

sector. In anticipation of future write-downs, investors have discounted book value and are willing to pay

a much lower multiple to stated book values because of the high probability that many financial

institutions will be forced to take additional write-downs. Finally, the low return on equity is a direct

result of write-downs as well. Write-downs have decimated net income for financial institutions, and

therefore return on equity is unusually low. Over the long-term, it is reasonable to expect net income and

return on equity to revert to the mean in the financial sector as economic conditions improve and these

institutions are able to move past the effects of the sub-prime lending crisis. Because of the unusually

low current net income figures at financial institutions as a result of write-downs, the financial sector will

likely prove to be relatively cheap despite current multiples seeming to indicate that it is fairly valued.

Relative to the S&P 500, financials appear to be expensive on the basis of price to forward and

trailing earnings, but this is the result of write-downs as discussed previously. Because many of these

write-downs are non-recurring items, financials again appear cheap on the basis of price to EBITDA. The

price to book ratio also indicates that financials may be cheap, but this is largely the result of investor

anticipation of future write-downs. Although the current turmoil in the financial sector makes it difficult

to definitively determine whether the sector is cheap relative to the S&P 500, it is apparent that there is

significantly more uncertainty in the financial sector than in the overall market. Investors will have to

determine whether the discounts in the sector are sufficient compensation for bearing the additional risk

associated with financials.

Berkshire Relative to Financial Sector

High Low Mean Current

Percent From

Mean

Forward PE 6.24 0.75 1.98 1.64 -17.2%

Trailing PE 4.76 1.13 2.09 1.29 -38.3%

Price to EBITDA 4.12 1.69 2.51 3.89 55.0%

Price to Sales 0.47 0.05 0.13 0.09 -30.8%

Price to Book 1.32 0.41 0.76 1.21 59.2%

Price to Cash Flow 1.95 1.17 1.45 1.29 -11.0%

PEG Ratio 99.90 1.05 1.45 1.17 -19.3%

Return on Equity 0.95 0.11 0.38 0.95 150.0%

BRKA Relative to Financial Sector - 10 years

8

Although multiples in the financial sector are distorted by recent and anticipated future write-

downs as addressed previously, Berkshire appears cheap relative to financials based upon several metrics.

Forward earnings, trailing earnings, sales, cash flow, and the PEG ratio all indicate that Berkshire is cheap

relative to the financial sector. However, Berkshire appears expensive relative to the sector on the basis

of EBITDA and book value. Despite the lack of a consensus valuation for Berkshire relative to the

financial sector, because a majority of the fundamental multiples indicate that it is cheap relative to the

sector, it is reasonable to conclude that Berkshire is currently trading at a discount to its historical

multiples relative to the financial sector.

Berkshire Absolute Valuation

Absolute valuation of Berkshire Hathaway produces a relatively wide range of target prices.

While the forward PE ratio, trailing PE ratio, and the price to sales ratio indicate that Berkshire is

significantly undervalued, the price to book and price to cash flow ratios indicate that it is fairly valued.

Finally, the price to EBITDA ratio indicates that Berkshire is overvalued at its current price. Overall, it

appears that Berkshire may be undervalued on an absolute basis, and at worst, it is fairly valued. The

forward PE multiple, trailing PE multiple, and price to sales ratios all produce target prices that are above

my target price of $145,000. However, since none of the historical multiple-based valuation methods

provide a definitive valuation for Berkshire, it is necessary to examine other valuation methods to

establish a framework within which the target price of $145,000 can be evaluated.

How Buffett Values Berkshire

Berkshire’s 1997 10-K provides the following guidance on valuation: “In our last two annual

reports, we furnished you a table that Charlie and I believe is central to estimating Berkshire’s intrinsic

value…In effect, the columns show what Berkshire would look like were it split into two parts, with one

entity holding our investments and the other operating all of our businesses and bearing all corporate

costs.” Berkshire’s investments per share and pre-tax earnings per share excluding all investment income

