Warren Buffett has his groove back—and so does Berkshire Hathaway stock.
As some 30,000 Berkshire Hathaway investors prepare to gather in Omaha, Neb., on May 6 for the company’s annual meeting, there is plenty of reason for enthusiasm—and not just because CEO Warren Buffett seems as sharp as ever at 92.
Berkshire Hathaway has never been in better shape. Its after-tax operating earnings from a widely diversified group of businesses, including the Burlington Northern Santa Fe railroad, a huge property-and-casualty insurance business, and one of the country’s largest electric utilities, are expected to rise more than 10% this year to $35 billion despite economic headwinds.
Even better, Buffett is acting like Buffett again.
After a period of inactivity following the onset of the pandemic—which disappointed many Berkshire investors—Buffett snapped up P&C insurer Alleghany for $11.6 billion last year, a cheap price. He spent $8 billion earlier this year to boost Berkshire’s stake to 80% in the parent of Pilot Flying J truck stops, which should benefit from the accelerated rollout of charging stations nationwide in the next decade.
Buffett also has been an active buyer of stocks, particularly in the energy sector. Berkshire now owns $27 billion of Chevron (CVX) and has steadily amassed a 23.6% stake in Occidental Petroleum (OXY) worth $13 billion, which has prompted speculation that Buffett may buy the whole company.
Squeaking By
Despite Warren Buffett’s stock-picking prowess, Berkshire stock has only managed to keep up with the S&P 500.
1-Yr Return | 5-Yr Return | 10-Yr Return | 20-Yr Return | |
|---|---|---|---|---|
Berkshire | 0.6% | 11.0% | 12.0% | 10.3% |
S&P 500 | 0.5 | 11.1 | 12.2 | 10.1 |
Note: Five-, 10-, and 20-year returns are annualized
Source: Bloomberg
Even after that, Berkshire is sitting on more than $125 billion of cash that could be deployed in what Buffett has called an “elephant size” acquisition. Until then, that cash, which Buffett shrewdly kept in short-term Treasury bills, can earn 5% while banks are sitting on over $600 billion of bond losses. Plus, it’s one of the most defensive large-cap stocks due to what Buffett calls its “Fort Knox” balance sheet and durable earnings.
“Berkshire is attractive and defensive in the financial sector,” says Edward Jones analyst James Shanahan, who notes that the company doesn’t have the loan, funding, and margin issues confronting banks.
Add it all up and Berkshire stock looks appealing, despite not appearing cheap. The Class A shares, at about $500,000, are up 6.6% this year and trade for 21.6 times projected 2023 earnings, a premium to the S&P 500 index’s 18.9 times. The stock is valued at about 1.4 times book value, using Shanahan’s June 30 estimate for book value, in line with its five- and 10-year averages.
The more actively traded Berkshire Class B shares look like a slightly better bet. They trade for $326 a share, a roughly 2% discount to the A shares. (Each B share is worth 1/1500th of an A share.)
Many investors focus on what Buffett has called Berkshire’s “look through” earnings, a calculation that reflects the proportional profits of the companies in the company’s investment portfolio, led by Apple (AAPL). Based on this measure, which doesn’t conform to generally accepted accounting principles, Berkshire is valued at about 14 times projected 2023 earnings.
Chris Bloomstran, a longtime Berkshire investor who runs Semper Augustus, a St. Louis investment firm, valued Berkshire earlier this year based on several measures. They averaged $421 per Class B share.
“Berkshire is trading at about 75% of intrinsic value,” he says.
Standout Berkshire businesses include its utility, which Bloomstran says is “unrivaled” in the industry due its scale and growth prospects. Berkshire’s insurance businesses are benefiting from stronger industry pricing, with Geico, its big auto insurer, expected to turn an underwriting profit this year after losing $1.9 billion last year.
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Berkshire’s buybacks are tough to predict since Buffett is price sensitive. A figure close to $15 billion in 2023, double last year’s total, looks reasonable based on the repurchase pace so far. That would be 2% of Berkshire’s market capitalization. The company pays no dividend and is unlikely to do so as long as Buffett is alive.
And that, of course, is the rub. Buffett is set to turn 93 in August. To say he’s irreplaceable, given his management and investment skills, is no understatement. “He’s still the best capital allocator,” Bloomstran says. Berkshire has scored with investments in a group of Japanese trading companies now worth about $12 billion. The Apple stake, now worth $151 billion, is about five times what Berkshire paid.
Still, Buffett has said Berkshire stock, which has only performed in line with the S&P 500 over the past 5, 10 and 20 years, will go up, not down, as many might presume, when he dies since investors would bet on a breakup of the sprawling company. That’s a move he opposes, and board additions in recent years, including Buffett’s daughter Susan, could be designed in part to keep Berkshire intact after his death.
A Lot to Like
Berkshire Hathaway owns strong businesses and a solid portfolio of stocks, and has the cash to add more.
Key Data | |
|---|---|
Recent Price | $499,700 |
2023E P/E Ratio | 21.6 |
Book Value* | $354,000 |
Price/Book Ratio | 1.4 |
Cash | $129 billion |
Top Shareholder | Warren Buffett 15.6% |
Top Equity Holdings | Apple, Bank of America, Chevron |
Key Business Units | BNSF, Geico, Electric utility |
E=estimate *Edward Jones June 30, 2023 estimate
Sources: Bloomberg; company reports
It’s encouraging, though, that Buffett’s likely successor, Greg Abel, 60, who heads Berkshire’s noninsurance operations, is taking a more assertive role at the conglomerate in improving operations at subsidiaries, something that the famously hands-off Buffett preferred not to do.
“He’s probably tougher than I would be in terms of getting things done and everything,” Buffett said recently in a CNBC interview. “And so, it has already improved dramatically, the management of Berkshire.”
Abel and Ajit Jain, the head of Berkshire’s insurance business, will be on hand at the annual meeting to answer shareholder questions along with Buffett and his longtime partner, Vice Chairman Charlie Munger, 99. And there will be plenty of questions. Most of all, Berkshire shareholders will enjoy Buffett’s presence, humor, and insights, knowing there won’t be many more of these events to come.
That’s a worry for another day. With everything running the way it should, it’s a great time to bet on Buffett and Berkshire stock.