Berkshire Hathaway Class B (BRK.B) is a company like no other. Led by the legendary Warren Buffett, one of the most successful investors in history, it owns a wide range of businesses including insurance companies, railroads, utilities, retail stores and food producers as well as a $392 billion cash/investment portfolio, asserts George Putnam, editor of The Turnaround Letter.

Buffett acquired a controlling stake in Berkshire Hathaway, a struggling textile mill, in 1965. Over time, he diversified the company into more promising businesses, notably with an initial stake in insurance company GEICO in the late 1970s. 

The company has since expanded through organic growth as well as from new businesses purchased with internally generated cash and funds from a growing pool of insurance capital. 

Berkshire maintains a minimal headquarters staff of about 25 people, preferring to delegate the management of its businesses to each unit’s highly capable leadership team. Buffett’s primary focus is the allocation of capital within and across each of the companies.

While Berkshire shares have vastly outperformed the S&P 500 over the past 20+ years, their return over the past decade has essentially matched the index and have lagged in the past five years through year-end 2019.

Investors wonder if the company has grown too large to find meaningful new growth opportunities or acquisition targets, worry about Buffett’s advanced age (89), whether his conservative investment strategy has become outdated and what a post-Buffett Berkshire might look like.

The company’s insurance operations face heavy competition as well as the remote possibility of a large casualty loss (as with any insurer), and an economic downturn will likely lead to near-term earnings declines in many of its businesses.

The current market downturn has provided an attractive entry point for investors looking to buy Berkshire shares. Since the market’s peak in February, its share price has declined 22%, unwinding almost three years of appreciation. We consider book value per share, which is about where the stock currently trades, to be a floor valuation level. 

Over the past decade, the shares have traded at a considerable premium to book value (averaging at least 30%).  Buffett has nibbled at share repurchases at valuations above book value, and we anticipate that he will become more aggressive now.

If anything, Berkshire’s hesitancy to make large acquisitions has proven to be prescient rather than outdated.  The recent market decline was partly driven by an over-valued and overly optimistic market returning to a more reasonable valuation. Buffett was showing his patience and skill by waiting. 

While we acknowledge that Berkshire’s scale and scope create practical limits to its ability to grow by acquisition, we expect the company to use its large cash hoard to become more active in making acquisitions, helping to rekindle profit and book value growth.

Buffett clearly can’t run Berkshire forever.  He has installed capable leaders to replace him in key functions, but a post-Buffett Berkshire may lose some of the luster that has been generated by the reputation of the man himself.

However, given that book value probably undervalues the combined entity, and that over time the Berkshire entity may be unwound, any drop in the share price surrounding his passing should be only temporary.

Berkshire’s exceptionally well-capitalized and highly diverse businesses, strong company-level leadership and unusually low valuation provide investors with not only a sturdy port in the current storm but also an opportunity for longer-term capital appreciation.

For most investors, the Class B shares, which are economically equivalent to 1/1500th of a Berkshire Hathaway Class A share (BRK.A) and hence trade at about 1/1500th of the price of a Class A share (currently at $274,021 per share), offer a more accessible way to invest. BRK class B shares with a $250 price target.

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