Berkshire Hathaway Inc. Stock Report

Berkshire Hathaway Inc.

Berkshire’s Book value per share (the green line) has grown at a compounded average of 11.1% per year since 2013 pushed up by very large gains on its stock portfolio.  This 11.1% is quite strong. Berkshire’s revenue per share (the red line) has shown reasonably strong growth averaging 8.5% per year. The GAAP earnings (blue line) has recently become highly volatile due to recent accounting changes which now require changes in the market value of its stock investments to be reflected in net income. The adjusted earnings (operating earnings) per share (pink line) eliminates realized gains and losses on investments and has compounded up a strong 10.8% annual average since 2013 including a boost from substantially lower income tax rates since 2018.

In the case of Berkshire, adjusted earnings (if defined as operating earnings) are  substantially under-stated over the years since it ignores all investments gains and losses (both realized and unrealized) which although volatile and sometimes negative have been positive and material on average over the years. Adjusted earnings also include only the dividends on the large investments in companies like Coke and not a full pro-rata share of earnings of those companies.

Berkshire Hathaway Inc. (BRKB, New York)  
RESEARCH SUMMARY  
Report Author(s): InvestorsFriend Inc. Analyst(s)
Author(s)’ disclosure of share ownership:  Author(s) hold shares
Based on financials from: Dec ’23 Y.E.
Last updated: April 2, 2024
Share Price At Date of Last Update:  $                                419.00
Currency: $ U.S.
Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): (lower) Buy at $419
Qualifies as a stock that could be bought with confidence to hold for 20 years? Yes
Has Wonderful Economics? Yes
Has Excellent and Trustworthy Management? Yes!
Likely to grow earnings per share at an attractive rate over the next decade? Expect modest growth
Positive near-term earnings outlook? Uncertain
Valuation? Somewhat Expensive
SUMMARY AND RATING:  The graph shows that the book value per share has grown strongly over the ten years shown on the graph. Revenues per share had grown steadily but then flattened for a few years but have accelerated sharply in the past three years. Adjusted (which are operating) earnings  had seen relatively modest growth but surged in 2018 boosted substantially by lower income tax rates but then declined modestly in 2019 and declined further in 2020 with the pandemic but then surged in the past three years. Importantly, Berkshire is reasonably predictable (in the long term) and can be expected to continue to grow at least modestly over the years. The value ratios are difficult to interpret due to the difficulty of identifying the current normalized earnings level and would justify a Buy rating at this time. Management is exceptional. The short-term outlook for operating earnings is difficult to predict sine 2023 was very strong and insurance earnings could fluctuate lower. The stock holdings are always vulnerable to a pullback in stock prices such as due to higher interest rates. The long term outlook is positive given its competitive advantages. The insider trading signal is neutral due to a lack of trades.  Buffett has pointed out that book value includes deductions for deferred income tax, for the insurance float liabilities and for amortization of customer lists and trademarks. But in the case of Berkshire (unlike most insurance companies) the cost of the float has been negative almost every year and it regenerates year after year. So it can be discounted greatly as a liability. Similarly deferred income taxes incur no interest and tend to grow over the years and again can be discounted as a liability. Overall, we would rate this a (lower) Buy at $419.
MACRO ENVIRONMENT: Berkshire Hathaway is relatively stable in terms of operating earnings. The current strong U.S. economy is favorable even as some of its subsidiaries suffer from weakness in discretionary spending lined partly to higher interest rates.
LONG TERM VALUE CREATION: The long-term value creation at Berkshire has been tremendously good.
DESCRIPTION OF BUSINESS: A HUGE operating and investment company. The employee count was 396,500 at the end of 2023.  In 2020 the breakout of the net earnings from operations by segment was: insurance 15% (this will be very volatile year to year) dividends and interest on insurance investments 26%, manufacturing, service and retailing 34%, railroad 14%, utilities and energy 6%. This excludes gains and losses on investments which are positive on average but are highly volatile and are negative some years. The insurance operations provide substantial funds (float) for investments which are held mostly in equities. Deferred income taxes also provide substantial funds for equity investments. The strategy is to invest in companies that are stable and can be predicted to continue to earn excellent profits, that have excellent (and likable and ethical) management, and that are available at good prices. The preference is to buy entire companies, usually these are private companies but some have been taken private by buying all the shares on the stock market. These buys are forever. Direct subsidiary companies once bought are almost never sold. As an alternative to buying entire companies, shares in companies with similar qualities are purchased. These are sometimes later sold but the intention is typically to hold indefinitely. The corporate culture includes the highest in ethics, deep respect for investors and includes being efficient. Managers are highly incented (both financially and emotionally) to be as efficient as possible and make high returns on capital. The use of debt is generally discouraged or minimised except in lending (financing) operations and in the railroad and utilities. The company is highly decentralized. Head office is involved in large capital spending decisions and in selecting, motivating  and compensating the top manager at each subsidiary. The goal of the company is the grow intrinsic value per share over the long term at a rate higher than the total returns on the S&P 500. Long term profit is never ever sacrificed for the sake of short term profits or currying favor with analysts or investors in any way.
