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Berkshire’s Premium Valuations amid Acquisition Expectations

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Stock performance

Berkshire Hathaway (BRK.B) stock has risen 4.7% in the last month and 15.9% in the last year. In comparison, the financial sector (XLF) has risen 1.1% in the last month and 11.2% in the last year. The stock has seen recovery in recent months mainly due to organic growth expectations across the Insurance, BNSF, and Manufacturing segments. Liquidity deployments by CEO Warren Buffett and other managers are facing issues of high valuations and relatively low scales of operations.

In the second quarter, Berkshire’s higher penetration through auto insurance, chemicals growth, and NetJets, partially offset by the weaker performance of financial services, will likely drive its operating performance.

Berkshire Hathaway’s revenue is expected to rise ~7.0% to $61.6 billion in the second quarter aided by manufacturing, higher insurance premiums, services growth, and BNSF’s performance. Wall Street expects the company’s EPS to rise 32.5% mainly due to lower claims and lower taxes.

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Premium valuations

Berkshire Hathway’s consistent performance, track record of beating broad indexes, and high liquidity—which allow it to invest heavily when there is any steep correction—has allowed it to garner premium valuations. It’s trading at a one-year forward PE multiple of 20.4x and a trailing enterprise value-to-EBITDA (enterprise value-to-EBITDA) multiple of 16.5x.

While Berkshire Hathaway’s trailing-12-month PE multiple is 12.4x due to investment gains, its peers (XLF) General Electric (GE) and Chubb (CB) are trading at forward PE multiples of 12.7x and 11.7x, respectively.

Portfolio performance

Berkshire’s investment portfolio has seen major concentration in select names amid rising uncertainty, rate hikes, and concerns about high valuations. The performances of Berkshire Hathaway’s major holdings in the second quarter were as follows:

  • Wells Fargo (WFC) rose 9.7%.
  • The Kraft Heinz Company (KHC) rose 4.6%.
  • Apple (AAPL) rose 12.3%.
  • The Coca-Cola Company (KO) rose 2.5%.
  • American Express (AXP) rose 8.8%.
  • IBM (IBM) fell 6.8%.

The performance of the company’s investment portfolio is expected to be better than in the first quarter, which should be reflected in its reported numbers due to new accounting rules.

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