Is Berkshire Hathaway Still a Buy? A Deep Dive into Valuation
For investors pondering whether Berkshire Hathaway (BRK.A) remains a smart investment despite its impressive, yet substantial, share price, the question is valid. Recent performance – a 9.2% gain over the past year, 54.4% over three years, and a remarkable 111.4% over five – suggests continued growth. But is that growth priced in? This analysis focuses on a valuation-driven perspective to help you decide.
The Buffett Factor and Market Sentiment
Berkshire Hathaway consistently attracts attention due to Warren Buffett’s capital allocation decisions and its growing cash reserves. Investors are keenly watching for strategic buybacks and acquisitions. The current market environment – characterized by higher interest rates and increased volatility – is also influencing how investors assess Berkshire’s risk-reward profile. The company’s ability to navigate these conditions is paramount.
Recent market fluctuations, including a modest pullback in Berkshire’s stock, haven’t significantly dampened the long-term bullish sentiment. However, it’s crucial to move beyond simple price charts and delve into the underlying fundamentals.
Unlocking Intrinsic Value: The Excess Returns Model
Determining a stock’s true worth requires understanding its ability to generate returns above what investors demand. The Excess Returns model, used by Simply Wall St, estimates this surplus profit and translates it into an intrinsic value per share. For Berkshire, this starts with a substantial Book Value of $485,274.36 per share and consistent Earnings Per Share (EPS) of $67,566.83, based on its five-year average Return on Equity (ROE) of 12.85%.
Considering a Cost of Equity of $39,788.12 per share, the model calculates an Excess Return of $27,778.71 per share. This indicates Berkshire is expected to consistently outperform its required rate of return. This is a key indicator of long-term value creation.
A 36.5% Undervaluation?
Projecting this earning power onto a Stable Book Value of $525,977.48 per share (based on analyst estimates) and discounting it reveals an intrinsic value of approximately $1,171,303 per share. Compared to the current market price, this suggests Berkshire Hathaway is currently undervalued by around 36.5%.
Pro Tip: Intrinsic value calculations are sensitive to assumptions. Always review the underlying data and consider different scenarios.
Beyond Earnings: The Price-to-Earnings Ratio
For a consistently profitable company like Berkshire, the Price-to-Earnings (P/E) ratio provides another lens for valuation. It reflects not only current profitability but also market expectations for future growth. Berkshire currently trades at a P/E of 15.87x, slightly above the Diversified Financial industry average of 13.70x, but significantly below the broader peer group average of 26.40x.
Simply Wall St’s Fair PE Ratio for Berkshire is 18.09x, factoring in its specific growth prospects, profitability, market capitalization, and risk profile. Because this fair multiple is higher than the current P/E, the shares appear modestly undervalued.
The Power of Narratives: Your Personal Valuation
While quantitative models are valuable, they don’t capture the full picture. Simply Wall St’s “Narratives” feature allows you to build your own investment story for Berkshire Hathaway. You can input your assumptions about future revenue, earnings, and margins, and instantly see the resulting fair value.
Did you know? Narratives are dynamic, updating automatically with new information like earnings releases and major deals, ensuring your valuation remains relevant.
This approach acknowledges that different investors may have different perspectives. For example, an investor focused on Berkshire’s cash pile and buybacks might see more upside than one concerned about its size limiting future growth.
Staying Informed and Engaging with the Community
The investment landscape is constantly evolving. Staying informed and engaging with a community of like-minded investors can provide valuable insights. Simply Wall St’s Community page allows you to share your Narratives, discuss your views, and learn from others.
Frequently Asked Questions (FAQ)
- What is Berkshire Hathaway’s intrinsic value? Based on the Excess Returns model, the intrinsic value is approximately $1,171,303 per share.
- Is Berkshire Hathaway currently undervalued? The analysis suggests it is undervalued by around 36.5%.
- What is a Fair PE Ratio? Simply Wall St calculates a Fair PE Ratio of 18.09x for Berkshire Hathaway.
- What are Narratives? Narratives are a tool to build your own investment story and calculate a personalized fair value.
Ready to dive deeper? Explore Berkshire Hathaway’s comprehensive Company Report on Simply Wall St and start building your own investment narrative.
