Why Berkshire Hathaway Stock Is a Buy
Warren Buffett’s company is a solid candidate for downside protection, says Morningstar’s analyst—and the stock is attractively priced, too.
We believe that Berkshire Hathaway BRK.A/BRK.B, owing to its diversification and lower overall risk profile, offers one of the better risk-adjusted return profiles in the financial-services sector and remains a generally solid candidate for downside protection during market selloffs. We continue to be impressed by Berkshire’s ability in most years to generate high-single- to double-digit growth in book value per share, comfortably above our estimate of its cost of capital. We expect that it will take some time before the company finally succumbs to the impediments created by the sheer size and scale of its operations, and that the ultimate departure of Warren Buffett and Charles Munger will have less of an impact on future operating results than many investors believe. We view Berkshire’s decentralized business model, broad business diversification, high cash-generation capabilities, and unmatched balance sheet strength as true differentiators for the company.
We’ve tended to believe that Berkshire’s economic moat is more than just a sum of its parts, although the parts that make up the whole are fairly moaty in their own regard. The insurance operations—Geico, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Primary Group—remain important contributors to the overall business. Not only do they account for 20%-25% of Berkshire’s pretax earnings (and 44% of our current valuation of the company, as the insurance operations are overcapitalized and maintain a larger-than-normal equity investment portfolio for a property and casualty insurer), but also they generate low-cost float. These temporary cash holdings, which arise from premiums being collected in advance of future claims, have allowed Berkshire to generate additional returns as the company invests these funds in assets that are commensurate with the duration of the business that is being underwritten. And they have tended to come at little to no cost to Berkshire, given the company’s proclivity for generating underwriting gains the past several decades.
Our fair value estimate for Berkshire is derived using a sum-of-the-parts methodology, valuing each of the company’s operating segments separately and then adding them together for the total estimate. We value the Class A shares at $535,000 and the Class B shares at $357. This is equivalent to 1.57, 1.39, and 1.27 times our estimates for Berkshire’s book value per share at the end of 2022, 2023, and 2024, respectively. For some perspective, the shares have traded at an average of 1.40 times trailing calendar quarter-end book value per share during the past five years and 1.39 times during the past 10 years. We use a 9.0% cost of equity in our valuation.
Our Morningstar Uncertainty Rating for Berkshire is Low. We don’t consider any environmental, social, or governance issues at the company to be material enough at this point to affect our uncertainty rating, primarily because of the company’s lower exposure to some of the main ESG risks inherent to the industries where it competes. However, Berkshire has generally scored lower on governance issues because of the makeup of its board and board committees, the unequal voting structure of its shares, and the lack of engagement and opaqueness on governance issues historically.
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Greggory Warren does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.