Berkshire Hathaway (NYSE: BRK.B)
QVI Research Report | Updated Coverage | April 2023
Summary
Berkshire Hathaway may underperform in heated bull markets; however, its common shares tend to outperform during bear and sideways markets.
As expected, Berkshire’s stock outperformed during the 2022 bear market.
In this updated research report, QVI takes note of Berkshire’s enduring legacy, although shareholder yields and valuation multiples point to a premium stock price.
Nevertheless, the company’s low-risk profile in an otherwise volatile market represents a bullish long-term view with a current share price best suited for investors adding on a low-cost basis.
Premium (paying) subscribers: When referencing this research report, access your Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the market close on April 24, 2023, and intended for illustration only.
Berkshire Hathaway Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
Berkshire Hathaway, Inc. (NYSE: BRK.A BRK.B) is a non-dividend-paying large-cap stock in the financials sector’s multi-sector holdings industry. BRK.B was added to the QVI Concentrated Portfolio on February 9, 2022, at $322.38 a share.
Berkshire Hathaway Inc., through its subsidiaries, engages in the insurance, freight rail transportation, and utility businesses worldwide. It provides property, casualty, life, accident, and health insurance and reinsurance; and operates railroad systems in North America. The company also generates, transmits, stores, and distributes electricity from natural gas, coal, wind, solar, hydroelectric, nuclear, and geothermal sources; operates natural gas distribution and storage facilities, interstate pipelines, liquefied natural gas facilities, and compressor and meter stations; and holds interest in coal mining assets.
In addition, the company manufactures boxed chocolates and other confectionery products; specialty chemicals, metal cutting tools, and components for aerospace and power generation applications; flooring products; insulation, roofing, and engineered products; building and engineered components; paints and coatings; and bricks and masonry products, as well as offers manufactured and site-built home construction, and related lending and financial services.
Further, it provides recreational vehicles, apparel and footwear products, jewelry, and custom picture framing products, as well as alkaline batteries; castings, forgings, fasteners/fastener systems, aerostructures, and precision components; and cobalt, nickel, and titanium alloys. Additionally, the company distributes televisions and information; franchises and services quick service restaurants; distributes electronic components; and offers logistics services, grocery and foodservice distribution services, and professional aviation training and shared aircraft ownership programs. It also retails automobiles; furniture, bedding, and accessories; household appliances, electronics, and computers; jewelry, watches, crystal, china, stemware, flatware, gifts, and collectibles; kitchenware; and motorcycle clothing and equipment.
Berkshire Hathaway was acquired by Warren Buffett in 1964, incorporated as a holding company in 1998, and is headquartered in Omaha, Nebraska, USA.
QVI’s value proposition elevator pitch for Berkshire Hathaway:
The Warren Buffett-built conglomerate of diversified businesses wholly owned or through its massive stock portfolio is better than an index fund because of its emphasis on quality and value.
Performance vs. Sector and Market
The chart below illustrates BRK.B’s performance against the Financial Select Sector SPDR® Fund ETF (NYSE: XLF) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) since QVI’s initial coverage of Berkshire Hathaway in February 2022.
For example, BRK.B has outperformed its sector and the broader market in total return during the coverage timeframe.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit Berkshire Hathaway’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the U.S. Securities and Exchange Commission or SEC.
QVI’s value proposition rating for Berkshire Hathaway: Bullish.
BRK.B Total Return vs. XLF and SPY
Berkshire Hathaway Inc (BRK.B) Total Return: +0.60%
Financial Select Sector SPDR ETF (XLF) Total Return: -16.97%
SPDR S&P 500 ETF Trust (SPY) Total Return: -8.09%
Since February 9, 2022 (as of April 24, 2023)BRK.B Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
BRK.B’s earnings yield traded below the targeted floor at -3.18%, as demonstrated in the below chart. Moreover, at +3.03%, BRK.B’s free cash flow yield traded far under the threshold.
As inverse valuation multiples, the earnings and free cash flow yields suggest that BRK.B trades at a premium. QVI will further explore valuation multiples later in this report.
Dividend Yield
Berkshire Hathaway does not offer a dividend.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 3.49% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for BRK.B was -0.05% or -354 bps below the 10-Year Treasury.
Of note, despite its highly profitable stock portfolio over the long term, Generally Accepted Accounting Principles (GAAP) requires Berkshire to mark down short-term losses in the portfolio against the operating units’ income.
QVI’s shareholder yields rating for BRK.B: Neutral.
BRK.B Shareholder Yields
Berkshire Hathaway Inc (BRK.B) Price: $326.05
Berkshire Hathaway Inc (BRK.B) Earnings Yield: -3.18%
Berkshire Hathaway Inc (BRK.B) Free Cash Flow Yield: +3.03%
Berkshire Hathaway Inc (BRK.B) Dividend Yield: 0.00%
One-Year Trailing (as of April 24, 2023)Berkshire Hathaway Fundamentals
QVI Research Report’s fundamentals section measures the performance strength of the company’s senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the below chart, Berkshire Hathaway had negative three-year annualized revenue growth of -10.55%, underperforming the +5.06% median growth of the financials sector.
Farther down the income statement, Berkshire Hathaway had a trailing three-year double-digit net profit margin of 13.84% but underperformed the sector’s median net margin of 26.69%.
Returns on Equity and Invested Capital
Berkshire Hathaway’s management produced a trailing three-year return on equity or ROE of 9.66%, under QVI’s targeted threshold and the sector’s median ROE of 11.07%.
Stock buyback programs often elevate ROE. For example, Berkshire Hathaway’s board of directors authorized stock buybacks of $7.9 billion in 2022, $27.1 billion in 2021, and $24.7 billion in 2020.
At 7.59%, Berkshire Hathaway’s three-year return on invested capital, or ROIC, was below the QVI threshold but outperformed the sector’s median ROIC of 5.01%, indicating that its senior executives are above-average capital allocators. Nonetheless, in its long operating history, Buffett’s Berkshire has proven superior in deploying invested capital.
Nonetheless, Berkshire Hathaway’s ROIC matches its weighted average cost of capital, or WACC, of 7.88%. (Source of WACC: GuruFocus).
Despite negative revenue growth and modest recent returns on equity and invested capital, the company’s double-digit profit margins and long history of robust returns on management suggest that Berkshire Hathaway will continue its legacy of 2nd level performance in Omaha.
QVI’s fundamentals rating for Berkshire Hathaway: Neutral.
BRK.B Returns on Management
Berkshire Hathaway Inc (BRK.B) Revenue (3y Growth): -10.55%
Berkshire Hathaway Inc (BRK.B) Profit Margin (3y Median): +13.84%
Berkshire Hathaway Inc (BRK.B) ROE (3y Median): +9.66%
Berkshire Hathaway Inc (BRK.B) ROIC (3y Median): +7.59%
Three-Year Trailing (as of April 24, 2023)BRK.B Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, and overall investment thesis of Berkshire Hathaway, Inc. (BRK.B), including potential catalysts. So let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have a beneficial long position through direct ownership of BRK.B common shares in our family portfolio. I wrote this post myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.
About the Writer
David J. Waldron is contributing editor of Quality Value Investing and author of the international-selling book, Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. He received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University. David and his wife, Suzan, reside in historic South Central Pennsylvania, USA.
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