ECONOMICS OF THE BUSINESS: In insurance Berkshire concentrates on areas where it has a cost advantage (Geico through direct selling) or where its huge financial resources provide a competitive advantage and where others fear to tread (reinsurance and the writing of massive policies) or where the business is extremely long tailed (workers compensation) to take advantage of Berkshire’s investing prowess. In insurance Berkshire retains all its earnings and uses this to build up an equity ratio far higher than regulators require and debt is shunned. This provides an unusually strong (for the insurance industry) balance sheet which allows the company to invest both the insurance premium and its own equity mostly in equities for their higher returns (the higher risk of equities is offset by the Gibraltar like financial strength). In addition to stocks and bonds, wholly owned companies are often purchased through the insurance operations. All of the equity investments whether wholly owned or not tend to be in stable predictable businesses that are well managed and have good economics. The rail business economics are strong in that the business grows predictably with the economy, rail has cost advantages over trucking and many customers may face limited or no other choice. The utility business is a regulated monopoly and so earns steady but unspectacular earnings. Both rail and utilities have the need for and the opportunity to invest large additional capital amounts. The Finance and Financial products consists of loans to buyers of its manufactured homes as well as various investing operations that Berkshire undertakes outside of its insurance operations. The economics of finance are good but requires discipline and brains to avoid big mistakes.
RISKS: As a huge conglomerate, the risks are too numerous to list here. Please see the annual report. Some important risks are the risks of large losses in insurance due to earthquakes,  hurricanes and terrorist attacks. Also the stock price would likely drop at least temporarily on the ultimate death or retirement of Warren Buffett. The stock price would also drop if the share prices of its stock holdings declines.
INSIDER TRADING / INSIDER HOLDING: Warren Buffett has never sold a single share except for transfers as gifts, including the large transfers to charity that he began in 2006 with the amount determined by a formula that he set out and follows.  There has ben very little insider trading.  Vice Chair and top insurance executive Ajit Jain has sold relatively regularly for some years. His sale prices in the past two years ranged from about $277 to a more recent $362. Long-time Board member and Buffett friend Ronal Olsen bought at $275.  Overall, the insider trading signal is about neutral.  Berkshire started buying back a material amount of shares in Q1 2020 and this continues and the share count has been reduced by 12% which is material.  The amount paid in the latest quarter averaged about $347.
WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is  simple to understand and is predictable (fail, it is a huge conglomerate and its insurance operations are complex), has favorable long-term economics due to cost advantages or superior brand power (pass as Buffett has always bought such businesses for Berkshire and its core insurance business passes the test as well), apparently able and trustworthy management (pass given Buffett’s reputation), a sensible price – below its intrinsic value (marginal pass at best), Other criteria that have been attributed to Buffett include: a low  debt ratio (pass), good recent profit history (pass when including gains on shares)  little chance of permanent loss of the investors capital (pass) a low level of maintenance type capital spending required to maintain existing operations excluding growth (marginal pass as the rail and utility businesses require constant capital spending)
MOST RECENT EARNINGS AND SALES TREND:   Note that revenue and earnings growth is impacted by “lumpy” gains and occasional loses on investments disposed of as well as occasional bad results in insurance operations. In the four most recent quarters beginning with the most recent (Q4 2023) revenues per share rose 21%, 23%, 23% and 22% while operating earnings per share (which exclude gains and losses but which are affected by lumpy insurance results) rose 30%, 43%, 8% and 14. Revenues per share rose 22% in 2023 and operating earnings per share rose 23%. Revenues per share rose 12.5% in 2022 and operating earnings per share rose 14.5%.  By nature the revenue and adjusted earnings are “lumpy” making the trend difficult to interpret. Overall the very recent trend in operating earnings and revenues per share is very strong. Historic figures: Revenues per share rose 19% in 2021 and operating earnings per share rose 32%. Revenues per share fell 1% in 2020 and operating earnings fell 6%. Revenues per share rose 3% in 2019 and operating earnings fell 3%. Revenues per share rose 3% in 2018 and operating earnings per share rose 71%. Revenues per share rose 8% in 2017 and operating earnings per share fell 18%.
COMPARABLE STORE SALES: Not Applicable.
