In the middle of April, I interviewed Brian Boyle, the founder and portfolio manager of Boyle Capital as part of ValueWalk’s Value Fund Interview Series. The interview’s scheduled to be published over the next week but here’s a sneak preview of our discussion on Berkshire Hathaway and Fairfax Financial:
“Rupert Hargreaves: Alongside Fairfax you own the value investor’s staple stock Berkshire Hathaway. Both Berkshire and Fairfax are relatively similar businesses but if you had to pick one of the two, which would you pick?
Brian Boyle: If I was to pick just one based on growth prospects alone, I would have to go with Fairfax. Fairfax is the smaller company and has more room for growth going forward, but that growth potential comes at a cost which is greater volatility. Berkshire is a relatively stable investment. As we are doing this interview, the stock is currently trading at around $143 per share. Book value is around $104. Buffett has stated that he is willing to buy back stock at around 1.2 times book value, around 12% to 13% below the current price, which gives you a pretty sizeable margin of safety. The downside is limited to 13%, and there is also plenty of upside as the company continues to grow steadily. Berkshire’s earnings are likely to grow at a compound annual rate of around 8% to 10% going forward, and the conglomerate has a fortress balance sheet which can be used for both acquisitions and to reward shareholders.
The flipside of this is the fact that Warren Buffett won’t be around forever — that’s the main key man risk here. With Fairfax, this is a smaller company, and it doesn’t take much in the way of growth to move the needle. The group also has emerging market exposure and we think this can really fuel long-term growth. For me, if I had to pick just one I would pick Fairfax because it has a better long-term growth potential. That said, I like to own both Berkshire and Fairfax in a portfolio. The thing with Berkshire is that the group’s very large equity portfolio can lead to volatility, so results tend to be irregular. Fairfax’s insurance operations produce steady growth, so the company’s shares are likely to perform better in rocky markets. Still, over the long-term both companies are likely to produce impressive returns for shareholders, provided that investors buy them at appropriate valuations. Right now, we believe Fairfax is fairly valued while Berkshire is undervalued.
RH: You believe Berkshire Hathaway is undervalued at present levels?
BB: Yes, we believe Berkshire Hathaway’s B shares have an intrinsic value of around $185 per share. That’s based on the value of the company’s investments and cash, plus operating businesses valued at 12 times earnings.”