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About Berkshire Hathaway
First and foremost, this stock analysis article wouldn’t be right if we didn’t pay a short tribute to the late, storied, candid and quick witted founding partner of one of the world’s most valuable conglomerates, Charlie Munger, recently passing away at the age of 99.
Outside of the spectrum of business, we know Charlie will be missed by many and his legacy both as an investor and a person will surely be carried on.
With his business partner in crime, one of the most successful stock market participants of all time, Warren Buffett, they put their heads and moneys together and in 1965, wholly acquired a relatively tiny manufacturing operation and have since turned it into one of the world’s largest (if not the absolute largest) holding company, as today it is a gigantic operator and manager of a few businesses you might’ve heard of, along with a variety of portfolios and other revenue and profit producing operations.
Some of the businesses owned by Omaha, Nebraska-headquartered Berkshire Hathaway include the likes of one of the largest insurance companies in the United States, GEICO (headquartered in Chevy Chase, Maryland), one of the largest, wide-spanning and most important railroad operators, headquartered in Fort Worth, Texas, Burlington Northern Santa Fe, better known simply as BNSF, a prominent logistics company (trucking, primarily) by the name of McLane, headquartered in Temple, Texas, a specialty chemical company by the name of Lubrizol, which happens to be based in Wickliffe, Ohio, another insurance company by the name of Alleghany Corporation, paint company Benjamin Moore & Co., a media company by the name of Business Wire, a battery company by the name of Duracell, a fast-food dining chain by the name of Dairy Queen, aviation training company Flight Safety International, specialty clothing company Fruit of the Loom, jewelry venue Helzberg Diamonds, private jet operator NetJets and quite literally so many others.
Berkshire Hathaway is massive, to say the least.
As one might’ve been able to conclude for themselves, Berkshire generates the vast majority of its revenues through these holding companies, whether it is moving freight through BNSF and McLane or helping pilots receive the training they need or flying their affluent audience(s) all around the world aboard their extensive fleet of private aircraft.
Oh, and don’t forget the batteries, insurance, and chicken strips.
At any rate, one of the most appealing things we initially found regarding Berkshire’s various businesses is the fact that many of them lend themselves as being rather resistant to broader recessionary pressures, as regardless of the state of the economy, people will still need batteries, underwear, flight training, paint, freight to be moved from one place to another, insurance and for even the more discretionary lines of business Berkshire is engaged in, for instance, Dairy Queen, this business specifically is naturally one of low price points and who are we kidding, the blizzards hit the spot and it’s hard for consumers to part with them, especially down here in the all too warm state of Texas.
Prior to delving headfirst into the company’s financials and other relevant figures, it is worth briefly mentioning that Berkshire, like other companies, has two classes of publicly traded stock, the distinct primary difference between the two being that one class has more shareholder voting rights than the other, and we just so happen to be analyzing the one with more voting rights, which also just happens to be miles more expensive (on the strict basis of cost alone, not value) than its other line of outstanding shares, the BRK.B shares, which happen to have less voting rights.
Trade-offs, am I right?
However, being that a single share of BRK.A would set someone back around $542,000 (no, this is not a joke, really, the furthest thing from it), most retail-oriented investors are inclined to purchase shares of BRK.B, which trade at a significantly more comfortable share price of $356.53.
With this introduction of Berkshire Hathaway, I think now is a fitting time to learn more about this company’s financials so as to conclude whether or not this American conglomerate’s stock (NYSE: BRK.A) is worth considering making like Buffett’s core style of investing and buying and holding for a long period of time.
Berkshire’s stock financials
With the already established fact that shares of BRK.A cost a little more than half of a million dollars each, it can also be found that the holding company has a market capitalization of a whopping $777.69 billion along with a prevailing price-to-earnings (P/E) ratio of 10.31 and at least for the time being, does not issue its shareholders an annual dividend.
While it can be somewhat of an oddity for such a large, established, presumably cash flow generative company to not pay out an annual dividend to its shareholder base, we understand why Buffett and Berkshire have opted to not dish out a dividend, as it allows the holding company to retain more cash that it can in turn further invest in its own business(es) and also store up for the inevitable future investment and buyout opportunities that surely lie ahead with a company with as much dry powder (i.e., cash to spend, capital to deploy) as this one.
Regarding the company’s price-to-earnings ratio, it heavily insinuates that shares of Berkshire Hathaway (NYSE: BRK.A) are trading at a discount relative to what they are actually worth paying for, at least when considering the commonly held fair value benchmark of 20, which even after all of the gains sustained over this past year’s span of time (nearly 20%), is a great sign, as the sum of Berkshire’s parts are still not seemingly fully priced in, leaving upside potential for prospective and current shareholders.