Earnings Growth Scenario and Justifiable P/E: It is difficult to comment on the P/E ratio since the earnings are quite lumpy and it is difficult to judge what its normalized earning are at this time. But if we assume its normalized earnings are 8% to 10% of book value annually then the current share price (and normalized earnings P/E of 20 to 19) is pricing in about  7 to 8% annual growth in earnings with a terminal P/E of 15 to 18.
VALUE RATIOS: Analysed at a price of $419. Price to book value ratio is probably somewhat unattractively high at 1.62 (considering that many financial and holding companies tend to trade at low multiples to book value and that its cash and stock portfolio representing about half the assets is already marked to market, and keep in mind that book value includes a substantial amount of purchased goodwill). The price to tangible book value is less attractive at 2.03. The most important value ratios are usually based on a view of adjusted earnings which ideally is a base level from which we can project a growth or decline. Berkshire provides a view of operating earnings that excludes all market value and sale gains and losses on securities. This adjusted figure is conservative because although gains are volatile, they are positive in the great majority of years. It also ignores the fact that a material portion of its income taxes is ersatz in that deferred income taxes are usually continually growing and some goodwill-like intangibles are being amortized which reduces earnings. This means that the calculated adjusted P/E is “artificially” high and the adjusted ROE is “artificially” low. On that basis, the adjusted (operating earnings) P/E is somewhat unattractive at 24 and the ROE is not attractive at 7.2%.  If we assume that its normalized earnings are 10% of book value then on that basis the P/E is attractive 16 and the assumed ROE of 10% is reasonably good.  There is no dividend.  Revenues per share have grown at an average of 8.5% in the past five calendar years. Operating earnings have grown at an average of 11% per year over the past five years. These value ratios are hard to interpret but would likely support  a Buy rating.
TAXATION: Nothing unusual for a U.S. stock  
SUPPORTING RESEARCH AND ANALYSIS  
Symbol and Exchange: BRKB, New York
Currency: $ U.S.
Contact: 0
Web-site: www.berkshirehathaway.com
INCOME AND PRICE / EARNINGS RATIO ANALYSIS  
Latest four quarters annual sales $ millions: $364,482.0
Latest four quarters annual earnings $ millions: $96,223.0
P/E ratio based on latest four quarters earnings: 9.5
Latest four quarters annual earnings, adjusted, $ millions: $37,350.0
BASIS OR SOURCE OF ADJUSTED EARNINGS: Adjusted earnings uses operating earnings provided by management which (conservatively) excludes gains/losses on investments including derivatives. But it does not adjust for the lumpy results in the insurance business. Earnings may be under-stated due to amortization of certain goodwill-like intangibles and, in most years, continuing very  large deferrals of income taxes.
Quality of Earnings Measurement and Persistence: GAAP earnings have been under-stated because for an investment like Coke shares, in which it has a huge investment, its earnings reflect only dividends received and not its share of Coke’s earnings. Its adjusted earnings are understated for the same reason and because adjusted earnings remove all gains or losses on investments sold and yet in the vast majority of years these are positive. Also earnings reflect about a 25% income tax rate when on a current tax payable they are much lower due to deferred taxes. Earnings are also volatile due to the volatile nature of insurance operations. While its GAAP and adjusted earnings ROEs seem to be low, its increase in book value per share has averaged about 11% per year in the ten years ending 2023. Overall, the earnings quality and persistence is very good although volatile.
P/E ratio based on latest four quarters earnings, adjusted 24.4
Latest fiscal year annual earnings: $96,223.0
P/E ratio based on latest fiscal year earnings: 9.5
Fiscal earnings adjusted: $37,350.0
P/E ratio for fiscal earnings adjusted: 24.4
Latest four quarters profit as percent of sales 10.2%
Dividend Yield: 0.0%
Price / Sales Ratio 2.50
BALANCE SHEET ITEMS  
Price to (diluted) book value ratio: 1.62
Balance Sheet: (Updated for Q4, 2023) 16% of the assets are in cash and cash equivalent including mostly  treasury Bills. 33% of assets are in equity investments and an additional 3% is in partly controlled equities including part ownership of Kraft Heinz, Occidental Petroleum and Pilot (Flying-J) Travel Centers, and an additional 2% is in fixed income. So a total of 54% in cash and investments.  2% is in mortgage loans receivable. Purchased goodwill and equivalent intangibles represents 11% of assets. 20% of assets are in the property plant and equipment of its various businesses with the vast majority of that being in its utility and railroad businesses.  The remaining 13% is in receivables, inventory and other. These assets are financed 52% by equity, 19% by insurance liabilities. 12% by debt, about 9% by deferred income tax, the remaining 8% is mostly accounts payable and pre-paid amounts. This is an extremely strong balance sheet. The use of debt and insurance float liabilities is low compared to most “insurance” companies.