are displayed to the right. Since 1993,

Year Investments Per Share

Pre-Tax Earnings Per Share

Excluding All Investment Income

2007 $90,343 $4,093

High Low Mean Current

Normalized

Multiple

Current

Metric Per

Share Implied Target Price

Forward PE 99.9 13.0 26.5 21.7 26 5,713 $148,535.48

Trailing PE 82.5 15.6 27.7 20.5 27 6,047 $163,277.56

Price to EBITDA 10.6 7.3 9.0 9.9 9 12,522 $112,700.00

Price to Sales 8.5 1.5 2.4 1.8 2.3 69,646 $160,185.96

Price to Book 2.9 1.1 1.6 1.6 1.6 77,481 $123,970.00

Price to Cash Flow 20.0 13.8 16.7 16.3 16.7 7,606 $127,012.21

BRKA Fundamental Multiple-Based Valuation - 10 years

9

applying a 13 multiple to the pre-tax earnings per share generated by the operating businesses and adding

this figure to investments per share has provided a reliable approximation of Berkshire’s intrinsic value.

This valuation method provides an intrinsic value of $143,552 per share based on figures provided in the

2007 10-K. This target price is 15.6% above the May 23, 2008 closing price, and is very close to my

target price of $145,000. While this would seem to imply a reasonable margin of safety at the current

market price, examination of Berkshire’s investment portfolio and its collection of operating businesses is

necessary to affirm that this valuation method does provide a reasonable proxy for intrinsic value.

Investment Portfolio

Since 1964, Berkshire has constantly sought to build and grow an equity portfolio of publicly-

traded businesses that possess “wide moats” and are selling at a discount to intrinsic value at the time of

purchase. A business with a “wide moat” is one that possesses a sustainable competitive advantage that

will endure both economic and

societal changes. This competitive

advantage allows these businesses to

generate abnormally high returns on

capital, and thus should consistently

provide reasonable returns to

shareholders over the long-term if the shares can be purchased at a reasonable price. However, by

purchasing shares in these businesses when they are selling at a discount to intrinsic value, Berkshire has

been able to generate exceptionally high returns in its equity portfolio. Because emphasis is placed on the

long-term sustainability of the business’ competitive advantage, Berkshire often intends to hold these

shares forever, leading to

the mantra that the

company’s “favorite time

to sell is never.” The free

cash flow provided by

Berkshire’s operating

businesses, coupled with

the float provided by its

insurance businesses, has

served as a constant

source of capital for new

equity investments in the

investment portfolio. The

Shares Company

Percentage of

Company Owned

Cost

(in millions)

Market Value as

of 12/31/07 (in

millions)

151,610,700 American Express Company 13.10% $1,287 $7,887

35,563,200 Anheuser-Busch Companies, Inc. 4.80% $1,718 $1,861

60,828,818 Burlington Northern Santa Fe 17.50% $4,731 $5,063

200,000,000 The Coca-Cola Company 8.60% $1,299 $12,274

17,508,700 Conoco Phillips 1.10% $1,039 $1,546

64,271,948 Johnson & Johnson 2.20% $3,943 $4,287

124,393,800 Kraft Foods Inc. 8.10% $4,152 $4,059

48,000,000 Moody's Corporation 19.10% $499 $1,714

3,486,006 POSCO 4.50% $572 $2,136

101,472,000 The Procter & Gamble Company 3.30% $1,030 $7,450

17,170,953 Sanofi-Aventis 1.30% $1,466 $1,575

227,307,000 Tesco plc 2.90% $1,326 $2,156

75,176,026 U.S. Bancorp 4.40% $2,417 $2,386

17,072,192 USG Corp 17.20% $536 $611

19,944,300 Wal-Mart Stores, Inc. 0.50% $942 $948

1,727,765 The Washington Post Company 18.20% $11 1,367

303,407,068 Wells Fargo & Company 9.20% $6,677 $9,160

17,242,000 White Mountains Insurance Group Ltd. 16.30% $369 $886

Others $5,238 $7,633

Total Common Stocks $39,252 $74,999

Berkshire Hathaway Investment Portfolio - 12/31/2007

Year Per Share Investments Years

Compound Annual

Gain in Per Share

Investments

1965 $4

1979 $577 1965 - 1979 42.8%

1993 $13,961 1979 - 1993 25.6

2007 $90,343 1993 - 2007 14.3%

Investments per Share Over Time - 1965 - 2007

10

current market value of the common stock held in Berkshire’s investment portfolio is $74.999 billion.

