T2 Partners: Berkshire Hathaway Cheapest it's Been in 13 Years

Whitney Tilson and Glen Tongue of T2 Partners are speaking at the Value Investing Congress and mentioned Berkshire Hathaway BRK as the most attractive on risk reward basis in the thirteen years it has owned it. Tilson believes that shares are trading 35% below intrinsic value, which he thinks is $169,500, using a 10 multiple. When Berkshire and Warren Buffett announced the recent share buyback program, Tilson believes that Buffett has put a floor below the shares, down 3%, and a ceiling at 50% higher than the stock is currently trading. Buffett said that he will buy back stock when it falls below 10% book value. Buffett has $77 billion in cash and short term instruments, and wants to keep $20 billion in cash. This leaves him $57 billion to buy back stock, and common equities, as he has done previously, and a potential mega acquisition, like he did with Burlington Northern Santa Fe. Tilson then talked about his second largest position, J.C. Penney JCP. Bill Ackman, of Pershing Square has made headwinds into J.C. Penney, and he is currently on the board of directors. He believes it is fairly valued on a current performance, but the company, now led by new CEO Ron Johnson, formerly of Apple AAPL, will help to turn the company around. It also has Ackman and Vornado VNO as significant share holders in the Plano, TX.-based company. Tilson said that J.C. Penney is a long-term hold, not a shorter term investment. Johnson starts in November, and in the short term, it will trade on same-store-sales, retail sales, and general investor sentiment towards retailers. Johnson came from Target TGT to Apple, and turned Target into "Tarjay", and turned it cheap to chic. In 2000, Steve Jobs turned to Johnson to build Apple's stores, and even came up with the idea of the "Genius Bar," according to Tilson. Today, Apple stores sell more than $4,000 per square foot in 350 stores. Johnson purchased $50 million worth of J.C. Penney stock in warrants, and can not sell the warrants for a number of years. Glenn Tongue took over the presentation from Tilson to talk about J.C. Penney. Tongue said that J.C. Penney is increasingly gaining good will with its performance, especially with the addition of Sephora inside of J.C. Penney department stores. It is expected that Sephora will be in 30% of JCP stores by year end. The next initiative is the recent addition of brands from Liz Claiborne LIZ, which it purchased from the company last week. The last initiative is to grow online sales, which have been flat for the past four years. A 15% improvement in the current sales per square foot could get you to $38 per share. Tongue believes there is an opportunity for J.C. Penney to increase margins, especially with Sephora, private labels, and more efficient in advertising. He believes that hundreds of basis points in operating margins could be added. In total, 300 basis points of EBITDA would be worth an additional $15 per share. Tongue talked about the J.C. Penney real estate, and he believes it is worth $12-$15 per share. Including the base case of the retail business, the real estate, margin improvements and other improvements, J.C. Penney could be worth $65 per share. The company also owns REIT assets worth $1.40 per share. The company initiated a $900 million buyback in February 2011, and purchased $787 million in the first quarter, with the remainder being purchased in the second quarter at an average price of $36.98 per share. Tongue believes there is the opportunity to do more buybacks of scale if the management team believes it is worth it.