Quality of Net Assets and Book Value Measurement: With the shares recently trading at a modest 1.59 times book value, it is worthwhile to consider if the book value of the equity might be over- or under-stated. Under accounting rules the book value should be conservatively stated. However, many assets are marked to market. Insurance liabilities are intended to be conservatively stated but are subject to uncertainty. In Berkshire’s case these liabilities have provided investment funds at a cost of less than zero most years (there is an underwriting profit rather than the usual underwriting loss) and these funds regenerate annually. The many 100% owned operating companies likely have substantial additional goodwill value which is not recognised (except for the more recent acquisitions where the goodwill is already on the books due to the recent purchase). Overall the book value of assets is likely under-stated. Warren Buffett has indicated a few years ago that intrinsic value is significantly higher than 120% of book value. Buffett has indicated that the insurance liabilities of Berkshire (but not other insurance companies) can be considered to be  like equity since it is a growing source of money for investment that has been obtained at a negative “interest” cost due to the underwriting profits. See page 4 of the 2017 annual letter where he said the insurance investments could be considered an unencumbered source of value to investors if underwriting profits remain on average positive in the future, which he expected they would. We interpret that to mean that the “liability” of the float is a very soft liability, a less than zero cost liability and so somewhat equity like. Deferred income taxes are a liability that incurs no interest costs and also regenerates or grows most years and is therefore also a rather soft liability. However the deferred income tax liability would increase if income tax rates were increased. Overall, at 1.59 times book value it’s not clear if the  shares are cheap on that basis.
Number of Diluted common shares in millions:                                   2,163.9
Controlling Shareholder: As of the Spring of 2020, Warren Buffett, who is chairman and CEO, owned 16.0% of the company and 31% of the voting power and is the controlling shareholder.
Market Equity Capitalization (Value) $ millions: $906,674.1
Percentage of assets supported by common equity: (remainder is debt or other liabilities) 52.5%
Interest-bearing debt as a percentage of common equity 23%
Current assets / current liabilities: not provided
Liquidity and capital structure: Berkshire has a rare AA credit rating and is self described as having Gibraltar-like financial strength.
RETURN ON EQUITY AND ON MARKET VALUE  
Latest four quarters adjusted (if applicable) net income return on average equity: 7.2%
Latest fiscal year adjusted (if applicable) net income return on average equity: 7.2%
Adjusted (if applicable) latest four quarters return on market capitalization: 4.1%
GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE  
5 years compounded growth in sales/share 10.8%
Volatility of sales growth per share:  Strong growth
5 Years compounded growth in earnings/share 93.5%
5 years compounded growth in adjusted earnings per share 11.3%
Volatility of earnings growth:  Volatile growth
Projected current year earnings $millions: not available
Management projected price to earnings ratio: not available
Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in (adjusted)  earnings per share? Yes, although earnings are lumpy
Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: 7.2%
More conservative estimate of compounded growth in earnings per share over the forecast period: 6.0%
More optimistic estimate of compounded growth in earnings per share over the forecast period: 10.0%
OUTLOOK AND AMBITIONS FOR BUSINESS: Berkshire is likely positioned for continued modest growth in most of its operations although those depending on discretionary spending may be weaker in 2024.  It’s stock portfolio will be vulnerable if stock markets pull back materially from the recent sharply higher levels. The ultimate death of Buffett would likely lead to lower investment results and to decreased acquisition opportunities. Berkshire has been for years the acquirer of choice for large family-owned private corporations that wish to sell. That may no longer be the case with Buffett’s advanced age.
LONG TERM PREDICTABILITY: Berkshire is probably relatively predictable in the long term although any individual year can suffer from large insurance losses and market value losses on its investment portfolio.
Estimated present value per share: Note that we have calculated adjusted earnings in an unusual and hopefully conservative way, that is by assuming its normalized earnings level is 10% of book value based on its achievement of an average total increase in book value per share of about 12% per year on average in the past ten years. This brings its average gains on investments into the picture.  On that basis, We calculate  $322 if such adjusted earnings per share grow for 5 years at the more conservative rate of 7% and the shares can then be sold at a P/E of 13 and $476 if such adjusted earnings per share grow at the more optimistic rate of 10% for 5 years and the shares can then be sold at a P/E of 16. Both estimates use a 7.0% required rate of return.