Although the size of Berkshire has limited the company’s investment universe to primarily other

large-capitalization companies, Berkshire has consistently exhibited the ability to generate above-market

returns in the portfolio. Over the period from 1993 to 2007, the portfolio grew at a rate of 14.3% per

year, which surpassed the return of every major index over that period. So while Berkshire’s current size

will almost certainly prevent it from ever repeating the 42.8% annualized growth of the investment

portfolio that was generated from 1965 to 1979, it is not unreasonable to expect at least market returns

from the portfolio, and recent history would seem to indicate that market outperformance is a very

realistic expectation. The notion that Berkshire is too big to grow its investment portfolio at an above-

market rate certainly has not held true over the past 15 years. At a minimum, the portfolio will almost

assuredly generate steady returns over the long-term regardless of economic conditions.

Operating Businesses

As Berkshire has grown, so has the importance of its collection of operating businesses. While

Berkshire’s size now prevents it from taking meaningful partial stakes in small-capitalization and most

mid-capitalization companies, it can acquire entire small and mid-size businesses, in addition to large

businesses. In acquiring entire

businesses, Berkshire seeks the

same type of “moat” that it seeks

in its investment portfolio.

Although it is much more difficult

to acquire an entire business at a

deep-discount price than it is to acquire a portion of a business at this type of price, Berkshire has

consistently demonstrated the ability to identify businesses that possess sustainable competitive

advantages and has been able to acquire these businesses at a reasonable price.

For many Berkshire subsidiaries, the sustainable competitive advantage amounts to a combination

of a brand name that

promises quality,

coupled with a price

that is the best for that

level of quality.

Nebraska Furniture

Mart serves as a prime

example of how it and

many other Berkshire

Year

Per Share Pre-Tax

Earnings Years

Compound Annual

Gain in Per Share

Pre-Tax Earnings

1965 $4

1979 $18 1965 - 1979 11.1%

1993 $212 1979 - 1993 19.1%

2007 $4,093 1993 - 2007 23.5%

Operating Businesses Over Time - 1965 - 2007

Distribution of 2007 Non-Insurance Earnings

McLane

3%

MidAmerican

27%

Financial

15%Other Services

14%

Other

Manufacturing

31% Retail

4%

Shaw

6%

Financial

McLane

MidAmerican

Shaw

Retail

Other Manufacturing

Other Services

11

subsidiaries are able to prosper in both favorable and unfavorable

economic conditions. During favorable economic periods, their customer

base has a sizeable amount of discretionary income and purchases luxury

items and high-end electronics for their homes. Price is not as much of a

concern for many customers during these periods, and high-end and high

margin products are quite popular. During unfavorable economic periods,

price becomes more of a concern, and customers are attracted to Nebraska

Furniture Mart for the value lines of furniture carried in the store. In

addition to the usual customer base, the stores thrive during economic

downturns by attracting customers from other furniture and electronic

chains that cannot compete with the prices offered on Nebraska Furniture

Mart’s value lines. The ability to appeal to customers in all economic

conditions allowed Nebraska Furniture Mart to have a record year in 2007

while many of its competitors struggled mightily. Management has

indicated that both sales and margins have remained strong at the chain

thus far in 2008.

Prudent capital allocation among the operating businesses has

served as another source of competitive advantage for Berkshire’s

operating businesses. Each of the businesses retains cash needed to operate

and expand the business, but excess capital is returned to Omaha to be

strategically allocated by Buffett and Munger. This emphasis on putting

excess capital to use in the most effective manner has been one significant

factor in Berkshire’s ability to continue to generate high returns on capital

despite its enormous size.

A final source of competitive advantage for Berkshire with respect

to its operating businesses is that Berkshire is the buyer of choice for

certain privately held businesses. It is well documented that Berkshire

does not become involved in bidding wars when acquiring an operating

business because of the company’s focus on never overpaying. While this

does limit the company’s universe of acquisition candidates, it also ensures

that Berkshire only acquires operating businesses at what it judges to be a

reasonable price. The culture of Berkshire makes it the ideal acquirer for

many privately held or family owned businesses when the founder wants to

ensure that his or her business thrives into the future. The seller has the

Berkshire Hathaway Operating

Businesses

- Acme Brick Company

- Applied Underwriters

- Ben Bridge Jeweler

- Benjamin Moore & Co.

