TIP810: Berkshire Hathaway 2026 Valuation w/ Chris Bloomstran

Episode Summary

Executive Summary: This Berkshire Hathaway pre-meeting conversation centers on Chris Broomstrand’s valuation framework, his estimate that Berkshire remains modestly undervalued, and his read on Greg Abel’s first CEO letter as thoughtful and appropriately Berkshire-like. The discussion expands to compensation, capital allocation, AI-driven capital spending, shareholder buybacks, and why high market margins and multiples may not be sustainable.

Main Topics: Berkshire intrinsic value and valuation framework (Priority: 5/5): Chris explains his four-method approach to valuing Berkshire: sum-of-the-parts, gap-adjusted financials, price-to-book, and a two-prong method. He concludes intrinsic value rose about 9.3% year over year and Berkshire still trades at a discount to fair value. Greg Abel’s first shareholder letter and leadership transition (Priority: 5/5): The hosts assess Abel’s debut letter as measured, culture-aware, and business-focused. Chris argues Abel understands Berkshire’s conservatism, subsidiary details, and capital allocation responsibilities, and should be judged by future actions in crises rather than rhetoric. Capital allocation, cash hoard, and buybacks (Priority: 5/5): A major theme is how Abel should deploy Berkshire’s large cash balance. Chris believes the next major recession or dislocation will be the true test of Abel’s willingness to swing hard on major opportunities and repurchases when Berkshire is cheap. Compensation and governance alignment (Priority: 4/5): The conversation debates Greg Abel’s $25 million compensation and broader executive pay structures. Chris argues Berkshire’s model is unusually aligned because leaders own stock personally and are paid to act long term, not to maximize short-term metrics. Market margins, multiples, and mean reversion (Priority: 5/5): Chris revisits Buffett’s 1999 margin-reversion thesis, arguing margins are structurally higher now but still mean revert. He warns that current high margins plus high multiples imply weak forward returns, especially if capex and competition compress margins. AI capex cycle and valuation risk (Priority: 4/5): Chris argues the AI buildout resembles prior capital cycles and may not generate enough revenue/profit to justify the massive spending. He uses OpenAI and hyperscaler capex as examples of how profitability assumptions may prove too optimistic. Share repurchases and dilution in the broader market (Priority: 4/5): The discussion criticizes S&P 500 buybacks as often being used to offset dilution and support stock prices rather than create true per-share value. Chris says a trillion dollars of repurchases can coexist with flat or rising share counts.

Key Arguments: Berkshire’s intrinsic value increased, but the stock still appears cheap enough for buybacks; Chris estimates the shares trade around 85 cents on the dollar. The media misreads Berkshire’s reported earnings because it ignores currency translation, insurance reserve development, and goodwill write-downs that distort year-over-year comparisons. Greg Abel’s letter was credible because it reflected Berkshire’s culture, focused on operating businesses, and acknowledged the realities of insurance and capital allocation. Abel should be judged by whether he deploys Berkshire’s cash aggressively during the next major downturn, not by whether his letter is as entertaining as Buffett’s. Berkshire’s CEO compensation is reasonable because Abel is already wealthy, owns stock, and is expected to act as a long-term steward rather than a short-term optimizer. Most public-company compensation systems are flawed because they reward growth, adjusted EBITDA, or stock-price appreciation instead of real capital efficiency and long-term returns. The S&P 500’s current high margins are not a justification for higher multiples; if margins mean revert, valuations can compress sharply. AI spending may be creating a new capex-heavy cycle that undermines the very high margins currently enjoyed by big tech platforms. Share buybacks are not inherently bad, but most companies use them poorly, often to offset compensation dilution rather than improve intrinsic value per share. The broader market may face lower future returns because high valuations, high margins, and declining buyback support are all working against investors.

