Buffett has long pointed out in Berkshire’s annual letters to shareholders that the gap between the company’s book value and intrinsic value has been widening in recent years. The latter is an estimate of the future cash output of a business discounted to present value. In other words, book value tells you how much money was put in to a business; intrinsic value says how much money can be pulled out.
The last time Berkshire bought its own shares was in 2012. That year, Buffett told investors, was lackluster. Berkshire’s book value didn’t increase on pace with the gain in the S&P, and Buffett failed to make a major acquisition. “I pursued a couple of elephants, but came up empty handed,” he said then. Berkshire didn’t purchase any shares in 2013 because the stock didn’t meet the 120 percent hurdle.
In turning to share purchases, Buffett is also signaling there isn’t anything he feels comfortable buying at current values. Berkshire hasn’t had good luck on the deal front in a while, backing down from an offer for Texas power transmission firm Oncor after a bidding war broke out last year and abandoning a potential deal for Unilever.
With a flood of money at private equity firms waiting to be invested and Wall Street’s willingness to pile on debt to get a deal done, Berkshire’s classically frugal deal style is out of favor, said David Rolfe, the chief investment officer of St. Louis-based Wedgewood Partners, a long-time holder of Berkshire B shares.
Share purchases are a bullish sign that a company sees its shares as undervalued. “It’s a high-class problem,” Rolfe told CNBC. Buffett famously said a few years back that he was going “elephant hunting” to find big takeover targets to put Berkshire’s cash to work.
“All along, the biggest elephant has been at the Omaha zoo. In his own company,” Rolfe said.