- Berkshire Hathaway Group

- Berkshire Hathaway Homestates

Companies

- BoatU.S.

- Borsheims Fine Jewelry

- Buffalo NEWS, Buffalo NY

- Business Wire

- Central States Indemnity Co.

- Clayton Homes

- CORT Business Services

- CTB Inc.

- Fechheimer Brothers Co.

- FlightSafety

- Forest River

- Fruit of the Loom

- Garan Incorporated

- Gateway Underwriters Agency

- GEICO Auto Insurance

- General Re

- Helzberg Diamonds

- H.H. Brown Shoe Group- HomeServices of America, a

subsidiary of MidAmerican Energy

Holdings Company

- International Dairy Queen, Inc.

- Iscar Metalworking Co.

- Johns Manville

- Jordan's Furniture

- Justin Brands

- Larson-Juhl

- Marmon Holdings, Inc.

- McLane Company

- Medical Protective

- MidAmerican Energy Holdings Co.

- MiTek Inc.

- National Indemnity Company

- Nebraska Furniture Mart

- NetJets

- The Pampered Chef

- Precision Steel Warehouse, Inc.

- RC Willey Home Furnishings

- Scott Fetzer Companies

- See's Candies

- Shaw Industries

- Star Furniture

- TTI, Inc.

- United States Liability Insurance

Group

- Wesco Financial Corporation- XTRA Corporation

12

option of selling his or her business to a private equity firm and may not recognize the business a few

years later, or selling it to Berkshire and receiving assurance that it will still be essentially the same

business decades into the future. Certain sellers are willing to give Berkshire a more reasonable price in

exchange for the assurance that the business that an individual or family spent their lives creating will

continue to run in its current capacity long into the future. This opportunity to purchase at reasonable

prices entire privately held businesses that generate exceptional returns on capital will give Berkshire the

opportunity to continue to grow its portfolio of operating businesses well into the future.

Comparative Analysis: Berkshire Relative to Conglomerates

Evaluating Berkshire relative to other conglomerates will serve as another piece of the framework

within which Berkshire’s target price can be evaluated. The conglomerates chosen for comparison were

Leucadia National Corp. (LUK), Markel Corp. (MKL), Otter Tail Corp. (OTTR), Alleghany Corp. (Y),

and General Electric Co. (GE). Berkshire, Markel, and Alleghany all have significant exposure to the

financial sector, and specifically, the insurance industry. General Electric has limited exposure to the

financial sector through its Commercial Finance and GE Money segments. Leucadia and Otter Tail have

very little exposure to the financial sector, but serve as useful comparisons since they are conglomerates

like Berkshire.

On the basis of earnings, Berkshire is near the expensive end of the group. Using this metric, it is

cheaper than only Leucadia and is very similarly valued to Otter Tail. General Electric, Markel, and

Alleghany all appear cheaper than Berkshire on the basis of earnings. However, when using the price to

book value metric, which is often used when evaluating conglomerates, Berkshire appears to be among

the cheaper conglomerates. While it is still more expensive than Alleghany, it is only slightly more

expensive than Markel on the basis of price to book value. Using this metric, it appears cheaper than

Otter Tail, Leucadia, and General Electric. It seems reasonable to conclude that Berkshire’s current price

places it in the middle of the group of conglomerates with respect to valuation. The financial stability of

Berkshire is unmatched by any of the other conglomerates, but aggressive investors may prefer a small

BRKA LUK MKL OTTR Y GE

Forward PE 21.7 33.6 15.3 18.4 14.9 13.3

Trailing PE 20.5 33.6 11.6 21.6 14.9 14.2

Price to EBITDA 9.9 99.9 7.5 7.1 6.2 5.5

Price to Sales 1.8 9.2 1.7 0.9 2.2 1.8

Price to Book 1.6 2.2 1.5 2.1 1.1 2.6

Price to Cash Flow 16.3 30.0 11.2 10.6 14.0 9.7

PEG Ratio 1.4 7.6 1.2 3.1 3.5 1.2

Return on Equity 7.9 7.1 13.5 9.9 8.0 18.8

BRKA Relative to Conglomerates

13

conglomerate such as Markel if they desire the potential for the types of return that Berkshire was able to

generate in the 1970s and 1980s. These investors must realize however, that in choosing Markel over

Berkshire, they would be trading a steady 10% to 15% return for significantly greater uncertainty. Given

Berkshire’s financial stability and the predictability of its earnings over the long-term, Berkshire seems to

be fairly valued relative to other conglomerates.

