Berkshire Hathaway (BRK.A/BRK.B) released its first-quarter earnings report on May 4. Here’s Morningstar’s take on Berkshire Hathaway’s earnings and outlook for its stock, as well as the key points from the annual meeting, which was held on the same day.
Berkshire Hathaway Meeting: the Key Takeaways
While wide-moat Berkshire Hathaway’s annual meeting has always been entertaining, it generally has not been a huge source of insight into the firm’s operations. While this year’s event had the feel of past meetings – the setting was the same, the throngs of shareholders were present, and the company’s top managers were onstage taking questions from CNBC’s Becky Quick and shareholders during the live event in Omaha – the absence of Charlie Munger (who passed away in November 2023) hung over the meeting, with his quick wit and biting comments sorely missed by all in attendance.
With CEO Warren Buffett joined by Ajit Jain and Greg Abel onstage, this year’s questions were driven more toward eliciting information about the inner workings and performance of Berkshire’s operating companies, stock investments, ongoing capital allocation, and succession planning. These were interspersed with plenty of questions about the economy, as well as the usual requests for advice from Buffett about one thing or another in the questioner’s life or business.
If we had to sum up our main takeaways from this year’s meeting, from an analyst’s perspective, we would highlight the following: the meeting provided more insight into Geico and BNSF, both of which have had their troubles the past five years or so; climate change and, more specifically, wildfires (including the increased exposure to litigation) are a bigger issue now for Berkshire Hathaway Energy; the insurer remains a net seller of stocks, despite putting a fair amount of capital into a yet-to-be-disclosed financial services stock, with sales of Apple and Paramount highlighted during the meeting.
Buffett also discusses succession planning, pays tribute to Munger, and opines on future capital allocation oversight; and Berkshire increased its share-buying activity in the first quarter (and early part of April) while there were distant rumblings about a dividend.
Key Morningstar Metrics for Berkshire Hathaway
• Fair Value Estimate BRK.A: $640,000.00
• Fair Value Estimate BRK.B: $427.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low
Fair Value Estimate for Berkshire Hathaway Stock
With its 4-star rating, we believe Berkshire Hathaway’s stock is undervalued compared with our long-term fair value estimate of $427 per Class B share, which is equivalent to 1.45 times our estimate of the firm’s book value per share at the end of 2024 and 1.35 times for 2025. For some perspective, during the past five (10) years, the shares have traded at an average of 1.43 (1.44) times the trailing year-end book value per share. We use a 9% cost of equity in our valuation and assume Berkshire pays at the very least the required 15% corporate alternative minimum tax on adjusted financial statement income.
Berkshire Hathaway's Economic Moat Rating
We’ve historically believed that Berkshire’s economic moat is more than the sum of its parts, although the parts are fairly moaty on their own. The insurance operations – Geico, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Primary Group – remain important contributors to the overall business. Not only are they expected to account for around 32% of the firm’s pretax earnings (and 50% of our valuation of it), but they are overcapitalised, maintaining a larger-than-normal equity investment portfolio for a property and casualty insurer.
They also generate low-cost float (temporary cash holdings arising from premiums collected in advance of future claims). This lets Berkshire generate returns on these funds with assets commensurate with the duration of the business being underwritten. And they tend to come at little to no cost to Berkshire, given the company’s proclivity for generating underwriting gains over the past several decades.
That said, we don’t believe the insurance industry is conducive to developing maintainable competitive advantages. While there are some high-quality firms, with Berkshire having some of the best operators in the segments where it competes, insurers essentially sell a commodity, and excess returns are difficult to achieve consistently. Insurance buyers are not inclined to pay a premium for brands, and the products are easily replicable.
Given the growth of its auto insurance operations over the years, Geico has become one of Berkshire’s largest generators of earned premiums. The strength of the auto insurer’s direct-selling operations has made it one of the largest US private passenger auto insurance underwriters, responsible for 12.3% of written premiums last year, compared with industry leader State Farm’s 18.3%.
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