Berkshire’s Valuation Premium Widens on Hedged Performance
Performance in line with index
As of August 2017, Berkshire Hathaway (BRK.B) stock has risen 4.7% in the past month and 25.0% in the past year. By comparison, the S&P 500 (SPX-INDEX) (SPY) has risen 2.0% in the past month and 13.9% in the past year.
In 2Q17, Berkshire saw an 11% decline in operating profits to $4.1 billion, mainly due to underwriting losses in the insurance sector and the subdued profitability of the Energy and Services division, partially offset by a strong recovery in shipments for BNSF and growth in the manufacturing space.
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Berkshire Hathaway’s business model is a mix of conglomerate and active asset management. The investing giant raises funds from the insurance business in the form of premiums and doesn’t invite direct investments from institutional investors or limited partners. Berkshire competes for investments and fund acquisitions in profitable companies with asset managers like KKR (KKR), Blackstone (BX), and BlackRock (BLK).
Valuation premium widens
On a one-year forward PE (price-to-earnings) basis, Berkshire is trading at 21.9x, while its peers are trading at an average of 13.5x. As of 1Q17, Berkshire’s equity portfolio was valued at $163 billion, compared with $148 billion as on December 31, 2016. In 2Q17, its major holdings had the following performances:
- American Express (AXP): 6.5% rise
- Coca-Cola (KO): 5.7% rise
- Kraft Heinz (KHC): 5.7% fall
- Apple (AAPL): 0.3% rise
- International Business Machines (IBM): 11.7% fall
- Wells Fargo (WFC): 0.5% fall
Berkshire’s diversification and Buffett’s strong track record has helped the company garner higher valuations. The trend is expected to continue in the upcoming quarters depending on how divisions and investment income shape up. The company is sitting on the strong and rising liquidity of $99 billion as of June 30, 2017, which should call for more acquisitions in the upcoming quarters.