Comparative Analysis: Berkshire Relative to Insurers

Although Berkshire is a conglomerate, insurance premiums generated by its various insurance

businesses accounted for 26.9% of Berkshire’s revenue in 2007. Because Berkshire has such large

exposure to the insurance industry, evaluating its current valuation relative to major insurers will also be a

valuable piece of the investment framework within which Berkshire’s target price can be evaluated. A

diverse set of insurers was chosen since Berkshire has insurance businesses in each segment of the

insurance industry. The insurers chosen for comparison were American International Group (AIG),

Allstate Corp. (ALL), AXA (AXA), Allianz SE (AZ), ING Groep NV (ING), and Progressive Corp

(PGR).

On the basis of earnings, Berkshire is the most expensive of the group of insurers. On the basis

of price to book value, Berkshire is the second most expensive insurer, with only Progressive being more

expensive. However, the PEG ratio places Berkshire in the middle of the pack of insurers, primarily due

to Berkshire’s higher projected earnings growth in 2008. The primary reason for Berkshire being more

expensive than its peers in the insurance industry is because of its exposure to industries outside of

insurance. As is discussed in the subsequent Risks and Concerns section of the paper, the outlook for

insurers in 2008 is quite unfavorable. Value Line describes the industry as “fiercely competitive”5 and

notes that this competition will place pressure on insurance premiums, margins, and profits in 2008.

Because Berkshire possesses unmatched financial stability in the insurance industry, is known for its

underwriting standards, has not suffered major write-downs like many of its insurance peers, and has

5 Gendler, Ian. "Berkshire Hathaway." Value Line. 15 Apr. 2008 <www.valueline.com>.

BRKA AIG ALL AXA AZ ING PGR

Forward PE 21.7 10.7 8.7 8.3 7.4 7.4 15.7

Trailing PE 20.5 20.4 8.4 11.4 18.4 6.3 13.4

Price to EBITDA 9.9 21.5 5.3 6.4 3.6 4.8 7.5

Price to Sales 1.8 1.0 0.8 0.5 0.6 0.8 0.9

Price to Book 1.6 1.2 1.4 1.2 1.2 1.5 2.7

Price to Cash Flow 16.3 12.8 7.2 11.4 14.3 5.6 10.0

PEG Ratio 1.4 0.7 1.1 1.4 1.8 1.5 2.3

Return on Equity 7.9 4.9 16.2 10.1 6.7 24.7 18.1

BRKA Relative to Insurers

14

exposure to numerous industries outside of insurance, it deserves to trade at a premium to its peers in the

insurance industry.

Discounted Cash Flow Analysis

Income Statement Projection

Appendix 2 contains the income statement forecast and discounted cash flow model for Berkshire

Hathaway, yet another important piece of the framework within which Berkshire’s target price can be

evaluated. An emphasis was placed on conservatism in choosing estimates for 2008, 2009, and 2010, and

therefore, estimates were chosen that were conservative relative to their averages over the prior 5 years.

Key assumptions are listed below:

• Operating Revenue: Historic growth rates of individual business segments were used with an

emphasis placed on risks to sustaining these levels of growth.

• Insurance Losses & Loss Adjustment Expense: 19% was used for 2008, 2009, and 2010, which is

higher than the actual rates in 2007, 2006, and 2005 (17.77%, 13.26%, and 18.26% respectively)

to account for the possibility of large-scale natural disasters that would result in a significant

increase in the number of claims.

• Tax Rate: Assumed a 32.75% tax rate.

• Minority Interest and Growth in Average Common Shares Outstanding: Projected based upon

prior 5 years’ growth rates.

