Is The Market Valuing Berkshire Hathaway Fairly?

BRK-B: Berkshire Hathaway logo
BRK-B
Berkshire Hathaway

Berkshire Hathaway (NYSE:BRK-B) has had a positive 2017, with strong growth across multiple revenue streams. As a result of revenue growth and an increase in earnings through the year, its stock price (class B shares) surged from $160 at the beginning of last year to over $215 in early 2018. Since then the market price has come down to around $190. We expect the strong revenue growth across most revenue streams to continue through 2018, while insurance revenues are likely to be lower than the revenues generated in 2017.  Based on our expectations for the company’s 2018 results, which we have compiled on our interactive dashboard platform, we estimate Berkshire Hathaway’s fair value to be $171, which is around 10% lower than the current market price. You can change expected segment revenue and net margin figures for Berkshire Hathaway to gauge how changes will impact its valuation.

 

Relevant Articles
  1. Beating S&P500 BY 11% YTD, What To Expect From Travelers Stock?
  2. Up 50% Over The Last 12 Months, Is Hyatt Stock Still Attractive?
  3. Capital One Stock Gained 44% In The Last 6 Months, What’s Next?
  4. Up 8% Year To Date As 5G Gains Traction, What’s Next For Verizon Stock?
  5. Up 32% In The Last 12 Months, Where Is BNY Mellon Stock Headed?
  6. Rallying 30% YTD, What’s Spurring The Rally In Applied Materials’ Stock?

Trends, Forecasts & Growth Drivers For Berkshire Hathaway

The Nebraska-based conglomerate had a positive set of results through 2017, with meaningful revenue growth across segments. However, it was also an exceptional year for two main reasons. First, the company’s insurance segment reported a surge in insurance revenues, which was attributable to hurricanes Irma and Harvey, which drove premiums higher. However, the insurance claims were even higher through the year, which led to underwriting losses compared to previous years. Secondly, the company realized roughly $21.5 billion in one-time tax benefits for 2017, which led its net income to be much higher than previous years at nearly $45 billion. As a result, despite a drop in the company-wide operating profit margin, Berkshire Hathaway’s net income was significantly higher over previous years.

Insurance revenues (from GEICO, Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group) have increased from $46 billion in 2015 to $50 billion in 2016 before surging to $65 billion in 2017. Looking ahead, we expect insurance revenues to be lower than 2017 levels at $59 billion. Moreover, a lower expected claim rate relative to 2017 should help bring the operating profit margin back to 2016 levels. Berkshire’s McLane wholesale distribution and supply chain management business has reported a modest increase in revenues from $48 billion in 2015 to just under $50 billion in 2017. We expect this trend to continue in 2018, with revenues forecast to be around 1% higher at just over $50 billion.

BNSF railroad freight revenues fell 10% in 2016 to under $20 billion before picking up to $21.4 billion in 2017. This business generates revenues from four main categories – consumer products, coal, industrial products and agricultural products. In 2016, total volume shipments (mainly for coal and industrial products) was lower, leading to revenue declines through the year. Industrial product volumes were low for petroleum products due to pipeline displacement of crude rail traffic in the U.S. and lower domestic oil production. This trend reversed in 2017 despite continued low volumes for petroleum products, due to strengthening in the industrial sector and high demand for sand, steel and other commodities. Similarly, consumer product shipping also picked up through the year, signaling improvement in economic conditions. This trend is likely to continue through 2018 with a 7% increase in BNSF revenues to $23 billion.

In addition, utilities and energy revenues from PacifiCorp, MidAmerican Energy Company (MEC), NV Energy and other natural gas and energy businesses combined rose from $17.8 billion in 2016 to $18.9 billion in 2017 due to strength in the MEC business and acquisitions in Berkshire’s real estate business. We expect combined utilities and energy revenues to be up 6% to nearly $20 billion through 2018. Similarly, combined manufacturing revenues, including industrial, building and consumer products, have increased steadily from $36 billion in 2015 to $50.4 billion in 2017. This was mainly driven by strength in industrial product manufacturing across both the PCC and IMC businesses. We forecast combined manufacturing revenues to continue to grow in mid single digits to $53 billion for 2018.

It should be noted that despite revenue increases in recent years, Berkshire Hathaway’s adjusted EBITDA margin fell from 19-20% in 2015 and 2016 to 13.6% in 2017, per Trefis estimates. Losses from the insurance business were a key contributing factor to the the fall in margins in 2017. For 2018, we expect margins to pick up from 2017 levels, but remain lower than pre-2017 levels at around 15%. However, lower tax rates should help boost earnings. As a result, we expect the company’s net margin to be around 10.4% for 2018, which is slightly lower than the 10.8% reported in 2016. Based on our forecasts, we estimate the fair value of Berkshire Hathaway’s class B stock to be around $171. If you disagree with our forecasts, you can modify segment revenues, margin figures and earnings multiple for 2018 on our interactive dashboard to arrive at your own price estimate.

What’s behind Trefis? See How it’s Powering New Collaboration and What-Ifs

For CFOs and Finance Teams | Product, R&D, and Marketing Teams

More Trefis Research

Like our charts? Explore example interactive dashboards and create your own