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Berkshire (BRK.B) Rises 24% YTD: What Should Investors Do Now?
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Shares of Berkshire Hathaway Inc. (BRK.B - Free Report) have gained 23.8% year to date, outperforming the industry’s 22.6% growth, the Finance sector’s rise of 18.2% and the S&P 500 composite’s rise of 19.3%.
Berkshire Hathaway is a conglomerate with more than 90 subsidiaries engaged in diverse business activities. Per Warren Buffett, its “strength comes from its Niagara of diverse earnings delivered after interest costs, taxes and substantial charges for depreciation and amortization.” Its property and casualty insurance business, one of the largest property and casualty insurance companies, generates the maximum return on equity.
Berkshire Outperforms Industry, Sector & S&P YTD
Image Source: Zacks Investment Research
BRK.B Trading Above 50-Day Moving Average
Berkshire shares are trading well above the 50-day moving average, indicating a bullish trend. Shares are trading near the high end of its 52-week range.
BRK.B Price Movement vs 50 Day Moving Average
Image Source: Zacks Investment Research
What’s Working in Favor of Berkshire?
Among its diverse business activities, the most important is its insurance operations, which contribute around one-fourth of Berkshire’s top line. The insurance business is poised for long-term growth, banking on increased exposure, prudent underwriting standards and better pricing.
Continued insurance business growth fuels an increase in float, drives earnings and generates maximum return on equity. Notably, Berkshire generated underwriting profit in 18 of the last 20 years. However, when catastrophes occur, like other insurers, Berkshire’s underwriting profitability is affected, resulting in a deterioration of its combined ratio.
In a favorable interest rate environment, it derives higher interest income from short-term investments.
Berkshire Hathaway’s economically sensitive non-insurance businesses — Utilities and Energy, and Manufacturing, Service and Retail — are performing well. The Utilities and Energy business has grown with increased revenue contributions from Burlington Northern SantaFe Corp. However, unfavorable changes in the business mix and lower fuel surcharge revenues are areas of concern. Nonetheless, lower fuel costs are expected to limit any downside. Demand for utilities is expected to be strong in the future and drive earnings growth.
Increasing demand for goods and services, given an improved economic backdrop, should benefit its Manufacturing, Service and Retail operations.
Collectively, these have driven revenues higher and facilitated margin expansion over the past many years.
With a huge cash hoard, we believe Berkshire Hathaway will successfully continue its acquisition spree, acquiring entities that have consistent earning power and generate impressive returns on equity. While big acquisitions open up more business opportunities for the company, bolt-on acquisitions enhance the earnings of the existing business.
Warren Buffett has always eyed acquisitions or made investments in properties that are undervalued or have potential for growth. Investments in Coca-Cola (KO - Free Report) and American Express (AXP - Free Report) show the investment acumen of Warren Buffet and Charlie Munger. Berkshire Hathaway also has stakes in behemoths like Apple, Bank of America, Chevron and Occidental Petroleum.
Also, Berkshire Hathaway's liquidity helps it repurchase shares regularly. It bought back shares worth $2.6 billion in the first quarter of 2024.
Shares Overpriced
The stock is overvalued compared to its industry. It is currently trading at a price-to-book multiple of 1.65, higher than the industry average of 1.56. However, we believe that given Berkshire Hathaway's dominant market presence, diverse business activities, and, above all, the name Warren Buffet, a premium valuation is quite justified for this Zacks Rank #3 (Hold) stock.
Stock’s Valuation
Image Source: Zacks Investment Research
Berkshire’s Return on Capital
Return on equity in the trailing 12 months was 7.3%, underperforming the industry average of 7.8%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders. It's noteworthy that though BRK.B’s ROE is lagging behind the industry average, the company successfully improved the same even during the pandemic.
Image Source: Zacks Investment Research
The same holds true for return on invested capital (ROIC), which has increased every year since 2020. This reflects BRK.B’s efficiency in utilizing funds to generate income. However, ROIC in the trailing 12 months was 5.7%, lower than the industry average of 5.9%.
Image Source: Zacks Investment Research
Mixed Analyst Sentiment
One of the two analysts covering the stock has raised estimates for 2024 and 2025 over the past 30 days, while one has lowered the same for 2025. Thus, the Zacks Consensus Estimate for 2024 implies a 0.4% year-over-year increase, while the same for 2025 suggests a 0.6% decrease.
Image Source: Zacks Investment Research
Conclusion
In a letter to shareholders, Warren Buffett stated that Berkshire Hathaway has the largest GAAP net worth recorded by any American business and it occupies about 6% of the total GAAP net worth of S&P 500 companies.
Holding shares of Berkshire Hathaway renders dynamism to a shareholder's portfolio. It gives a feel of investing in mutual funds apart from rewarding investors with higher returns at the same time. But above all, the company has Warren Buffett at its helm, who has been creating tremendous value for shareholders over nearly six decades with his unique skills.
Thus, investors who already hold Berkshire shares should continue to retain the stock in their portfolio.
However, given its premium valuation, new investors can wait for a better entry point.
