Berkshire Hathaway stock is familiar to almost every investor. She belongs to the company of Warren Buffett, who is considered one of the most successful investors of all time. Under his leadership, Berkshire has risen to become one of the most valuable companies in the world and the now 90-year-old value investor has become one of the richest people in the world. Because of this extraordinary success, Berkshire Hathaway shares are very popular with private and institutional investors, although no dividend is paid. Buyers of the stock are primarily looking to benefit from Warren Buffett’s expertise. In the past, the stock has also offered good diversification because Berkshire, as a holding company, invests in a variety of companies. In this stock analysis, you can find out whether the Berkshire Hathaway share in your portfolio or Warren Buffett is now out of the woods.
The business model: This is how Berkshire Hathaway makes money
Berkshire is a so-called “Holding”. A holding company does not conduct its own business, but only manages the companies it owns. So Berkshire Hathaway does not sell its own products or services, but makes a profit by investing in other companies. All or part of the profits from the investments go to Berkshire. Berkshire’s portfolio includes dozens of holdings and is therefore broadly diversified. Warren Buffett invests in both private and publicly traded companies. While the acquisition of publicly traded companies by buying shares is in principle open to everyone, this is not the case with private companies. Via the Berkshire Hathaway share, however, you can also invest indirectly in the shares handpicked by Warren Buffet or his management.
|Berkshire Hathaway stock|
|Market capitalization||€ 444.4 billion|
|Stability cash flow||0.94 of max. 1.0|
Berkshire Hathaway also owns some very large companies entirely. One example is the BNSF Railway Company as a direct competitor of Union Pacific. The BSNF is wholly owned by Berkshire.
Warren Buffett is what is known as a “value investor.”“. With this investment strategy, a company is bought below its fair value. The difficulty here is in estimating its fair value. If you estimate the value incorrectly, you may pay too much for the shares or participation. To maximize profits, Buffett tries to buy a stock at the largest possible discount at its fair value. Later, when the market realizes the company’s true value and the stock price rises, Warren can sell the stock for a handsome profit if necessary. Especially when an alternative investment seems more lucrative. Warren needs patience for this strategy, but in many cases he can collect dividends during the waiting period.
The Berkshire Hathaway portfolio
Warren Buffett’s investments tend to be long-term, and his preferred holding period, he says, is “forever“. In the long run, however, the only way to achieve high returns is to buy stocks in high quality companies that grow their profits over the years.
Warren Buffett relies on various industries. Shares in banks and financial service providers such as Bank of America and Visa are very common in the portfolio. Berkshire also prefers to invest in consumer goods manufacturers like Procter & Gamble. But Berkshire has also invested in technology companies such as Apple and Amazon. There are also other companies from other industries, which makes the portfolio seem broadly diversified.
Now let’s take a look at the portfolio From Berkshire Hathaway and its major holdings in public companies:
Analogous to Buffett, the stock finder also tracks down quality companies with rising profits. How well Buffett’s largest investments perform in the stock finder can be seen here by means of a ranking that reflects the long-term growth of profit, cash flow and sales of the companies:
Not all stocks do well in the ranking. It is noteworthy that stocks with a low ranking such as Kraft Heinz or Wells Fargo have usually performed worse than stocks with a high ranking over the past few years.
The top 3 investments in the Berkshire portfolio
Berkshire Hathaway’s three largest equity holdings are Apple, Coca-Cola and Bank of America, which together account for nearly two-thirds of market capitalization.
The Apple share
|Market capitalization||1,775.3 billion euros|
|Stability dividend||0.90 of max. 1.0|
|Stability cash flow||0.95 of max. 1.0|
Believe it or not, when you buy Berkshire Hathaway stock, you are investing a large part in Apple! Because the market value of Berkshire’s stock portfolio now consists of 44 percent Apple. Warren Buffett owes this to the enormous price increase in recent months. The price of Apple shares has more than doubled since the Corona crash in March of this year. An incredible increase within a few months.
As a result, the market value of Berkshire-owned Apple shares rose to $ 122 billion (approximately 245 million shares * $ 497 per share). Unfortunately, diversification suffers because the Apple investment already accounts for almost half of the stock portfolio. I assume, however, that Buffett does not sell Apple shares. After all, he has Apple as the best company in the world designated.
