After Earnings, Is Berkshire Hathaway Stock a Buy, a Sell, or Fairly Valued?

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Berkshire Hathaway BRK.A/BRK.B released its first-quarter earnings report on May 4. Here's Morningstar's take on Berkshire Hathaway's earnings and outlook for its stock.

Key Morningstar Metrics for Berkshire Hathaway

What We Thought of Berkshire Hathaway's Q1 Earnings

While wide-moat Berkshire Hathaway's annual meeting has always been entertaining, it generally has not been a huge source of insight into the firm's operations. While this year's event had the feel of past meetings—the setting was the same, the throngs of shareholders were present, and the company's top managers were onstage taking questions from CNBC's Becky Quick and shareholders during the live event in Omaha—the absence of Charlie Munger (who passed away in November 2023) hung over the meeting, with his quick wit and biting comments sorely missed by all in attendance.

With CEO Warren Buffett joined by Ajit Jain and Greg Abel onstage, this year's questions were driven more toward eliciting information about the inner workings and performance of Berkshire's operating companies, stock investments, ongoing capital allocation, and succession planning. These were interspersed with plenty of questions about the economy, as well as the usual requests for advice from Buffett about one thing or another in the questioner's life or business.

If we had to sum up our main takeaways from this year's meeting—from an analyst's perspective—we would highlight the following: the meeting provided more insight into Geico and BNSF, both of which have had their troubles the past five years or so; climate change and, more specifically, wildfires (including the increased exposure to litigation) are a bigger issue now for Berkshire Hathaway Energy; the insurer remains a net seller of stocks, despite putting a fair amount of capital into a yet-to-be-disclosed financial services stock, with sales of Apple and Paramount highlighted during the meeting; Buffett discusses succession planning, pays tribute to Munger, and opines on future capital allocation oversight; and Berkshire increased its share-buying activity in the first quarter (and early part of April) while there were distant rumblings about a dividend.

Fair Value Estimate for Berkshire Hathaway

With its 4-star rating, we believe Berkshire Hathaway's stock is undervalued compared with our long-term fair value estimate of $427 per Class B share, which is equivalent to 1.45 times our estimate of the firm's book value per share at the end of 2024 and 1.35 times for 2025. For some perspective, during the past five (10) years, the shares have traded at an average of 1.43 (1.44) times the trailing year-end book value per share. We use a 9% 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.

Read more about Berkshire Hathaway's fair value estimate.

Economic Moat Rating

We've historically believed that Berkshire's economic moat is more than the sum of its parts, although the parts are fairly moaty on their own. 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 32% of the firm's pretax earnings (and 50% of our valuation of it), but they are overcapitalized, maintaining a larger-than-normal equity investment portfolio for a property and casualty insurer.

They also generate low-cost float (temporary cash holdings arising from premiums collected in advance of future claims). This lets Berkshire generate returns on these funds with assets commensurate with the duration of the business being underwritten. And they tend to come at little to no cost to Berkshire, given the company's proclivity for generating underwriting gains over the past several decades.

That said, we don't believe the insurance industry is conducive to developing maintainable competitive advantages. While there are some high-quality firms, with Berkshire having some of the best operators in the segments where it competes, insurers essentially sell a commodity, and excess returns are difficult to achieve consistently. Insurance buyers are not inclined to pay a premium for brands, and the products are easily replicable.

Given the growth of its auto insurance operations over the years, Geico has become one of Berkshire's largest generators of earned premiums. The strength of the auto insurer's direct-selling operations has made it one of the largest US private passenger auto insurance underwriters, responsible for 12.3% of written premiums last year, compared with industry leader State Farm's 18.3%.

Read more about Berkshire Hathaway's economic moat.

Financial Strength

Berkshire's strong balance sheet and liquidity are among its most enduring competitive advantages. Its insurance operations are overcapitalized, carrying greater equity, fixed income, and cash relative to its reserves. The company generates large amounts of free cash flow and maintains significant cash on its balance sheet, amounting to $167.6 billion at the end of 2023.

Berkshire likes to keep $30 billion in cash on hand as a backstop for its insurance operations, with each of the firm's businesses likely requiring at least 2% of annual revenue as operating cash, with additional carve-outs set aside for capital expenditures. As a result, by our estimate, Berkshire entered 2024 with an excess cash balance of around $126 billion—dry powder that could be used for acquisitions, investments, share repurchases, or dividends.

While Berkshire is unlikely to pay a dividend as long as Warren Buffett is running the show, the principal insurance subsidiaries could (without prior regulatory approval) pay out as much as $31 billion in ordinary dividends during 2024. We believe the company should be able to easily buy back $6 billion to $7 billion of its common stock quarterly during 2024-28, which is what we've predicted for the firm in our initial five-year forecast.

Read more about financial strength.

Risk and Uncertainty

Our Uncertainty Rating for Berkshire is Low. We do not consider any environmental, social, or governance issues material enough to affect our uncertainty rating. This is due to the firm's lower exposure to some of the main ESG risks inherent to its industries.

That said, Berkshire has tended to score lower on governance issues because of the makeup of its board and board committees, the unequal voting structure of its Class A and Class B shares, and its opaqueness and lack of engagement on governance issues.

Berkshire faces the risk that insurance claims exceed loss reserves or that material impairments affect its investment portfolio. Several of its key businesses—insurance, energy generation and distribution, and rail transport—operate in industries subject to higher degrees of regulatory oversight, which could affect future business combinations and the setting of rates charged to customers. Many of the company's noninsurance operations are exposed to the cyclicality of the US economy, with results suffering during economic slowdowns.

Following the death of Charlie Munger in November 2023, Berkshire's main key employee risk rests with CEO Warren Buffett, who has been responsible for almost all the firm's investment and capital allocation decisions. With Buffett turning 94 in August 2024, it is increasingly probable that our valuation horizon will exceed his lifespan, with the quality of investment returns and capital allocation likely being affected.

Read more about Berkshire Hathaway's risk and uncertainty.

BRK.B Bulls Say

Book value per share—a good proxy for measuring changes in Berkshire's intrinsic value—increased at an estimated 18.3% CAGR during 1965-2023, compared with a 10.2% annualized return for the S&P 500 TR Index.
Berkshire's stock performance has generally been solid, increasing at a 12.1% (11.8%) CAGR during 2019-23 (2014-23), compared with a 15.7% (12.0%) average annual return 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.

BRK.B Bears Say

Given its size, Berkshire's biggest long-term hurdle will be its ability to consistently find meaningfully large deals that add value.
Another big issue facing the firm is the longevity of CEO Warren Buffett (who turned 93 in August 2023), especially following the death of longtime managing partner Charlie Munger in November of 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.

This article was compiled by Oratile Matome.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.

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