Image: Shutterstock
Berkshire (BRK.B) Rises 24% YTD: What Should Investors Do Now?
Shares of Berkshire Hathaway Inc. (BRK.B - Free Report) have gained 23.8% year to date, outperforming the industry’s 22.6% growth, the Finance sector’s rise of 18.2% and the S&P 500 composite’s rise of 19.3%.
Berkshire Hathaway is a conglomerate with more than 90 subsidiaries engaged in diverse business activities. Per Warren Buffett, its “strength comes from its Niagara of diverse earnings delivered after interest costs, taxes and substantial charges for depreciation and amortization.” Its property and casualty insurance business, one of the largest property and casualty insurance companies, generates the maximum return on equity.
Berkshire Outperforms Industry, Sector & S&P YTD
Image Source: Zacks Investment Research
BRK.B Trading Above 50-Day Moving Average
Berkshire shares are trading well above the 50-day moving average, indicating a bullish trend. Shares are trading near the high end of its 52-week range.
BRK.B Price Movement vs 50 Day Moving Average
Image Source: Zacks Investment Research
What’s Working in Favor of Berkshire?
Among its diverse business activities, the most important is its insurance operations, which contribute around one-fourth of Berkshire’s top line. The insurance business is poised for long-term growth, banking on increased exposure, prudent underwriting standards and better pricing.
Continued insurance business growth fuels an increase in float, drives earnings and generates maximum return on equity. Notably, Berkshire generated underwriting profit in 18 of the last 20 years. However, when catastrophes occur, like other insurers, Berkshire’s underwriting profitability is affected, resulting in a deterioration of its combined ratio.
In a favorable interest rate environment, it derives higher interest income from short-term investments.
Berkshire Hathaway’s economically sensitive non-insurance businesses — Utilities and Energy, and Manufacturing, Service and Retail — are performing well. The Utilities and Energy business has grown with increased revenue contributions from Burlington Northern SantaFe Corp. However, unfavorable changes in the business mix and lower fuel surcharge revenues are areas of concern. Nonetheless, lower fuel costs are expected to limit any downside. Demand for utilities is expected to be strong in the future and drive earnings growth.
Increasing demand for goods and services, given an improved economic backdrop, should benefit its Manufacturing, Service and Retail operations.
Collectively, these have driven revenues higher and facilitated margin expansion over the past many years.
With a huge cash hoard, we believe Berkshire Hathaway will successfully continue its acquisition spree, acquiring entities that have consistent earning power and generate impressive returns on equity. While big acquisitions open up more business opportunities for the company, bolt-on acquisitions enhance the earnings of the existing business.
Warren Buffett has always eyed acquisitions or made investments in properties that are undervalued or have potential for growth. Investments in Coca-Cola (KO - Free Report) and American Express (AXP - Free Report) show the investment acumen of Warren Buffet and Charlie Munger. Berkshire Hathaway also has stakes in behemoths like Apple, Bank of America, Chevron and Occidental Petroleum.
Also, Berkshire Hathaway's liquidity helps it repurchase shares regularly. It bought back shares worth $2.6 billion in the first quarter of 2024.
Shares Overpriced
The stock is overvalued compared to its industry. It is currently trading at a price-to-book multiple of 1.65, higher than the industry average of 1.56. However, we believe that given Berkshire Hathaway's dominant market presence, diverse business activities, and, above all, the name Warren Buffet, a premium valuation is quite justified for this Zacks Rank #3 (Hold) stock.
Stock’s Valuation
Image Source: Zacks Investment Research
Berkshire’s Return on Capital
Return on equity in the trailing 12 months was 7.3%, underperforming the industry average of 7.8%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders. It's noteworthy that though BRK.B’s ROE is lagging behind the industry average, the company successfully improved the same even during the pandemic.
Image Source: Zacks Investment Research
The same holds true for return on invested capital (ROIC), which has increased every year since 2020. This reflects BRK.B’s efficiency in utilizing funds to generate income. However, ROIC in the trailing 12 months was 5.7%, lower than the industry average of 5.9%.
Image Source: Zacks Investment Research
Mixed Analyst Sentiment
One of the two analysts covering the stock has raised estimates for 2024 and 2025 over the past 30 days, while one has lowered the same for 2025. Thus, the Zacks Consensus Estimate for 2024 implies a 0.4% year-over-year increase, while the same for 2025 suggests a 0.6% decrease.
Image Source: Zacks Investment Research
Conclusion
In a letter to shareholders, Warren Buffett stated that Berkshire Hathaway has the largest GAAP net worth recorded by any American business and it occupies about 6% of the total GAAP net worth of S&P 500 companies.
Holding shares of Berkshire Hathaway renders dynamism to a shareholder's portfolio. It gives a feel of investing in mutual funds apart from rewarding investors with higher returns at the same time. But above all, the company has Warren Buffett at its helm, who has been creating tremendous value for shareholders over nearly six decades with his unique skills.
Thus, investors who already hold Berkshire shares should continue to retain the stock in their portfolio.
However, given its premium valuation, new investors can wait for a better entry point.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.