Berkshire Hathaway Closes Out 2016 Near Full Value

We came into 2016 believing it would be a better year for wide-moat-rated

While a case could be made for additional gains in the shares in the near term, driven by a potential reduction in the U.S. corporate tax rate from 35% to 25% (or a less likely 15%), we believe some of this is already baked into the stock. Berkshire's blended tax rate already hovers around 30%, as a combination of tax-exempt and tax-advantaged investment holdings, as well as U.S. and foreign income tax credits, reduces its overall tax obligation. While a lower corporate tax rate would likely increase annual earnings by more than 10% (depending on the offsets required in any new tax regime), this would be a one-time jump with future earnings growth still driven by fundamentals.

Berkshire tends to trade on book value per share, though, which by our calculations would see an immediate one-time increase of around 5% if the lower tax rate is adopted (primarily related to adjustments to the firm's large deferred tax liabilities). This, along with the earnings hike, would likely push book value per Class A (B) share to around $190,000 ($127) by the end of 2017, implying a fair value for the shares in the $265,000-$285,000 ($177-$190) range, about 8% higher on average than our current estimate. As much of this is based on conjecture, with little insight into the offsets that would be required in a new tax regime, we're sticking with our base case until we have more details.

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