This company, helmed by legendary investor Warren Buffett, is a conglomerate that owns and invests in dozens of other businesses. The company just held its annual meeting, where Buffett lamented his decision early on, not to invest in Google and Amazon, revealed that he had dumped one-third of his IBM shares and maligned United Airlines’ behavior, but discussed why he still likes the stock.
Berkshire Hathaway (BRK-B)
From Cabot Benjamin Graham Value Investor
Berkshire Hathaway (BRKB: Max Buy Price 165.21) is a complex holding company with renowned value investor Warren Buffett at the helm as chairman and chief executive officer.
Berkshire directly owns 100% of 62 businesses. In addition, several insurance companies owned by Berkshire hold parts of 52 businesses; these businesses were attained primarily through purchases of marketable common stocks.
Any excess capital within Berkshire’s insurance companies is used to buy stocks. Berkshire’s businesses and stock investments make up a well-diversified array of investments, with a significant over-weighting in the insurance sector.
Some of the more-recognizable companies which Berkshire directly owns include Benjamin Moore & Co., Burlington Northern Santa Fe, Clayton Homes, Dairy Queen, Duracell, Fruit of the Loom, GEICO, General Re, H.H. Brown Shoe Group, Helzberg Diamonds, Johns Manville, Jordan’s Furniture, Lubrizol, NetJets, Precision Castparts, See’s Candies, Shaw Industries and The Pampered Chef. All businesses are managed on a decentralized basis with minimal involvement by Berkshire headquarters.
The 10 largest common stock holdings held by Berkshire’s insurance subsidiaries are Kraft Heinz, Wells Fargo, Apple, Coca-Cola, IBM, American Express, Phillips 66, U.S. Bancorp, Charter Communications and Moody’s. Stock holdings are managed by a team of investment professionals at Berkshire who use a buy low/hold forever approach.
Earnings per share are expected to be flat for the 2017 year due to lower earnings from the directly-owned reinsurance companies (higher catastrophe claims) and BNSF railroad (lower coal shipments). However, earnings are a poor measure of Berkshire Hathaway’s progress because of Warren Buffett’s long-term investment approach. Book value is a better yardstick to measure the company’s growth, although according to Mr. Buffett, book value “far understates” Berkshire’s intrinsic value because many of Berkshire’s directly-owned businesses are worth much more than their carrying value. Stated book value is currently $117.40 per share, an increase of 9% from 2015. Book value is expected to rise by a similar amount in 2017 and beyond.
BRKB shares will likely rise faster than the S&P 500 Index in 2017 because of the heavy weighting in financial assets which will benefit from higher interest rates. In addition, the income tax rate for Berkshire is 30%, which could drop noticeably if tax reform is enacted.
At 1.40 times conservatively-stated book value, BRKB shares are undervalued. The company has built up a cash hoard of $71 billion, which provides flexibility to take advantage of investment opportunities quickly. I expect BRKB to climb 18% to reach my Min Sell Price of 194.24 within one year. The recent dip in the stock price presents an excellent buying opportunity.
Berkshire will release its first-quarter results on Friday, May 5, and hold its annual meeting with 40,000 Warren Buffett fans in attendance on May 6. Buy at 165.21 or below.
WSBDS Editor’s Note: A decline in investment gains sent Berkshire’s first-quarter profit down by 27%, with net income coming in at $4.06 billion, or $2,469 per Class A share. Buffett noted that while quarterly investment and derivative gains are often meaningless, he’s required to report them as per accounting rules.
On a special note, I eagerly watched clips from Berkshire’s annual meeting, where both Warren Buffett and Charlie Munger held shareholders spellbound. I was fortunate to attend one of the annual meetings a few years ago, and it was an incredible treat to listen to Buffett’s investment philosophy and his answers to shareholders’ questions, in person. If you’ve not had a chance to attend, I would encourage you to go, as both Buffett and Munger are not getting any younger.
J. Royden Ward, Cabot Benjamin Graham Value Investor, www.cabotwealth.com, 978-745-5532, May 4, 2017