On Friday, Berkshire Hathaway (BRK) reported Q2 earning of $2.79, handily beating estimates of $2.24. Results were strong in most businesses highlighted by results from GEICO, Reinsurance and Burlington Northern. Book value grew by 19% y/y. BRK holds over $111b of excess cash and is expected to increase share repurchases. BRK’s collection of high quality businesses continue to generate significant cash flow. Price target raised to $225.
Current Price: $209 Price Target: $225 (raised from $200)
Position Size: 3.3% TTM Performance: 17%
Thesis Intact. Key takeaways from the quarter:
- On 7/18, BRK lifted a restriction on share buybacks which placed a valuation limit of 1.2x book value for purchases. It is expected that BRK could use as much as $20b for share buybacks, potentially increasing EPS by 5%.
- Book value grew +19% y/y and ROE was 13.6%
- Valuation is near upper end of history at 1.43x BV, but price to book has become less meaningful as insurance is only about 15% of valuation. 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. Also, BRK is expected to buy its own shares which reduces book value and raises P/B ratios.
- Sum of the parts valuation is supportive of current price and suggests more upside, especially if excess cash is invested.
| FY1 P/E | BRK 2019E Earnings | Valuation | Per share | ||
| Insurance | |||||
| CB | 11.77 | ||||
| PGR | 14.51 | ||||
| TRV | 11.93 | ||||
| Average | 12.74 | $ 5,881 | $ 74,921 | $ 30.38 | |
| Manufacturing | |||||
| DOV | 16.09 | ||||
| GD | 16.65 | ||||
| HON | 18.44 | ||||
| Average | 17.06 | $ 8,271 | $ 141,114 | $ 57.21 | |
| Railroads | |||||
| UNP | 18.10 | ||||
| CSX | 19.05 | ||||
| Average | 18.58 | $ 5,611 | $ 104,231 | $ 42.26 | |
| Utilities and Energy | |||||
| D | 17.71 | ||||
| AEE | 19.03 | ||||
| SO | 17.20 | ||||
| Average | 17.98 | $ 2,340 | $ 42,067 | $ 17.06 | |
| Investments | |||||
| 14.00 | $ 17,154 | $ 240,156 | $ 97.37 | ||
| Total | $ 39,257 | $ 602,489 | $ 244.27 | ||
- Additional highlights from Q2 2018
i. Strong results from GEICO. Premiums up 13% YoY. Combined ratio improved to 92% versus 98.4 a year ago.
ii. Burlington Northern earnings increased 8% y/y as volumes increase 5.2% and better margins
iii. Manufacturing up 13% YoY
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
$BRK/B.US
John R. Ingram CFA
Managing Director
Asset Allocation and Research
Direct: 617.226.0021
Fax: 617.523.8118
Crestwood Advisors
50 Federal Street, Suite 810
Boston, MA 02110