Data Points: Berkshire intrinsic value growth: 9.3% year over year - Chris’s blended average across four valuation methods Berkshire intrinsic value: ~$1.2 trillion to $1.25 trillion market cap equivalent - Chris’s estimate of Berkshire’s intrinsic value Berkshire B-share intrinsic value: $570 per share - Chris’s current estimate for Berkshire B shares Berkshire A-share intrinsic value: $855,396 per share - Chris’s current estimate for Berkshire A shares Berkshire stock price vs fair value: ~85 cents on the dollar - Chris’s view of current trading price relative to intrinsic value Stock portfolio total return: 13.7% - Chris’s calculation for Berkshire’s portfolio return including 13F and non-13F holdings Book value growth: 10.5% - Berkshire book value growth cited in the discussion Operating earnings: $44.5 billion - Berkshire’s reported annual operating earnings 2024 operating earnings change: down almost 3% - Reported decline that Chris says was distorted by accounting items Currency translation impact: $1.7 billion delta - Difference between 2024 and 2025 currency translation effects Railroad earnings growth: up almost 9% - Year-over-year improvement in Berkshire’s railroad business Energy earnings growth: up almost 7% - Year-over-year improvement in Berkshire’s energy business Manufacturing/service/retail earnings growth: up 4.5% - Year-over-year improvement in Berkshire’s M/S/R businesses GEICO combined ratio: 82% in 2024; 85% in 2025 - Used to show underwriting profitability remained strong despite some deterioration GEICO policies in force: up 5% - Growth came from volume rather than price increases Underwriting expense increase: up 270 basis points - GEICO spent over $1 billion more on auto underwriting in 2025 vs. 2024 Reserve development 2024: $1.7 billion positive - Prior-year favorable loss reserve development Reserve development 2025: $1.1 billion positive - Still favorable, but $600 million less than 2024 Goodwill write-downs 2025: $1.4 billion - Non-operating charges included in Berkshire’s reported operating earnings OpenAI capital raised: ~$73 billion cumulative - Chris’s summary of OpenAI’s funding history OpenAI valuation round: $750 billion to $830 billion targeted range - Recent or planned funding round discussed Hyperscaler capex: just shy of $400 billion last year - Aggregate spending by major AI platforms AI revenue supported by incremental capex: ~$30 billion - Chris’s estimate of near-term revenue generated by the spending Future AI spending: $3+ trillion cumulative over five to six years - Projected capex cycle scale Required return on AI capital: 15% - Used to illustrate how much profit the AI buildout would need to justify spending S&P 500 P/E: 26x current earnings - Used in the discussion of market valuation and margin risk S&P 500 profit margin: 12.8% - Most recent margin level cited MAG-7 share of S&P 500: 37% - Concentration of the largest tech names in the index Magnitude of annual buybacks: Likely to exceed $1 trillion in 2025 - Chris’s estimate for S&P 500 aggregate share repurchases Share count change since June 2020: up 3.3% - Shows buybacks have not reduced share count overall Long-term S&P buyback effect: 1.8% share count growth over 25 years - Despite massive repurchases, dilution persisted Berkshire’s long-term compounding: 19.7% since 1965 - Berkshire’s growth under Buffett highlighted in the tribute section Berkshire wealth creation example: $100 grew to $6.1 million - Illustrates long-run compounding under Buffett S&P compounding from 1932 low: ~12.1% to 12.5% annualized - Chris’s example of buying the market at the 1932 bottom S&P growth from 1932 low: $100 to ~$4.4 million - Used to compare with Berkshire’s long-term compounding Berkshire’s cash balance: ~$370+ billion - Referenced as the dry powder available for future opportunities Greg Abel’s compensation: $25 million - Discussed as reasonable for Berkshire’s scale and role Ted Weschler’s portfolio responsibility: about 6% of investments - Abel’s letter described Ted’s role in investment oversight

Pivotal Quotes: "I think he gets the culture, he gets the integrity, he gets the value system of the place." — Chris Brewstrand: On Greg Abel’s first CEO letter and why it fit Berkshire "You just have to get used to tasting a little bit of your vomit." — Chris Brewstrand: On imperfect executive compensation structures and governance tradeoffs "They’re going to do it on Berkshire’s terms." — Chris Brewstrand: On how Berkshire should deploy cash and when it should act aggressively

Implications: The episode suggests Berkshire remains a disciplined but undervalued compounder, while Abel’s real test will be capital deployment in a downturn. More broadly, high market margins, aggressive buybacks, and AI capex may be setting up lower future returns.