We are reiterating our “Buy” rating and raising our target to $470 from $450 on Berkshire Hathaway Inc. (BRK.B). We have a positive view of the conglomerate nature of Berkshire, whose stock returns have doubled those of the S&P 500 since 1965 (compound annual growth of 19.8% versus 10.2% for the index), says Stephen Biggar, analyst at Argus Research.
Once known for purchasing large equity stakes, the company seeks to augment growth from its operating businesses with acquisitions, typically paying cash for targets in the $5 billion-$20 billion range.
Berkshire Hathaway Inc. (BRK.B)
Berkshire’s equity portfolio has historically had a value tilt, with major stakes in financial names such as Bank of America Corp. (BAC) and American Express Co. (AXP). More recently, Berkshire has substantially decreased its investment in Apple Inc. (AAPL) by approximately 50% even as Apple remains its largest holding. The company also sold shares of its second largest holding, BAC, in July.
In August 2019, Berkshire provided $10 billion in financing, via preferred stock and warrants, in Occidental Petroleum Corp.’s (OXY) $57 billion bid for Anadarko Petroleum. The 8% preferred shares would be convertible into 80 million OXY common shares at $69.50. OXY shares have rebounded, and are now trading around $59, but are still below the conversion level. Berkshire has since purchased additional OXY shares, bringing its stake in the energy firm to 27.8%.
The company had cash and short-term investments of $271 billion at June 30. Other than the $20 billion it plans to retain “to guard against external calamities” in the insurance business, Berkshire’s huge cash position is not by design. The company would like to put additional cash to use in acquisitions, but Chairman Warren Buffett, in the company’s 2023 annual report, lamented that there was only a “handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others.”
The advanced age of Buffett, 93, makes succession planning important. In May 2021, he announced that Greg Abel, a Berkshire vice chairman who runs the firm’s noninsurance operations, would be his likely successor.
On valuation, the stock is trading at 21.6 times our 2024 operating EPS forecast, below the current S&P 500 multiple of 26 times. Our revised target price of $470 assumes a 23.5-times multiple.
Recommended Action: Buy BRK.B.
