Berkshire Hathaway is a multinational conglomerate holding company. ‘s ( BRK.A 0.21% ) ( BRK.B 0.24% ) The stock has made significant gains of over 20% in the last year and is currently trading only 3% below its highest value ever. Despite challenges such as inflation, high interest rates, and geopolitical tensions affecting the overall markets, Warren Buffett’s diversified conglomerate has consistently delivered strong profits.
Although investors may be cautious about pursuing the recent market upturn, the Class B shares of Berkshire Hathaway are currently being traded at a value that falls below the target price range set by Wall Street, which is between $465 and $506. Is it advisable for investors to invest in this consistently performing stock before it reaches the lower end of the target price range?
The CEO of Berkshire Hathaway is Warren Buffett. Image credit: The Motley Fool.
What factors contribute to Berkshire Hathaway’s ability to withstand challenges as an investment?
In 1962, a youthful Warren Buffett purchased his initial stocks of Berkshire Hathaway for his portfolio. At that time, the company was facing difficulties as a textile manufacturer. By 1965, Buffett took over the entire company, shut down its textile operations, and turned it into a varied conglomerate through acquiring and investing in various industries.
Berkshire Hathaway’s primary focus was on acquiring companies with substantial cash reserves. providers of insurance The company has acquired significant insurers such as GEICO, Gen Re, and Alleghany. In 2023, its insurance underwriting and insurance-investment subsidiaries, which are fully owned, contributed 40% of its overall operating earnings. The remaining 60% of earnings were derived from its various subsidiaries in industries like railroad, utility, energy, and consumer staples.
In the previous year, the strong performance of its insurance underwriting and investment divisions counteracted the challenges faced by its other non-insurance businesses due to macroeconomic factors. These positive trends led to a 26% increase in operating earnings compared to the previous year in the first half of 2024.
Berkshire Hathaway’s operating earnings do not take into account any profits or losses from its closely monitored investments. collection of investments The portfolio consists of almost 50 stocks and exchange-traded funds (ETFs). The performance of these investments can lead to significant fluctuations in its overall earnings from one year to another. As a result, Buffett advises investors to focus more on the company’s operating earnings rather than its reported earnings per share. EPS ).
Although Berkshire Hathaway’s business may appear complex and extensive, its fundamental strategies are straightforward. The company earns significant cash flow from its wholly owned subsidiaries and reinvests a large portion of it in its investment portfolio and short-term treasuries. Additionally, it routinely adjusts its investment holdings to increase available funds. As a result, the company closed the second quarter with a substantial $277 billion in cash and similar assets.
While Berkshire Hathaway may not be considered a thrilling investment for growth, its extensive diversification and impressive increase in cash flow contribute to its attractiveness. attractive option to an S&P 500 An index fund is a great investment option for investors who want to buy, hold, and set aside without worrying about it.
Is Berkshire Hathaway priced low enough to be considered a good purchase?
Berkshire Hathaway has an enterprise value of $1.01 trillion, which means it is valued at only 3.6 times its cash reserves. Apple ( AAPL -0.18% ) Berkshire Hathaway, a major shareholder in the company, values its investment at 21.6 times the $153 billion in cash and similar assets reported in the most recent quarter.
Berkshire Hathaway’s current stock price is valued at 19 times its projected future earnings, which is influenced by the changing value of its investment portfolio. However, if we anticipate a 20% increase in its operational earnings for the year, the stock would then be valued at under 23 times that projected growth.
In the future, assuming Berkshire Hathaway sustains a steady compound annual growth rate (CAGR) of 15% in its annual operating earnings from 2023 to 2030, it could potentially achieve operating earnings of $100 billion by the end of that period. If this growth trajectory continues, with a valuation of 20 times its operating earnings, the company’s enterprise value could increase to around $2 trillion by 2030.
Many events may unfold in the coming years, such as a potential market crash, escalating geopolitical tensions, and the possibility of Greg Abel, Warren Buffett’s successor, making errors once he assumes leadership. However, if you have faith in Berkshire Hathaway’s ability to use its size to tackle these obstacles, it could be wise to invest in its enduring stock before it reaches the minimum price forecasted by Wall Street.
