Berkshire Hathaway: Stock of the Week

Key Takeaways on Berkshire Hathaway Stock

• Berkshire Hathaway stock offers one of the better risk-adjusted return profiles in financial-services
• The departure of Warren Buffett and Charles Munger will have less of an impact on future operating results than many investors believe
• Berkshire Hathaway stock is trading at a discount to our fair value estimate

Ruth Saldanha: Earlier this month, wide-moat-rated Berkshire Hathaway (BRK.A BRK.B) agreed to acquire narrow-moat Dominion Energy's 50% stake in Cove Point, a U.S.-based export, import, and storage facility for liquefied natural gas.

Morningstar analyst Greg Warren sees the energy and utilities sectors as being one of Berkshire's prime areas of focus for investment, from stock purchases to acquisitions. However, he has bemoaned the lack of acquisition activity over much of the past decade given the premium valuations ascribed to many of the types of firms the insurer and its subsidiaries would like to acquire, especially in the utilities sector. In his view, Berkshire has generally pursued deals and investments that could generate 10%-12% annual returns, but has been willing to settle for less in the utilities space.

What About When Warren Buffett Leaves?

With this latest acquisition, Warren thinks Berkshire Hathaway Energy’s price for Cove Point seems a bit on the richer side, especially considering where natural gas prices are right now. However, he continues to believe that Berkshire, owing to its diversification and its lower overall risk profile, offers one of the better risk-adjusted return profiles in the financial-services sector.

Warren also believes that it will take some time before the firm finally succumbs to the impediments created by the sheer size and scale of its operations, and that the ultimate departure of Warren Buffett and Charles Munger will have less of an impact on future operating results than many investors believe. Right now, Berkshire Hathaway stock is trading at a discount to Warren’s fair value estimate.

For Morningstar, I’m Ruth Saldanha

 Berkshire Hathaway Stock Bulls Say

• Book value per share, which is a good proxy for measuring changes in Berkshire's intrinsic value, increased at an estimated 18.3% CAGR during 1965-2022, compared with a 9.9% annualized return for the S&P 500 TR Index.
• Berkshire's stock performance has generally been solid, increasing at a 9.5% (13.3%) CAGR during 2018-22 (2013-22), compared with a 9.4% (12.6%) average annual return for the S&P 500 TR Index.
• At the end of 2022, Berkshire had approximately $164 billion in insurance float. The cost of its float has been negative for much of the past two decades.

 Berkshire Hathaway Stock Bears Say

• Given its size, Berkshire's biggest long-term hurdle will be its ability to consistently find deals that not only add value but are large enough to be meaningful.
• Another big issue facing the firm is the longevity of chair and CEO Warren Buffett (who turns 93 at the end of August 2023) and managing partner Charlie Munger (who turned 99 in January 2023).
• 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 U.S. markets.