Moving right over to the conglomerate’s balance sheet, Buffett and Co. are in charge of managing and expertly deploying around $948.4 billion in terms of total assets to their $476 billion in terms of total liabilities, which is a simply fantastic overall balance sheet breakdown and structure, as this company isn’t even close to being overleveraged nor does it have much of a shortage of cash, instilling a great deal of confidence to myself and my team in the respect of the efficacy of its day-to-day operations and long-term operations moving forward as well.
Flipping over to the company’s income statement, Berkshire Hathaway’s revenues (specifically referencing since 2018) have largely been trending upwards, starting at a relative base of just about $247.8 billion in 2018, leading up towards its latest reported revenue figure of just north of $302 billion, dipping ever so slightly during 2019 and 2020, shaving off around $9 billion during this time period, most likely (among a handful of other things) due to Dairy Queens across the nation being closed for a defined period of time and perhaps some temporary softening found within BNSF (maybe due to extensive supply chain issues and stresses and COVID-19) as well as other retail operations coming to a sudden halt, such as most of (if not all) Berkshire’s Benjamin Moore stores being closed indefinitely.
Much of this was to be expected, however, we have our fair share of suspicions that Berkshire has since been able to successfully pivot following what has so far been the brunt of COVID-19, for instance, making and further embracing a much needed digital pivot within its Dairy Queen division by onboarding with third-party delivery apps such as DoorDash and Uber Eats and meeting the customers outside of their stores, leveraging technology and successfully fending off COVID-related setbacks, for the most part.
Since this era, however, Berkshire’s total annual revenues have clearly grown, which is a general, but candidly expected positive worth pointing out.
As it relates to the company’s cash flow statement, specifically its total cash from operations during the same timeframe, Berkshire Hathaway has remained very consistent on a year-over-year (YOY) basis, averaging in around $37 billion each and every year, indicating that this massive conglomerate doesn’t have the hardest of times when it comes to extracting cash from its various business operations, along with the fact that its net income figures have been both consistent and positive for the most part as well.
Berkshire’s stock fundamentals
With thoughts of cash flow still on one’s mind, it wouldn’t hurt if we took a brief look at Berkshire Hathaway’s trailing twelve month (TTM) net profit margin (as it is shown on TD Ameritrade’s platform) and how it compares to that of the industry’s average.
Specifically, Berkshire’s TTM net profit margin is listed as being 22.25% to the industry’s respective average of 27.91%, which to a degree, makes some sense, as Buffett and Berkshire truly do have a lot of different operations and businesses both domestically and internationally, hence the comparably muted TTM net profit margin, as other larger conglomerates/holding companies simply aren’t as large and expansive as Berkshire and therefore are (again, on average) able to (more than likely) technically out-profit the holding company in question through the support of firmer margins and less globally scaled operations.
Thus, we don’t really view this as a positive nor a negative in the context of Berkshire Hathaway.
Lastly, when it comes to the company’s listed TTM returns on both assets and investment(s), both of Berkshire’s metrics in these respects lag behind the industry’s respective averages, with, for instance, the company’s TTM return on investment pegged at 8.94% to the industry’s respective average of 17.19%, which, we will offer some leniency due to the previously mentioned reasons surrounding why the conglomerate’s TTM net profit most likely isn’t as high as the competition’s respective average, however, this is still a rather sizable discrepancy, leading us to not exactly worry, but ponder why Berkshire is nearly 10% off from the industry’s average given its size, scale, pricing power and other factors.
Perhaps Berkshire hasn’t recently been or isn’t currently being as efficient with its capital as it should be, and/or maybe the discrepancy can be completely attributed to the company’s scale, and that’s all.
We urge you to ponder this yourselves, as well.
Should you buy Berkshire Hathaway stock?
Pretty much any dude on Instagram claims to be the “#goat” and is accompanied by a profile picture that looks somewhat natural but you know very well they took at least like ten minutes getting that picture of them holding up money to their ear while squatting in front of a car they most certainly rented, that is, if they own it at all.
Sorry, but you know who you are.
In the investment community, Warren Buffett doesn’t need a filter-ridden profile picture, as he quite literally is the greatest to ever do it, and between himself and Munger, they’ve crafted a shockingly impressive holding company with a track record filled with nearly everything except failure.
While Berkshire’s shares are still seemingly trading at a handsome discount relative to the company’s actual, intrinsic worth, the undisputed fact of the matter is that the company’s share price is floating near all-time highs, and it is our personal perspective that the greater overall economy is in a sort of short-term, artificial bull run and in the more intermediate and long runs, things are going to become considerably worse before they become even the slightest bit better.
Of course, we could be wrong.
Nevertheless, given this perspective, we deem it most appropriate to offer this conglomerate’s shares (NYSE: BRK.A) a “hold” rating, again, primarily due to our opinion(s) regarding the not-so-distant future economic backdrop.
Thank you, and goodnight.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.