ADDITIONAL COMMENTS  
INDUSTRY ATTRACTIVENESS: (These comments reflect the industry and the company’s particular incumbent position within that industry segment.) As a huge conglomerate it is difficult to assess the industry attractiveness. Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition based on the following four tests. No barriers to entry (Pass, Buffett looks to buy companies with barriers to entry). No issues with powerful suppliers (pass). No issues with dependence on powerful customers (pass – most of the Berkshire business serve a huge consumer base), No potential for substitute products (Pass, Buffett looks for companies that sell essential products) No tendency to compete ruinously on price (Pass, Buffett looks for companies that do not compete heavily on price).
COMPETITIVE ADVANTAGE: When it comes to large acquisitions of attractive privately owned companies, Berkshire/Buffett is clearly a purchaser of choice. Any seller of a large private company knows that with Berkshire, his sold company would be in excellent hands. When it comes to large reinsurance transactions, Berkshire/Buffett is again very much a partner of choice. During the financial crisis we saw “bond insurers” fail. Customers of Berkshire would be confident that it would not fail to deliver on its obligations. Many of Berkshires operating companies have competitive advantages in terms of brand names and lower operating costs. Berkshire’s willingness to purchase either stocks or businesses doubles its investment horizons and is an advantage.
COMPETITIVE POSITION: It is very difficult to comment on its competitive position because it has so many operating companies. However, Buffett’s strategy has been to invest in companies with competitive advantages. GEICO has  the cost advantage of being a direct seller (no brokers). General RE and all of the insurance operations have the advantage of Berkshire’s excellent financial strength and trust. The utilities are not high profit but are generally regulated monopolies, the railroad may be the only choice for many of its customers. Many of its retail and manufacturing operations have low-cost advantages and strong brand equity, but some are not performing well and have no great advantages. The equity investments are chosen from companies with competitive advantages.
RECENT EVENTS: This is a vast company with far too many recent events to list. However some of the notable events are: Berkshire has been buying back shares steadily since early 2020 and the share count is now down by about 12%. GEICO has cut back substantially on advertising leading to a decline in policies in force but profits were very strong. One of its utilities is being sued for a material amount after being accused of starting wild fires through its negligence. sales in its more discretionary divisions have been weak with Furniture sales down 9%, Recreational vehicle (trailers) at its Forest River division were down a huge 26% in 2023.
ACCOUNTING AND DISCLOSURE ISSUES: Warren Buffett and Berkshire Hathaway are considered to be the “Gold Standard” regarding accounting and disclosure. Disclosure is very good. Nevertheless, this is a complex company consisting of about 200 operating companies. Its large portfolio of common shares causes its operating earnings to be understated. This is because for a company like Coke, of which it owns about 10%, its operating earnings reflect only the dividend received from Coke and not its share of Coke’s earnings and not any change in the market value of this investment. (Changes in market value since 2018 are included in GAAP earnings but are not part of operating earnings). The lumpy nature of gains and losses on investments makes earnings difficult to interpret. Even the revenue growth gets distorted because (realised) gains on investments are required to be treated as revenues. We would prefer it  would release a Q4 report as well as a year-end report. There is a significant amount of amortization of intangibles (over one billion annually) that we (and Buffett) do not consider to be a real expense because the value of those intangibles (trademarks an customer relationships purchased) is likely increasing.
COMMON SHARE STRUCTURE USED: The B shares are equivalent to 1/1500th of an A share except that they get only 1/10,000th of a vote.
MANAGEMENT QUALITY: Warren Buffett is widely acknowledged as one of the most able and trustworthy executives ever. He also indicates that he has a superb stable of managers for the operating companies and that successors for both his operating management (This will be Greg Abel) and his investment duties are in the wings when needed.
Capital Allocation Skills: Berkshire’s capital allocation skills under Buffett’s leadership have been second to none. Berkshire has both a superior track record in capital allocation and superior opportunities compared to most companies. With a vast stable of companies and with a penchant for acquisitions of companies and/or marketable securities it is able to direct capital to the most attractive opportunities.
EXECUTIVE COMPENSATION: (Updated Spring 2024) Warren Buffett take only $100,000 each in salary. The CFO was paid $3.3 million in 2021 (but presumably owns a significant number of shares). The two top operating officers are now  paid $20 million each. No stock options or any other material compensation is provided. Given the size of this company, executive compensation is not at all an issue.
BOARD OF DIRECTORS: 14 directors , most or all with substantial ownership in the company. Buffett considers these people to possess excellent business judgment and to be people who will look after shareholders interests. They would not likely be considered very independent, given long-standing friendship with Buffett in most cases. However, Buffett has argued that most are independent by virtue of their wealth. He would expect them to be in a position to provide critical advice when needed.
Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed  analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry.
DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice.
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