• All other items were based on a percentage of revenue over the prior five years, with emphasis

placed on the likelihood of sustainability of recent growth rates.

These assumptions resulted in 2008 earnings per share of $7,525, relative to consensus of $6,851, 2009

earnings per share of $7,861, relative to consensus of $7,376, and 2010 earnings per share of $9,133,

relative to consensus of $12,300. It is notable that only one analyst has projected 2010 earnings per share

according to data provided by StockVal.

Discounted Cash Flow Model

Key Assumptions in the DCF model are listed below:

• Terminal discount rate: 10%

• Terminal free cash flow growth rate: 5%

• Revenue growth: Faded to 5% by 2018

• Operating margin: Remained at 13.50% through 2018

• Tax Rate: Remained at 32.75% through 2018

• Depreciation/Amortization and Capital Expenditures: Faded to offset by 2015

15

Although the DCF Model generates a target price of $170,300, I believe that my target price of

$145,000 is more reliable given the challenging economic conditions in which Berkshire will be

operating. In addition, because of the “conglomerate discount,” the tendency for conglomerates to trade

at a discount to the sum of the value of their parts, using a target price that is significantly below that

generated by a DCF analysis is conservative and appropriate.

Risks and Concerns

Key Manager Risk

The age of Buffett and Munger is a primary concern of many investors considering an investment

in Berkshire Hathaway. Buffett is currently 77 years old and will turn 78 on August 30, 2008. Munger

turned 84 on January 1, 2008. While both are in exceptional health by all accounts, it is apparent that

they cannot run Berkshire forever. They have assured investors that a succession plan is in place and

three top-notch individuals hand-picked by Buffett and Munger have indicated that they would be willing

to move to Omaha and run Berkshire whenever they are given the opportunity. Buffett’s current position

will be separated into two separate positions, Chief Executive Officer (CEO) and Chief Investment

Officer (CIO), to ensure that Berkshire has a specialist in each capacity. While Buffett and Munger are

undoubtedly irreplaceable, they have established a culture and mentality at Berkshire that will last for

decades after they are gone. Buffett has always said that he likes to buy businesses that are “so good even

an idiot can run them,” and to an extent, he has created such a business in Berkshire Hathaway. Even

when Buffett and Munger are no longer at the helm, Berkshire’s operating businesses will continue to be

run in a decentralized fashion as they are now. In addition, the investment portfolio of stocks that

Berkshire intends to hold forever will continue to consistently generate solid returns for decades to come.

The primary concern under new management will be allocation of new capital, which is no small concern

given the enormous amount of cash that Berkshire generates each year, but just as the size of Berkshire

prevents Buffett from producing the enormous returns of the 1960s and 1970s, the size would also make

it difficult for even a series of poor capital allocation or investment decisions to have a significant impact

on Berkshire.

Given the current discount at which Berkshire is trading in the market, it seems apparent that

there is zero “Buffett premium” built into the current price. In fact, if the ages of Buffett and Munger are

partially responsible for the current discount, there may in fact be a “Buffett discount” built into the

current price. The proposition of actually receiving a discount to have the greatest investment team ever

manage an investment portfolio for the rest of their lives seems like quite a favorable scenario for the

16

investor. Nonetheless, many investors are concerned that Berkshire’s shares will decline significantly

when Buffett or Munger passes away. Buffett has said on multiple occasions that he believes the deaths

of he and Charlie will present a buying opportunity for long-term investors. In addition, the $35.6 billion

of cash on Berkshire’s balance sheet as of March 31, 20086 serves as a sort of put option to a significant

share price decline in the event of Buffett and/or Munger being unable to lead the company. If the stock

declines as many investors expect it to when one or both of the managers pass away, Berkshire is likely to

utilize some of its $35.6 billion in cash to repurchase shares at the bargain price, which would create

significant long-term value for remaining shareholders. If Berkshire’s shares were to decline to a level

that the board judged to be unreasonably cheap, the company could also use its AAA credit rating to

borrow capital at a very low interest rate and repurchase shares at the sizeable discount from intrinsic

value, again creating tremendous value for remaining shareholders.