Bank of America
|Bank of America stock|
|Market capitalization||€ 189.7 billion|
|Stability dividend||-0.6 of max. 1.0|
|Stability gain||-0.4 of max. 1.0|
Warren Buffett is a fan of banking stocks. There are many banks in the Berkshire portfolio, but none of the positions are nearly as large as Bank of America (BofA). The major bank is Berkshire’s second largest investment after Apple and accounts for 11 percent of the total portfolio. The other banks Wells Fargo, Bank of New York Mellon and JP Morgan Chase, on the other hand, are only in the low single-digit percentage range. Although the BofA share has not been able to keep up with Apple’s performance over the past 5 years, it still achieved a return of 58 percent.
|Market capitalization||€ 183.7 billion|
|Stability dividend||1.0 of max. 1.0|
|Stability gain||0.83 of max. 1.0|
Warren Buffett has invested in the beverage giant Coca-Cola since 1987. He not only values the company as an investment, but is also a big fan of the black shower in his private life. He has often said in interviews that he drinks Coca-Cola every day and that there are Coca-Cola bottles on Buffett’s table at the Berkshire general meetings. The Coca-Cola share cannot keep up with the sometimes very strong price increases of tech shares like Apple. For this, Berkshire has been collecting handsome dividends every quarter for several decades.
Warren Buffett’s failures
However, you shouldn’t completely rely on Warren Buffett and assume that all of the Old Master’s purchases will be a success. Because, like all of us, Buffett makes a mishap every now and then.
|Kraft Heinz share|
|Market capitalization||€ 34.6 billion|
|Stability dividend||0.73 of max. 1.0|
|Stability gain||-0.51 of max. 1.0|
A prominent example in recent years is the investment in Kraft-Heinz,. The SEC has interfered with accounting practices. Kraft-Heinz was able to resubmit the problematic documents corrected, but left a negative aftertaste on the stock exchanges. Because Kraft-Heinz slept through the trend towards healthier food and has repeatedly slipped into the red because of the unsuccessful product policy.
Warren Buffett admitted in an interview shortly afterwardsfor paying too much for stocks in the food giant.
The US airlines
Buffett also crash-landed with the American airlines this year. The corona pandemic endangers the business model and threatens the existence of some companies. Berkshire therefore pulled the rip cord in May and sold all of the airline shares in the portfolio.
These examples show the reality of investing. As important as thorough research and common sense are, there are always unpredictable developments such as the flare-up of the corona pandemic. That is why diversification is so important. With Berkshire Hathaway, similar to an index fund (e.g. ETF), you are still significantly better diversified despite the Apple dominance than with the purchase of an ordinary share. In addition, the losers are offset by the gains on the other stocks. Just with the investment in Apple Buffett has the losses from Kraft-Heinz many times over.
Revenue is only included in revenue generated by companies that are majority or wholly owned by Berkshire (page K-71f). The profits and losses from the investment portfolio only play a role when determining profits. It is also not very informative to put the profits from private and stock exchange investments in relation to one another, since the profits from the portfolio vary greatly from year to year and are mostly unrealized book profits.
However, you can get an overview of the sales of the direct majority holdings. As you can see in the graph, Berkshire generates the most sales with insurance companies, closely followed by industrial holdings and the McLane Company, a logistics company. The secret star, however, is the BNSF. Although the BNSF is only responsible for 9 percent of sales, it contributes 25 percent to operating profit (page K-109).
That’s how well Berkshire Hathaway stock is doing
In terms of earnings at Berkshire Hathaway, the sharp fluctuations of the recent past are striking. These result from changed accounting regulationsaccording to which Berkshire Hathaway must report unrealized gains and losses with immediate effect:
As a result, the reported profit (EPS – GAAP) is largely influenced by the general mood on the stock market from quarter to quarter and can no longer be used for fundamental analysis. The following diagram shows the distortions caused by market gains or losses in the “Investments” column.
Instead of the recognized profit (EPS – GAAP), it is better to use the cash flow or the adjusted profit (operating EPS). Both are available in the share finder. The following graphic is from Dynamic Equity Valuation shows the difference between recognized and adjusted profit:
The recognized profit contains informational value in that it shows the short-term performance of the Berkshire Portfolio. But nothing more.
In terms of sales, Berkshire Hathaway has grown well in recent years. In 2015 sales were still at 210 billion USD. By the end of 2019, sales had grown to $ 255 billion. This corresponds to an annual increase of 5 percent. For 2020. According to a UBS analyst, these are badly affected the company Precision Castparts, a manufacturer of aircraft parts, the chemical company Lubrizol, and prefab home maker Clayton Homes. These companies are wholly owned by Berkshire Hathaway. Airlines are also suffering from the pandemic as air traffic has been reduced to a minimum. So Berkshire sold all of the airlines’ shares.
