Berkshire Hathaway BRK.B released its third-quarter earnings report on Nov. 2. Here’s Morningstar’s take on Berkshire’s earnings and stock.
Key Morningstar Metrics for Berkshire Hathaway
- Fair Value Estimate: $467.00
- Morningstar Rating: 3 stars
- Economic Moat: Narrow
- Morningstar Uncertainty Rating: Low
What We Thought of Berkshire Hathaway’s Q3 Earnings
- Following five exceptional quarters of underwriting results, during which Berkshire benefited from a hard pricing environment and limited catastrophe losses, the firm’s insurance results faltered. Underwriting profits were negatively affected by accrued losses tied to hurricanes and a reassessment of claims liabilities at Guard insurance companies.
- Berkshire’s BNSF Railway business was less of a drag on results. BNSF has maintained its practice of sacrificing more in pricing than its closest competitor, Union Pacific, to secure solid volume growth. This is not sustainable over the long run, as it can have a mixed effect on profit margins. Unlike BNSF, Union Pacific has pursued precision scheduled railroading to improve its profitability, reporting an operating ratio of 60.3%, relative to 65.1% for BNSF for the September quarter. This was a big improvement from the 68.9% reported in the first half of 2024, 850 basis points worse than Union Pacific’s 60.4%.
- Berkshire’s cash pile increased to a record $305 billion (as the firm still had to pay for $20 billion in unsettled Treasury bill purchases) at the end of the quarter. Going into the firm’s annual meeting, we noted that CEO Warren Buffett somewhat painted Berkshire into a corner in May 2017 (when it held $96.5 billion in cash and cash equivalents) when he said it would be difficult for the firm to defend holding $150 billion or more in cash. For much of the past seven calendar years, Buffett had been able to keep cash balances below that threshold, but that dam broke in the third quarter of 2023.
Fair Value Estimate for Berkshire Hathaway
With its 3-star rating, we believe Berkshire’s stock is fairly valued compared with our long-term fair value estimate of $467 per Class B share, equivalent to 1.44 times our estimate for its book value per share at the end of 2025 and 1.40 times that estimate for 2026. For perspective, over the past five years, the shares have traded at an average of 1.45 times trailing year-end book value per share. We use a 9% cost of equity in our valuation and assume that at the very least Berkshire pays the required 15% corporate alternative minimum tax on adjusted financial statement income. Our fair value estimate is derived using a sum-of-the-parts methodology, valuing Berkshire’s four operating segments separately and then adding them together.
Read more about Berkshire Hathaway’s fair value estimate.
Economic Moat Rating
We’ve historically believed that Berkshire’s moat is more than a sum of its parts, though the parts are fairly moaty. The insurance operations—Geico, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Primary Group—remain important to the overall business. Not only are they expected to account for around 39% of Berkshire’s pretax earnings on average over the next five years (and 52% of our firmwide valuation), but they are overcapitalized, maintaining a larger-than-normal equity investment portfolio for a property-casualty insurer.
They also generate low-cost float—the temporary cash holdings from premiums collected in advance of future claims. This allows Berkshire to generate returns on these funds with assets commensurate with the duration of the business being underwritten. They have tended to come at little to no cost to the firm, given its proclivity for generating underwriting gains over the past several decades.
Read more about Berkshire Hathaway’s economic moat.
Financial Strength
Berkshire likes to keep $30 billion in cash on hand as a backstop for its insurance operations, with each of the firm’s businesses likely requiring at least 2% of annual revenue as operating cash, as well as additional carve-outs set aside for capital expenditures. As a result, by our estimates, Berkshire entered the back half of 2024 with an excess cash balance of around $234 billion—which can be used for acquisitions, investments, share repurchases, or dividends.
While Berkshire is unlikely to pay a dividend as long as Buffett is running the show, the principal insurance subsidiaries could (without prior regulatory approval) pay out as much as $31 billion in ordinary dividends during 2024. We believe the company should be able to easily buy back $6 billion-$7 billion of its common stock quarterly during 2024-28, which is what we’ve forecast for the firm in our initial five-year forecast.
Read more about Berkshire Hathaway’s financial strength.
Risk and Uncertainty
Our Uncertainty Rating for Berkshire is Low. We do not consider any environmental, social, or governance issues material enough to affect our uncertainty rating. This is due to the firm’s lower exposure to some of the main ESG risks inherent to the industries where it competes. However, Berkshire has tended to score lower on governance issues because of the makeup of its board and board committees, the unequal voting structure of its Class A and Class B shares, and its lack of engagement and opaqueness on governance issues.
Berkshire faces the risk that insurance claims exceed loss reserves or that material impairments affect its investment portfolio. Several of the firm’s key businesses—insurance, energy generation and distribution, and rail transport—operate in industries subject to higher degrees of regulatory oversight, which could affect future business combinations and the setting of rates charged to customers. Many of the company’s noninsurance operations are exposed to the cyclicality of the US economy, with results suffering during economic slowdowns.
Read more about Berkshire Hathaway’s risk and uncertainty.
BRK.B 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 1965-2023 compared with a 10.2% annualized return for the S&P 500 TR Index.
- Berkshire’s stock performance has generally been solid, increasing at a 12.1% CAGR during 2019-23 compared with a 15.7% average annual return for the S&P 500 TR Index.
- At the end of June 2024, Berkshire had $169 billion in insurance float. The cost of the firm’s float has been negative for much of the past two decades.
BRK.B Bears Say
- Because of Berkshire’s size, its biggest hurdle continues to be its ability to consistently find deals that not only add value but are also large enough to be meaningful.
- Another big issue facing the firm is the longevity of Buffett, who turned 94 in August 2024, especially following the death of longtime managing partner Charlie Munger in November of 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 US markets.
This article was compiled by Kayleigh Hall.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