Insurance Industry

The lack of major natural disasters over the past few years has made the insurance industry

extremely competitive and has placed pressure on insurance premiums, margins, and profits. Because

Berkshire is known for having very strict underwriting standards, it is possible that revenues and earnings

generated by Berkshire’s insurance businesses could suffer in the short-term. However, Berkshire’s

strategy of only writing policies if it can profit on the policy itself, in addition to the float, is a prudent

long-term approach, and will prove beneficial to shareholders in the long run.

Another inherent risk in the insurance industry is the potential for large-scale natural disasters that

would be a significant drag on earnings in a given year. Because of Berkshire’s unmatched capital

structure, it is not at risk of these sorts of claims having a significant long-term impact on the company.

In fact, although natural disasters would be a short-term drag on Berkshire’s earnings, they would also

decrease the competition in the insurance industry and would allow Berkshire to realize greater

premiums, margins, and profits in subsequent years.

Even if Berkshire’s insurance businesses do experience challenges in the next few years, the

economics of the insurance industry are highly beneficial for a company with the capital structure of

Berkshire. The float on insurance policies equates to interest-free capital for Berkshire’s management to

strategically invest. When management is given capital at no cost, it has a very low bar that it must step

over to create additional value for shareholders. Assuming that the insurance businesses are able to

maintain their stringent underwriting policies, the float from insurance policies will serve as a constant

source of value creation for Berkshire shareholders.

6 Berkshire Hathaway 1st Quarter 2008 10-Q

17

Derivatives

Since reporting a $1.6 billion mark-to-market loss on derivatives in the 1st quarter of 2008,

Berkshire has been criticized for investing in what Buffett has referred to as “financial weapons of mass

destruction.” Although losses are never good, the $1.6 billion loss reported is merely a paper loss and is

unlikely to ever become a true loss. The loss results from put options that Berkshire wrote on four stock

indices, the S&P 500 and three foreign indices, in 2007. These put options were written at the money and

are not exercisable until expiration, which is between 2019 and 2027. Berkshire received $4.5 billion in

premiums for writing these options. Essentially, the company is predicting that come 2019 to 2027,

stocks will either be higher than they were in 2007 or at the same level. If this turns out to be the case,

Berkshire has made $4.5 billion on the put options despite the paper losses that occurred in the interim

periods. Although certain investors may choose to view this transaction as risky because of the interim

volatility, it seems like a pretty high probability event that stocks will at worst be flat over the next eleven

to nineteen years. If they happen to decline over this period, Berkshire has $4.5 billion in premiums to

cover any losses.

Conclusions

The combination of several factors makes Berkshire Hathaway an appealing investment candidate

at its current price of $123,970. This price is 17% below my conservative target price of $145,000 per

share and equates to a reasonable margin of safety for an investment in a company that possesses

unmatched financial stability and sustainable competitive advantages that characterize its operating

businesses and the businesses held in its investment portfolio. Several key aspects of my thesis are

summarized below:

• The $35.6 billion of cash on Berkshire’s balance sheet as of March 31, 2008 will give the

company opportunities to strategically capitalize on the current market turmoil. During prior

economic downturns, the company has been able to create significant value for shareholders, and

it is not unreasonable to expect that management will be able to repeat this feat under current

economic conditions.

• The financial stability of Berkshire is unmatched. The cash on its balance sheet, coupled with the

company’s minimal leverage, AAA credit rating, and consistent generation of sizeable free cash

flow makes Berkshire the ideal defensive investment.

• Berkshire is a low-risk investment that will allow investors to profit from the eventual

turnarounds of the financial and housing sectors. It is unique to be able to benefit from these

turnarounds without assuming the risks that are associated with pure-play financial and

homebuilding stocks in the current economic environment.

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• At its current price, Berkshire has reasonable upside potential with minimal risk of permanent

loss of capital for the long-term investor. Berkshire is a very low risk proposition for the long-

term investor, and when you don’t lose money, all of the other outcomes are good. The

opportunity to purchase Berkshire at a 17% discount to conservative intrinsic value provides a

reasonable margin of safety for an investment in a company of the caliber and stability of

Berkshire.

• There is zero “Buffett premium” built into the current price and there may in fact be a “Buffett

discount” due the ages of Buffett and Munger. The proposition of actually receiving a discount to

have the greatest investment team ever manage an investment portfolio for the rest of their lives

seems like quite a favorable scenario for the investor.

