Berkshire Hathaway (BRK.B) is an American conglomerate managed by legendary investor Warren Buffett. The financial institution has two classes of stock; Berkshire B, which is the less expensive yet more volatile version of Berkshire A (BRK.A).
The dual structure was created in 1996 because the stock became too expensive for many retail investors to access due to the “no stock-split policy.”
I am bullish on Berkshire Hathaway. (See Analysts’ Top Stocks on TipRanks)
Increased Intrinsic Value amid Stock Buybacks
Warren Buffet’s company has repurchased more than $20 billion in stock during 2021 as Berkshire’s cash pile increased significantly over the past year. Even after the repurchases, the firm’s cash and equivalents still stand strong at $149.2 billion.
Stock repurchases increase the intrinsic value of stocks, especially when the leverage ratio (currently 24.3%) remains low and no dividends are being paid.
The market has reacted in a bullish manner this year amid the vast quantity of stock repurchases; Berkshire Class B stock has gained more than 22% as a consequence.
Earnings Breakdown – Key Figures
Revenue from operating companies rose 12% during Q3 reaching $70.7 billion, driven by manufacturing (+15% year-over-year), services and retail (+19% year-over-year), and energy (+13% year-over-year).
Berkshire’s total operating earnings rose by 18% during Q3 as energy, railway, and utilities led the way, offsetting insurance catastrophe losses of $2.7 billion.
Finally, the company’s investments and derivatives gained by $3.88 billion versus $24.7 billion a year ago, signaling a more subdewed financial market in general.
Valuation & Momentum
Berkshire class B remains undervalued. The stock is trading at a 73% discount on an asset-based valuation and a 17.4% discount according to its justified forward PE ratio.
Berkshire B’s diluted EPS has grown considerably year-over-year by 153.10%, while the stock price has only increased by a sixth of that value. Diluted EPS and stock prices tend to correlate, and the price lag leads me to believe that a value gap has started to appear.
Berkshire B is trading above its 50, 100, and 200-day moving averages indicating that a momentum pattern is forming. The stock could well hit a momentum slope going into 2022 as higher bond yields could boost financial sector stocks.
Wall Street’s Take
Turning to Wall Street, Berkshire has a Moderate Buy consensus rating, based on one Buy assigned in the past three months. The latest analyst to have provided a consensus is Brian Meredith of UBS (UBS), whose $347.00 price target implies 23.3% upside potential.
Concluding Thoughts
Berkshire Hathaway’s Class B shares remain undervalued and should pick up further momentum once the company’s insurance underwriting division stabilizes.
Disclosure: At the time of publication, Steve Gray Booyens had a long position in BRK.B.
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