Ahead of Berkshire Hathaway’s AGM, is the Stock a Buy?

We
believe
that
Berkshire
Hathaway,
owing
to
its
diversification
and
its
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
remain
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
also
believe
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
departures
of
Warren
Buffett
and
Charlie
Munger
will
have
less
of
an
impact
on
future
operating
results
than
many
investors
think.
We
view
Berkshire’s
decentralised
business
model,
broad
business
diversification,
cash-generation
capabilities,
and
unmatched
balance
sheet
strength
as
true
differentiators
for
the
company.

Key
Morningstar
Metrics
for
Berkshire
Hathaway

•
Fair
Value
Estimate:
$640,000
Class
A/$427
Class
B
•
Star
Rating:
4
Stars
•
Economic
Moat
Rating:
Wide
•
Uncertainty
Rating:
Low

Berkshire’s
Economic
Moat
Rating

We’ve
historically
believed
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
are
they
expected
to
account
for
around
25%
of
Berkshire’s
pretax
earnings
(and
50%
of
our
valuation
of
the
company),
but
they
are
overcapitalised
and
generate
low-cost
float.

These
temporary
cash
holdings,
which
arise
from
premiums
being
collected
in
advance
of
future
claims,
allow
Berkshire
to
generate
returns
on
these
funds
with
assets
that
are
commensurate
with
the
duration
of
the
business
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.

Fair
Value
Estimate
for
Berkshire
Hathaway
Stock

Our
fair
value
estimate
is
derived
using
a
sum-of-the-parts
methodology,
valuing
each
of
Berkshire’s
operating
segments
separately
and
adding
them
back
together
for
the
total
estimate.
We
value
the
Class
A
shares
at
$640,000
and
the
Class
B
shares
at
$427.
This
is
equivalent
to
1.45
and
1.35
times
our
estimates
for
Berkshire’s
book
value
per
share
at
the
end
of
2024
and
2025,
respectively.
For
some
perspective,
the
shares
have
traded
at
an
average
of
1.43
times
trailing
quarter-end
book
value
per
share
during
the
past
five
years
and
1.44
times
during
the
past
10
years.
We
use
a
9.0%
cost
of
equity
in
our
valuation
and
assume
Berkshire
pays,
at
the
very
least,
the
required
15%
corporate
alternative
minimum
tax
on
adjusted
financial
statement
income.

Berkshire
Hathaway
Bulls
Say

•
Book
value
per
share,
which
is
a
good
proxy
for
measuring
changes
in
Berkshire’s
intrinsic
value,
increased
at
an
estimated
18.3%
compound
annual
growth
rate
during
1965-2023,
compared
with
a
10.2%
annualised
return
for
the
S&P
500
TR
Index.

•
Berkshire’s
stock
performance
has
generally
been
solid,
increasing
at
a
12.1%
CAGR
during
2019-23
and
11.8%
during
2014-23,
compared
with
15.7%
and
12.0%
respective
average
annual
returns
for
the
S&P
500
TR
Index.

•
At
the
end
of
2023,
Berkshire
had
$168.9
billion
in
insurance
float.
The
cost
of
its
float
has
been
negative
for
much
of
the
past
two
decades.

Berkshire
Hathaway
Bears
Say

•
Given
its
size,
Berkshire’s
biggest
long-term
hurdle
will
be
consistently
finding
deals
that
not
only
add
value
but
are
large
enough
to
be
meaningful.

•
Another
big
issue
facing
the
company
is
the
longevity
of
Buffett,
especially
following
the
death
of
longtime
managing
partner
Munger
in
November
last
year.

•
Berkshire’s
insurance
business
faces
competitive
and
highly
cyclical
markets
that
occasionally
produce
large
losses,
and
several
of
its
noninsurance
operations
are
economically
sensitive
and
focused
on
US
markets.

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