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Key Takeaways for Berkshire Hathaway Stock:
- Berkshire Hathaway is much less of an insurance bet than it was a decade ago, with railroads and energy now making up a major portion of pretax earnings.
- Berkshire’s diversification into noninsurance businesses helps provide a competitive advantage to the portfolio since the insurance industry is not conducive to moats.
- Investors may be hesitant to buy Berkshire stock without Warren Buffett and Charlie Munger, but with the firm’s decentralized structure, we are less concerned than most investors about their eventual departure.
Andrew Willis: What kind of financial services stock gets 40% of pretax earnings from manufacturing, service, and retail? An undervalued one with a better risk-adjusted return profile…
Of the more than 70 noninsurance businesses that make up Berkshire Hathaway (BRK.B) today, we see segments like railroads and energy now making up 20%. Equity strategist Greggory Warren says these two businesses wouldn’t have even shown up as a major contributor a decade ago.
Berkshire Hathaway Builds a Moat
Warren Buffett’s shift into debt-heavy businesses vs. insurance at least gives him a moat, or competitive edge, which isn’t easy to do in insurance. And with a decentralized business model, when he and Charlie Munger hand over the reigns, there should be less of an impact on operating income – and maybe even pay a dividend for once.
For Morningstar, I’m Andrew Willis.
Berkshire Hathaway 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 June 2023, Berkshire had approximately $166 billion in insurance float. The cost of its float has been negative for much of the past two decades.
Berkshire Hathaway 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 turned 93 at the end of August 2023) and managing partner Charlie Munger (who turns 100 in January 2024).
- 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.
