Is Berkshire Hathaway Stock A Buy Now? Not in my opinion! (50% downside)

I have been following Berkshire Hathaway stock for years now and I even bought BRK.B in May of 2020 because it did fit my minimum required return of 10% per year. At current BRK stock price levels, I feel one can expect an investing return of around 6% per year which is still good given the quality of Berkshire’s business, but as the stock price goes up, the investing risks are higher and the returns inevitably lower.

Berkshire stock valuation
Berkshire stock valuation

Berkshire stock valuation – Source: Sven Carlin (free template download)

My current Berkshire valuation requiring a 10% return is $484 billion and if I am more conservative, assume a 5% earnings growth rate and a price earnings ratio of 15, the valuation drops to $322 billion. Comparing the current market capitalization of $655 billion with my conservative case, BRK is overvalued.

Let me explain the key inputs from my valuation table above and compare the results with the current value of Berkshire. Here is the Berkshire stock video discussion for those that prefer listening, the written analysis continues below.

Is Berkshire stock a buy

Berkshire Hathaway Stock Price Overview

Since May of 2020, BRK stock is up almost 70% and that significantly changes the risk and reward of investing in Berkshire.

Berkshire stock price chart
Berkshire stock price chart

Investing risk is a function of price and that is especially true with Berkshire because of its size. Berkshire is a big company, actually the largest company in the US if you look at assets owned ($151 billion of PP&E, second is AT&T with $127 billion). Its size also means that Berkshire as a business changes very little over time and I am certain the business didn’t improve 70% over the last 12 months, despite the good earnings in Q1 2021.

There are 3 factors to focus on when it comes to valuing Berkshire stock and assessing the expected returns from investing in BRK now:

  • Berkshire’s current earnings and growth ahead,
  • Berkshire’s market valuation and
  • The $70 billion available for investments.

Berkshire’s 2021 Earnings

In Q1 2021 BRK reported $7 billion in earnings on what was are really good quarter. If we assume similar numbers for the rest of the year, we get to $28 billion in earnings. On top of BRK’s reported earnings we also have to account for the hidden earnings.

Berkshire stock portfolio – Source: Berkshire Annual Report
Berkshire stock portfolio – Source: Berkshire Annual Report

Berkshire owns $218 billion of stocks. Of that portfolio only the dividends received are reported within the insurance income segment while the earnings the above companies hold and reinvest are not reported within BRK’s business accounts.

For example, Apple’s earnings are $74.3 billion while what is paid out as dividends is $14.6 billion. If Berkshire would own 100% of Apple, all the $74.3 billion would be reflected in the accounting statement but as Berkshire owns just 5.4% of Apple, only 5.4% of the paid-out dividends is included. So, there is 5.4% of the $59.7 billion difference between net income and the dividend that one could argue should be used when it comes to valuing BRK. This is $3.2 billion just from Apple. Add the other companies owned above and we are likely at a number of around $8 billion.

Anyway, $28 billion plus $8 billion of hidden earnings gives me $36 billion in likely earnings for 2021. Then next step to assess is earnings growth ahead.

Berkshire Earnings Growth

In his last conference, even Warren Buffett discussed how there is a buying frenzy going on in the US. Given the exuberant business environment, I estimate future earnings growth to be slower than what has been the case, especially if we use the strong 2021 earnings as starting point. Of course, we don’t know the future but I think 5% long-term earnings growth for Berkshire would be something really good. 8 to 10% per year would be a stretched estimation, especially as things might slow down after the fiscal and monetary stimulus eventually subdues.

Berkshire PE Ratio

Given the $655 billion market capitalization and $36 billion in earnings, the forward PE ratio is 18.19. Compared to the market, BRK stock is still undervalued, but as Buffett disciples we invest on an absolute and not on a relative basis.

Of course, as Buffett would say: “If interest rates stay at zero, stocks are ridiculously cheap”, and consequently higher valuations are justified, but if we use a historical average of around 15 for Berkshire, the current intrinsic value change significantly.

Berkshire Hathaway historical PE ratio – Source: Macrotrends
Berkshire Hathaway historical PE ratio – Source: Macrotrends

Berkshire’s cash pile

When asked about the available cash to invest in the last conference call, Buffett said he could easily deploy $70 billion but he also said that the environment isn’t one where he can act given the high competition for acquiring businesses. Therefore, I don’t know when and what will be the return on the idle cash so it is up to you to see whether you will consider the cash as value to be added to my valuation or not.

Berkshire stock valuation

I have 3 scenarios when valuing Berkshire and the point is not to perfectly value it, that is impossible. The point of the below valuation table is to assess the risk and reward of investing in Berkshire stock so that you can compare it to other investing options you might have.

Berkshire stock valuation
Berkshire stock valuation

Berkshire stock valuation – Source: Sven Carlin (free template download)

In the normal case, the intrinsic value is $468 billion where BRK’s earnings grow 6% per year and the PE ratio 10 years from now is 20, in line with the current market valuation. In the best case, where BRK’s earnings grow 8% per year for then next 10 years and the market gives BRK a PE ratio of 25 in the future, the intrinsic value expecting a 10% return is at $693 billion, which is above the current market capitalization but the assumptions are pretty exuberant.
In my favourite case, the conservative one, I see Berkshire’s intrinsic value to be around $322 billion and for me to see BRK as a strong buy again, it would have to fall to that lever or at $400 billion where it would be if we add the idle cash. Sound’s crazy? Don’t forget BRK was trading at those levels just 13 months ago.

Is Berkshire Stock A Buy Now?

To answer the question whether Berkshire stock is a buy now? That depends on your expected future return and comparative investing options. On my list, Chinese stocks seem much cheaper and with higher future expected returns. Don’t forget you can download the below table for free and play around with the input assumptions.

Berkshire stock comparative valuation
Berkshire stock comparative valuation

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