On Friday, Berkshire Hathaway (BRK/B) reported Q3 earning $1.40 versus consensus of $1.56. The gap was driven by hurricane losses of $3b or only 1% of book value which is impressive given the severity of losses for the season. Book value grew by 8.9% y/y, with shareholder equity totaling $311.8m and BRK/B holds over $65Bn of cash. BRK/B’s collection of high quality businesses continue to generate significant cash flow. Price target raised to $200.
Current Price: $188 Price Target: $200 (raised from $157)
Position Size: 3.3% TTM Performance: 27.3%
Thesis Intact. Key takeaways from the quarter:
a. BV +8.9% y/y and ROE 6.5%
b. Valuation is near upper end of history at 1.5x BV, but price to book has become less meaningful as insurance is only to 26% of earnings. The price/book metric for valuation is less relevant for rest of firm – manufacturing, railroads and utilities. Book values of physical assets on the balance sheet are held at cost and depreciated (not so for land). Over time, book value drifts from intrinsic value, especially for long lived assets – a good example are railroad assets.
c. Sum of the parts valuation is supportive of current price and suggests more upside, especially if excess cash is invested.
Insurance FY1 P/E BRK 2018E Earnings Valuation Per share
CB 14.55
PGR 18.31
TRV 14.54
Average 15.80 $ 4,785 $ 75,602 $ 30.65
Manufacturing
DOV 22.05
GD 20.05
HON 19.42
Average 20.51 $ 6,912 $ 141,758 $ 57.47
Railroads
UNP 18.75
CSX 20.58
Average 19.66 $ 4,719 $ 92,799 $ 37.62
Utilities
D 20.35
AEE 22.32
SO 16.54
Average 19.74 $ 2,179 $ 43,004 $ 17.44
Investments
15.00 $ 10,749 $ 161,235 $ 65.37
Total $ 29,344 $ 514,398 $ 208.55
d. Highlights from Q3
i. Insurance group had $3b in hurricane losses. Without losses combined ratio improved to 95% from 96%. Insurance float increased to an all-time high of $113b.
ii. Premiums at GEICO increased 17% Y/Y. General Re’s premiums grew 17% y/y.
iii. Burlington Northern earnings increased 5% y/y as volumes increase 6% and better margins
iv. Berkshire Hathaway Energy increased earnings 1% y/y
The Thesis on BRKB:
• Berkshire Hathaway has assembled an enviable portfolio of companies and investments that can compound book value per share in the mid-upper single digits.
• Negative cost of float, strong rating and large cash position put Berkshire in great position to deploy capital.
• Berkshire is trading at an attractive valuation