The impending retirement of Warren Buffett is a key risk for the company. Berkshire Stock has a buy rating from analysts.
Berkshire Hathaway Inc (NYSE:BRK.B) stock got a strong boost from the election of Donald Trump as the President of The United States. Berkshire stock has gained by more than 13% since the election, compared to a 9.7% gain in S&P 500 (INDX:SPAL). While the Oracle of Omaha had backed Hillary Clinton before the elections, he is betting big on the Trump presidency. Warren Buffett recently revealed that Berkshire has invested more than $12 billion in the stock market since the elections.
The company recently filed its F13 with the SEC providing a look into its vast diversified portfolio. While the Warren Buffett-led company doubled down on its stake in Apple (NASDAQ:AAPL) and airline companies, it cut its exposure to Walmart, Verizon and Kinder Morgan. The Omaha, Nebraska-based company is expected to report its Q4 earnings on 24th of February. Given the improving macroeconomic scenario and rising interest rates, the Warren Buffett-led company is likely to continue doing well.
Improving economy will be a catalyst for Berkshire Stock.
Berkshire Hathaway will benefit from the strengthening economy and rising consumer expenditure. In spite of its recent push into the transportation and energy sectors, the banking and insurance sectors continue to contribute a significant portion of Berkshire's earnings. Insurers like GEICO and General Re contributed 20% of Berkshire's earnings in the first 9 months, higher than any other segment. In the last few years, earnings of insurance companies had taken a hit due to very low interest rates.
Insurance companies earn a significant chunk of their income by investing their float in liquid securities. The Fed had kept interest rates near zero for a long time since the financial crisis, which had in turn impacted investment income of insurance companies. But with the Fed expected to raise interest rates 3 times this year, the earnings of insurance companies are likely to get a boost. Berkshire also has stakes in several banks including Wells Fargo (NYSE:WFC) and Goldman Sachs, which will be another beneficiary of rising interest rates. In fact, Wells Fargo is one of Berkshire's largest holdings. The administration's proposal to modify the Dodd-Frank act and Consumer Protection Bureau will be another tailwind for banks.
The company will also benefit from Trumps pro-growth push including deregulation of the oil and energy industry. BNSF, the freight railroad company owned by Berkshire has significant exposure to coal and oil. The company had been bleeding in last few years due to declining shipments of coal. But with Trump promising to remove the restriction on coal mining, the demand for transporting coal could again shoot up.
Warren Buffett's retirement is the main risk surrounding Berkshire.
If you look at Berkshire's beta, the traditional measure of risk, it is currently at 0.81, indicating that the stock currently carries very low risks. The main reason for the low beta is Berkshire's hugely diversified interests. Berkshire operates as holding company which has stakes in several companies in very different sectors ranging from transportation to energy to finance.
However, the mathematical measures of risks like beta fail to take into account any risks arising from a specific future event. Every company has a core competency, a skill set or resource which distinguishes it from other firms. For Berkshire, it has largely been the investment picking ability of Warren Buffett, its Chairman and Charlie Munger, the Vice-Chairman. But with both the founders well past 80 years of age, there is increasing concern surrounding Berkshire's succession plan. Argus analysts Stephen Biggar and Mike Jaffe recently expressed their concern stating "We are also concerned about the succession plan for Chairman and CEO Warren Buffett, now 86, and Vice Chairman Charlie Munger, 93, who have been critical to the company’s success and will likely be difficult to replace".
In a letter to shareholders in 2015, Charlie Munger had said that Greg Abel and Ajit Jain, two Berkshire top managers, were CEO material and could take over the management anytime Buffett decides to retire. Munger had called both of them "proven performers". Also, Berkshire has recently brought in Todd Combs and Tedd Weschler as investment managers. Both of them have been successful investment managers before joining Berkshire Hathaway. Even in Berkshire Hathaway, they have continued to make good investment decisions. The acquisition of Precision Castparts (NYSE:PCP) was largely Combs' idea.
Berkshire Hathaway stock is a good buy right now.
Berkshire stock has been a consistent outperformer for the last few decades and is likely to deliver strong returns going forward. Berkshire stock currently trades at a PE (ttm) of 16.88 and a PS (ttm) of 1.96, which is not exactly expensive, especially for a low risk and growing company like Berkshire. Berkshire will be one of the major beneficiaries of the growing economy and economic plans of the Trump administration. The current analyst price target of $192 indicates that Berkshire stock has more than 15% upside potential. Berkshire stock remains a good long-term buy.