• Berkshire is a difficult company to value, which is often advantageous for the sophisticated

investor who is willing to work through multiple valuation techniques to establish a framework

within which a target price can be evaluated. Investors who are able to evaluate companies or

situations that others do not fully understand are often rewarded with healthy profits when other

investors later discover the value in a given company or situation.

In conclusion, Berkshire is admittedly not a deep-discount purchase at its current price, but it is

trading at a 17% discount to my conservative target price of $145,000. Several valuation methods

produced valuations that are significantly greater than my target price of $145,000, including the DCF

model, which produced a target price of $170,000. However, in the interest of conservatism and

acknowledging the conglomerate discount that has been evident in the markets over time, $145,000 seems

to be a reasonable target price. At its current price, I believe that an investment in Berkshire offers a very

high probability of consistent and reasonable returns to the long-term investor. The sizeable upside

potential coupled with minimal downside risk makes Berkshire Hathaway a prime investment for

investors with a long investment horizon.

19

Appendix 1: Berkshire Hathaway Financial Statements from Company 10-K

20

21

22

Appendix 2: Berkshire Hathaway Income Statement Forecast and Discounted Cash Flow Model

23

DCF Valuation

5/24/2008

Ticker: BRKA Terminal Discount Rate = 10.0%

Terminal FCF Growth = 5.0%

Forecast Terminal

Year 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E Value

Revenue 127,993 143,611 163,138 182,715 200,987 219,075 236,601 253,163 268,353 281,771 295,859

% Growth 12.20% 13.60% 12.00% 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 5.00%

Operating Income 17,919 18,885 22,024 24,667 27,133 29,575 31,941 34,177 36,228 38,039 39,941

Operating Margin 14.00% 13.15% 13.50% 13.50% 13.50% 13.50% 13.50% 13.50% 13.50% 13.50% 13.50%

Taxes 5,868 6,185 7,213 8,078 8,886 9,686 10,461 11,193 11,865 12,458 13,081

Tax Rate 32.75% 32.75% 32.75% 32.75% 32.75% 32.75% 32.75% 32.75% 32.75% 32.75% 32.75%

Minority Interest 400 510 625 750 875 1,000 1,125 1,250 1,375 1,500 1,625

Net Income 11,651 12,190 14,186 15,838 17,372 18,889 20,355 21,734 22,988 24,081 25,235

% Growth 4.6% 16.4% 11.6% 9.7% 8.7% 7.8% 6.8% 5.8% 4.8% 4.8%

Add Depreciation/Amort 2,560 2,944 3,344 4,111 5,025 6,025 7,098 8,228 8,721 9,158 9,615

% of Sales 2.00% 2.05% 2.05% 2.25% 2.50% 2.75% 3.00% 3.25% 3.25% 3.25% 3.25%

Plus/(minus) Changes WC (128) (144) (163) (183) (201) (219) (237) (253) (268) (282) (296)

% of Sales -0.10% -0.10% -0.10% -0.10% -0.10% -0.10% -0.10% -0.10% -0.10% -0.10% -0.10%

Subtract Cap Ex 5,888 6,750 7,749 7,765 8,039 8,215 8,281 8,228 8,721 9,158 9,615

Capex % of sales 4.60% 4.70% 4.50% 4.25% 4.00% 3.75% 3.50% 3.25% 3.25% 3.25% 3.25%

Free Cash Flow 8,195 8,241 9,618 12,001 14,156 16,479 18,936 21,481 22,720 23,800 24,939

YOY growth 1% 17% 25% 18% 16% 15% 13% 6% 5% 5%

Terminal 523,729.1

Terminal Value 523,729 P/E 20.8

NPV of free cash flows 96,378 37% EV/EBITDA 10.75

NPV of terminal value 166,876 63% Free Cash Yield 4.76%

Projected Equity Value 263,254

Free Cash Flow Yield 3.11%

Shares Outstanding (mil) 1.545751

Current Price 123,970.00$

Implied equity value/share 170,308.23$

Upside/(Downside) to DCF 37.38%

Cash 44,329

Debt 53,472