The passing of Charlie Munger on Nov. 28 marked the end of a chapter for longtime fans of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B). Munger often spoke less than Warren Buffett during the company’s famous annual meetings in Omaha, Nebraska. But his wit and wry sense of humor lightened the mood and complemented Buffett’s bouncy cadence perfectly.
Berkshire Hathaway is a behemoth of a company — the seventh-largest-weighted stock in the S&P 500 and the largest non-“tech” U.S.-based stock by market cap (“tech” because Meta Platforms and Alphabet are in the communications sector, while Tesla and Amazon are in the consumer discretionary sector).
Valuing the Berkshire Giant
At the time of this writing, Berkshire has a market cap of $779.5 billion. But a closer look shows that the value of its public equity portfolio is only 46% of that, or $358.1 billion. Over half of Berkshire Hathaway’s market value actually derives from private companies, wholly owned businesses, or other assets.
To determine if Berkshire Hathaway stock is a buy now, we need to break down its composition:
The Big Four Jewels
In Berkshire Hathaway’s 2020 annual letter to shareholders, Buffett called Berkshire’s many subsidiaries “a smorgasbord of businesses employing 360,000 at year-end.” The full list of companies Berkshire owns part of is long and varied. But in that same letter, Buffett singled out four crown jewels or Berkshire’s “big four” that account for the majority of its earnings and overall value.
These four pillars are Berkshire’s stake in Apple stock, its property and casualty insurance businesses, its outright ownership of BNSF railroad, and its 92% stake in Berkshire Hathaway Energy (BHE).
1. Apple: Still a Heavyweight
Berkshire’s position in Apple stock has grown since 2020, aided by Apple shares hovering around record highs. Apple now constitutes 48.4% of Berkshire’s public equity portfolio but only 22.2% of its total market cap. Still a substantial chunk, but smaller than it appears if only examining the public equities.
2. Insurance – A Core Holding
Arguably Berkshire Hathaway’s most valuable component is its property and casualty insurance operations. Berkshire divides its insurance activities into two buckets – underwriting and investing. Key underwriting subsidiaries are GEICO, Berkshire Hathaway Primary Group, and Berkshire Hathaway Reinsurance Group.
Insurance valuations are complex, but Buffett has long pointed to float as a solid proxy – the funds an insurer holds to pay out potential claims. Float originates from customer premiums and can be profitably invested at no capital cost.
Buffett loves insurance because premiums steadily amass capital for investing. In 2009, he noted Berkshire’s float exploded from $16 million in 1967 to $62 billion. By end of 2022, it reached approximately $164 billion, boosted by acquiring Alleghany.
Berkshire books an underwriting profit if premiums exceed total claim costs and expenses. But natural disasters can prompt major loss years. Still, Berkshire’s underwriting prowess is a hidden strength. Per its 2022 annual report, insurance underwriting generated a small after-tax loss last year but earned $728 million in 2021 and $657 million in 2020 after catastrophes. Success preserving float leaves ample investment funds.
Insurers often trade around 1x book value; 2x considered expensive. Just valuing Berkshire’s float at $164 billion makes insurance worth at least $162 billion.
3. BNSF – Reliable Returns
BNSF is one of America’s four major railroads, alongside Union Pacific, CSX and Norfolk Southern. Each holds a regional duopoly. In 2022, 38% of BNSF’s freight revenue was consumer goods, 23% industrial products, 23% agriculture, and 16% coal.
In 2022, BNSF netted $5.95 billion, on par with $5.99 billion in 2021 and up from $5.16 billion in 2020. Railroad valuations are opaque, but applying rival Union Pacific’s 10-year median 19.8x P/E multiple suggests BNSF is worth $117.8 billion. Norfolk Southern’s 17.96x or CSX’s 16.65x imply over $100 billion.
4. Berkshire Hathaway Energy – Steady Utility Returns
Next is Berkshire’s 92% stake in BHE, likely approaching $90 billion. BHE serves 5.2 million customers via 21,000 miles of pipelines and utilities across multiple states. It focuses on the stable midstream oil/gas and utility sectors rather than volatile exploration and production.
In 2022, BHE delivered $3.904 billion of net earnings, up from $3.572 billion in 2021 and $3.141 billion in 2020.
The Underrated Manufacturing/Services Arm
Lesser known is that Berkshire’s manufacturing, services and retailing segments booked higher 2022 profits than insurance, railroads or energy. At $12.51 billion, it surpassed $11.12 billion in 2021 and $8.3 billion in 2020. Wholly owned brands include Duracell, Fruit of the Loom, Benjamin Moore and more.
Tying Berkshire’s Value Together
Berkshire is multifaceted, but the value drivers are clear:
- Non-Apple public equities: $185.75 billion
- Cash and short-term treasuries: $157.2 billion
- Total public portfolio: $358.12 billion
- Insurance float at $164 billion, BNSF at $117 billion, BHE at $90 billion: $375 billion
- Apply a conservative 15x multiple to manufacturing/services profits: $187 billion
Sum those figures and include the cash: Berkshire is worth over $1 trillion. The current market cap of $780 billion appears cheap.
Berkshire Returns Capital to Shareholders
Unlike conglomerates paying dividends, Berkshire favors repurchasing undervalued shares. Over the past five years, buybacks have reduced total shares outstanding by 12%, increasing earnings per share. This boosts Berkshire’s value further.
What Lies Ahead?
While Munger’s passing turns a page, all signs point to Berkshire continuing its success under CEO Greg Abel, a veteran leader within Berkshire’s energy operations. And the complicated but clear value drivers look poised to continue delivering. For long-term investors, Berkshire Hathaway stock remains a buy.
What Could Change Berkshire’s Direction?
Of course, Berkshire faces potential headwinds that could alter its trajectory:
- Inflation – Prolonged high inflation may hurt operating businesses, weighing on earnings.
- Rising rates – Berkshire’s $157 billion cash pile loses purchasing power in a high rate environment. This reduces its capacity to fund investments and acquisitions.
- Market volatility – A deep, prolonged bear market would pressure Berkshire’s equity portfolio for an extended time period.
- Insurance losses – Though historically strong in its underwriting, unusually severe catastrophe claims could hit near-term profits.
- Transition uncertainty – While veteran Greg Abel is the heir apparent, anytime a new leader takes control creates uncertainty.
Despite these risks, Berkshire Hathaway still stands on very solid ground operationally and financially. The company remains well positioned to weather various storms. And the stock continues to offer a reasonable margin of safety at current valuations.