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Inside Berkshire’s Investment Income and Valuations after 3Q17

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Stock returns over SPY

As of October 2017, Berkshire Hathaway (BRK.B) stock has returned 3.2% in the past month and 31.4% over the past four quarters. The S&P 500 (SPX-INDEX) (SPY) has risen 3.0% in the past month and 20.3% in the past year.

This outperformance was due to a mix of investment income growth, the revival in BNSF Railway, manufacturing, and services  The trend is expected to continue in 2018, as Berkshire’s major divisions are seeing strong trends amid favorable macro policies.

In 3Q17, Berkshire is expected to see net declines on higher claims in the insurance sector, partially offset by the strong performance of BNSF, energy, and manufacturing.

On the investments front, Berkshire is pitted directly against asset managers (XLF) like BlackRock (BLK) and Goldman Sachs (GS).

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Valuations high amid expectations

On a one-year forward PE (price-to-earnings) basis, Berkshire is trading at 22.9x, while its major competitors are trading at an average PE ratio of 13.7x. The company continues to command a premium over broad index valuations as well as over sectorial peers, largely due to its ability to generate alpha over indexes by managing a huge amount of capital with a lower risk beta.

Berkshire’s total portfolio value stood at $162 billion in 2Q17, representing a $1 billion fall from previous quarters. Its major holding companies posted the following returns in 3Q17:

  • Apple (AAPL): 4.5% rise
  • Coca-Cola (KO): 1.9% rise
  • International Business Machines (IBM): 5.2% fall
  • Kraft Heinz (KHC): 8.4% fall
  • Wells Fargo (WFC): 2.5% fall
  • American Express (AXP): 4.7% rise

Berkshire’s investment income could see a marginal rise in 3Q17 due to rebound in markets, the performance of Apple (AAPL), and other major holdings. Buffett’s continued decision making will likely be an important input for the stock to continue to garner strong valuations.

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