Berkshire Hathaway: "A Lot to Love"

08/08/2019 5:00 am EST


Todd Shaver

Founder and Editor-in-Chief,

Berkshire Hathaway (BRK.B) is run by Warren Buffett, the famous ‘Oracle of Omaha.’ With a $500 billion market cap, Berkshire is the largest financial services company in the world, and one of the largest global conglomerates, notes Todd Shaver, editor of BullMarket Report.

Berkshire Hathaway is an Omaha-based conglomerate, which wholly owns and operates a diverse array of companies including Burlington Northern Santa Fe, Lubrizol, PacifiCorp, GEICO, Duracell, Dairy Queen, Fruit of the Loom, and NetJets.

The company also owns significant stakes in major American brands such as Coca-Cola (KO), Apple (AAPL), Kraft Heinz (KHC), American Express (AXP), Bank of America (BAC), Wells Fargo (WFC) and four major U.S. airlines.

Berkshire’s Class A stock currently trades at $310,000 per share. The Class B price is pegged to around 1/1,500 the price of Class A stock. This allows for more standard investing/trading by retail investors, who don’t have to worry about saving up $300,000 to purchase a single share of the Class A stock.

Because Berkshire is exposed to so many different markets, a market analysis of the company is essentially an analysis of the global macro-economy.

When the broader economy is percolating, so are Berkshire’s forward-looking prospects. When things go south, so does Berkshire’s stock. 2008 is a perfect example. Berkshire shed 30% of its value during The Great Recession.

Because the company is so diversified, it actually fared much better than most companies which don’t have exposure to more ‘defensive’ industries like Insurance and Industrials/Transportation. Additionally, with the global macro-economy currently booming, Berkshire’s shares are trading just below their all-time high of $224 set in October of 2018.

Berkshire was able to take advantage of depressed pricing in the wake of The Great Recession to load up on long-term equity positions the company believed would pay off down the road.

Berkshire invested $5 billion into Goldman Sachs (GS) in 2008, netting the company $1.1 billion in dividends, plus an extra $500 million in a preferred share buyback. The company also earned $2.7 billion on warrant options.

Berkshire also invested $5 billion into Bank of America to shore up its balance sheet. The deal had warrants attached, and Berkshire has earned over $15 billion in profit from this investment, and continues to make over $400 million a year in dividends.

Perhaps Buffett’s biggest investment came in 2009, when he purchased the remaining shares of Burlington Northern Santa Fe (he owned 23% prior to the buyout). Many investors were skeptical about the move. Just last year, Burlington Northern produced over $5 billion in earnings, for a 12% ROI.

Berkshire’s recent $10 billion financing of Occidental Petroleum (OXY) takeover of rival Anadarko Petroleum (APC) bears similarities to the aforementioned deals, and shows that the company can still secure favorable terms for its financing.

Berkshire’s financing yields 8%, and again there is a warrant attached allowing the company to purchase 80 million shares of Oxy at a price of $62.50. It was $68 in April, but is now in the low 50s. But guess what? Warren has all the time in the world to sit and wait. The man is just not in a hurry. He’s a long term investor.

Berkshire brought in just over $60 billion in revenue during 1Q19, which is on par with the prior three quarters. By the end of 1Q19, Berkshire’s equity investments totaled just over $190 billion, for a 10% gain during the quarter.

Its equity investments in banks, financial institutions and insurance companies rose 10% during the quarter, 14% for consumer products, and 8% for commercial, industrial and other operations.

The company’s total operating earnings rose 5% YoY to $5.5 billion. Berkshire also purchased $1.7 billion in stock during the quarter, nearly 25% more than all of its repurchases for 2018 ($1.3 billion).

Part of the reason the stock has ballooned so high lately has to do with rising earnings in Berkshire’s major business lines. Take Insurance, for example. Berkshire produced $2 billion in earnings in its Insurance division during 1Q19. Average profits have come in at $1.7 billion over the last decade-and-a-half. So Berkshire produced 18% upside from its already substantial income stream in its Insurance portfolio.

With $115 billion in cash and $100 billion in debt, the company maintains a 115% cash/debt ratio: extremely stable and underleveraged. Buffett has long espoused organic growth without an over-reliance on leverage, and that keeps Berkshire from becoming an overly risky investment.

Since The Great Recession, the stock has gone straight up, with the exception of some brief selloffs which haven’t lasted longer than a few months. Since early 2018, the stock has been testing the all-time highs of $224 (that’s an intra-day high), and we believe the stock is primed to break through this ceiling.

The global economy is healthy and durable, and with the Fed signaling an interest rate reduction in the near future, expect a short-term boost which will grease the wheels.

Berkshire is so large and diversified that its prospects are tied to the economy as a whole, with the added benefit of being a defensive play in case of a market downturn. Not many financial services companies can say that.

The Occidental deal proves that Berkshire still has the strong financial muscle to make big investments that will pay dividends long-term. We saw how those post-Great Recession deals played out (investments into Goldman, Bank of America and Burlington, for example), and Occidental is shaping up to be yet another big win.

Berkshire’s equity investments rose 9% during 2Q19, and we’re looking for the rest of the business to maintain its 1Q19 numbers when the company announces earnings. The China trade war has had very minimal impact here, especially since the largest holdings are not dependent on China trade (Insurance, Transportation, Financials).

There’s a lot to love about Berkshire going forward, most especially the leadership of Buffett and Vice Chairman Charlie Munger, who continue to bedazzle Wall Street with dependable, consistent growth. Berkshire is a great investment in a strong market, and a rock in weaker markets. We like Berkshire for the long haul.

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