Conglomerates have long been unpopular, if not totally ignored, on Wall Street, mainly because they have been market drags. But one conglomerate that still commands respect is Berkshire Hathaway (BRK.B), which stands distinct and distinguished among its peers, largely due to Warren Buffett’s mind and money in the company.
And with Berkshire’s major stakes in the nation’s major industries, it is considered one of the best investment bets on the U.S. economic recovery, which has been accelerating of late.
Founded in 1889, Omaha-based Berkshire owns major stakes in disparate industries, including insurance, railroad, manufacturing, and regulated utilities, as well as in energy, financial and retailing.
The company has been growing mostly through acquisitions, one of which was Burlington Northern San Fe which it acquired in 2010 for $28.6 billion. Berkshire also has stock investments in a myriad of major companies, including American Express (AXP), Coca-Cola (KO), Conoco-Philips (COP), Wal-Mart Stores (WMT), and Wells Fargo (WFC).
Zacks Investment Research on Sept. 14, 2012, upgraded its recommendation on Berkshire to outperform from neutral, based mainly on its robust second-quarter performance. “The quarter reflected strong performance across all the business segments,” says Zacks, which also noted that it expects the company’s finance and financial products segment to continue improving given the gradually recovering economy.
“A solid balance sheet, adequate liquidity, and continuing trend of growing book value are the other positives,” says Zacks. And then there’s the legendary investment adviser Warren Buffett, whose unique skills have created tremendous value for shareholders over the past 46 years.
“Berkshire's per-share book value grew from $19 to $95,453, at a rate of 20.2% compounded annually,” notes Zacks .”Book value growth is expected to get a pretty solid boost with the turn of the economy, further gains in the value of its derivatives positions, and continued positive contribution from earnings growth in the insurance operations,” predicts Zacks.
The chief concern among shareholders and investors now is the issue of who will succeed Buffett. “The CEO succession remains a risk, although less so since Warren Buffett’s CEO and investment management succession plan is now in place,” says Jay Gelb, analyst at Barclays Capital, who continues to rate the stock, now trading at $89 a share, as “positive,” with a price target of $100 a share. Zacks Investment Research has a higher price target: A six-month target for Berkshire’s class B stock of $109 a share, which equates to 18.7 times its 2012 earnings estimate of $5.67 a share. The price target implies an expected total return of 20% over the six-month period. For 2013, Zacks forecasts earnings of $6.23 a share.
Despite some concern about the question of who would succeed Buffett, Berkshire’s class B stock has continued to rise, hitting a new a 52-week high in the past few days. Many attribute Berkshire’s tremendous success to the skills of both CEO and Chairman Buffett and Vice Chairman Charles Munger, so it's logical that there is some feeling of uncertainty about the performance of the company under a new CEO. There is no question that the stock would be at higher levels without that concern.
Even so, the bulls contend that Berkshire will continue to be a long-term winner. “Berkshire’s property and casualty insurance business has been the engine behind its growth,” notes Zacks, as its insurance business “maintains capital strength at exceptionally high levels.”
And Berkshire’s economicallysensitive non-insurance businesses, mainly its utilities and energy as well as the manufacturing, services and retail sectors, are headed for recovery after suffering a sharp earnings decline in 2009 when the economy started to weaken, says Zacks.
With the economy now headed for a much-awaited strong recovery, Berkshire appears destined to flourish even more. The best way to measure Berkshire’s true worth, according to Barclays’ Jay Gelb, is through its book value – a conservative starting point, he says; sum-of-the-parts valuation; and its intrinsic value.
The reason why Berkshire's stock continues to rise, note the bulls, is the company continues to excel in all those metrics.