According to forecasts, sales will increase again in the following year and even exceed the level of 2019.
In contrast to sales, the operating margin has not increased in recent years, but has remained largely constant. However, it is below the values of previous years. No improvement is expected in the coming years either.
$ 147 billion in cash
Berkshire is currently sitting on a mountain of money bigger than ever. As of the end of June, it was just under USD 147 billion. This lush financial cushion offers security and enables new investments to be made or expanded as soon as a worthwhile opportunity appears to present itself. Opposed to cash and cash equivalents are liabilities of $ 391 billion. Berkshire has consistently achieved positive free cash flow for the past two decades and does not pay any dividends, which explains the high repayment power in the form of the green area in the graphic below. Over the past twelve months, the repayment power has been nearly $ 24 billion. With such a large surplus, it is not surprising that the cash balance has been growing for years.
Buy Japanese stocks
Berkshire announced just in time for Warren Buffett’s birthday, August 31stthat more than five percent of the shares in five Japanese trading companies have been acquired within the last 12 months: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo. The companies trade in all kinds of goods, such as food, textiles and metals. The total amount of investments is $ 6.25 billion. This corresponds to around 2.4 percent of the portfolio from Berkshire. According to its own information, Berkshire sees these purchases as long-term investments and keeps the option open to increase the stake up to 9.9 percent.
Obviously, Warren Buffett sees great opportunity in these companies. Otherwise he would not have made such a concentrated investment in the five trading companies from Japan, all of which are solid dividend payers, as you can see from a few key figures in the stock finder. By the way, Mitsui and Mitsubishi are eligible for savings plans at Consorsbank.
Is Berkshire Hathaway stock cheap?
Determining the fair value of Berkshire Hathaway stock is a tougher endeavor than any other company. In order to correctly determine the value of Berkshire, one would theoretically have to determine the fair value of all companies in the Berkshire portfolio and add up the participation weighted accordingly. The resulting sum would then be the value of Berkshire Hathaway. In reality, however, this method turns out to be impractical. It is true that the market values of the stocks traded on the stock exchange in the portfolio can be determined with manageable effort. However, there is no exact market value for the private companies, as these are not traded but are wholly owned by Berkshire.
The reported profit also seems to me to be unsuitable for the assessment. Due to the fluctuations, the fair value profit is currently not meaningful. But that has only been the case since 2017. In times of low volatility in the stock markets, however, the fair value profit can be helpful.
Adjusted earnings are, in my opinion, the appropriate metric to use to evaluate Berkshire Hathaway stock. I choose a 10 year evaluation period starting in 2010 to get a long term average. According to this valuation method, the Berkshire Hathaway share is currently roughly fairly valued. According to the forecasts, adjusted profit will decline slightly this year, but will recover immediately in the following year.
Despite the fair valuation, I see Berkshire stock as a good buying opportunity. As a result, the Apple shares in the Berkshire portfolio are now worth significantly more than they were a few months ago. That means you get Berkshire Hathaway shares at a fair price and are also indirectly invested in Apple without having to pay a high premium.
Excursus: The difference between Berkshire Hathaway shares A and B.
Berkshire Hathaway has the A and B shares. The “A” share has never been “divided” (share split) since it was first issued and is now the most expensive share in the world. An A share costs over $ 320,000, making it unattainable for retail investors. That is why there is also the “B” share, which represents a significantly smaller share in the company. 1500 “B” shares correspond to one “A” share, which is why the B share is much cheaper to buy. At this point to those for whom an A share comes into question.
|Berkshire A share||Berkshire B share|
Conclusion: Berkshire Hathaway Stock – A Solid Foundation
The Berkshire Hathaway share shows a slight list due to the high weighting of the Apple share. In addition, the equally high weighting of the financial sector (banks and insurance companies) can be viewed critically, as these are being affected by the Corona crisis. The economic downturn is also hard on holdings such as railroad companies. Nevertheless, Berkshire Hathaway still offers a certain diversification and Warren Buffett takes the stock search off of you by buying the stock. Thanks to the overall solid title of the holdings and an overall impressive track record of the Buffett management, the share is, in my opinion, a solid foundation for long-term portfolios – provided that you can forego dividends.
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