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What Berkshire’s Valuation Tells Us about Expections in 2017

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Beating the index

As of February 2017, Berkshire Hathaway (BRK-B) stock has risen 3.2% in the past month and 31% in the past year. By comparison, the S&P 500 (SPX) (SPY) has risen 3.3% in the past month and 26% in the past year.

Historically, the company’s performance was at or above the benchmark index. In 4Q16, Berkshire is expecting subdued performance, mainly due to BNSF Railway and the insurance division. In 3Q16, the company marginally missed analysts’ estimates due to weak insurance, reinsurance, and BNSF’s performance.

Valuations3

Warren Buffett’s Berkshire business model is a combination of conglomerate operations and active asset management. The company doesn’t raise capital from institutional investors or limited partners for various funds.

Instead, Berkshire raises capital through its insurance businesses in the form of premiums. The company competes with money managers such as Blackstone (BX) and BlackRock (BLK) for acquisitions of new companies and competition through existing holdings.

Fair valuation

On a one-year forward PE (price-to-earnings) basis, Berkshire Hathaway is trading at 21.3x. By comparison, its peers are trading at an average of 13.5x. The company consistently commanded a premium on its relative outperformance, hedged portfolio, and its ability to redeploy excess capital from holdings towards better opportunities.

On September 30, 2016, Berkshire’s equity portfolio was valued at $129 billion, as compared to $130 billion as of June 30, 2016. In 4Q16, it’s major holdings had the following performances:

  • Coca-Cola (KO): 2.0% fall
  • Kraft Heinz (KHC): 2.5% fall
  • American Express (AXP): 15.7% rise
  • IBM (IBM): 4.5% rise
  • Wells Fargo (WFC): 24.5% rise

Berkshire could trade near 18x–20x. It can expand its portfolio with strong liquidity of $84 as on September 30, 2016.

Warren Buffett might look to utilize existing reserves for more acquisitions in upcoming quarters. The acquisitions can be impacted by the new presidential administration’s policy measures towards domestic manufacturing.

In the next and final part of the series, we’ll discuss what analysts are suggesting for Berkshire.

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