Stock Dissection: Berkshire Hathaway (BRK-B)
When we consider a company’s stock as a possible investment, we dissect it thoroughly based on all the information and statistics we have available. We then measure this information about the specific stock against four big values; circle of competence, moat, management, and price. Based on this, we reach a verdict on whether, from a value investing perspective, the stock is a good investment or not.
In this post, we’ll look at and dissect Berkshire Hathaway (BRK-B), the American multinational conglomerate holding company. Although its core business is insurance, it does use a lot of capital from its insurance business to fund or acquire other businesses or companies.
So, it owns well-known subsidiaries and brands like Duracell, Dairy Queen, NetJets, Geico, and others. In addition, it also has significant minor holdings in companies like Kraft Heinz Company, American Express, The Coca-Cola Company, Bank of America, and Apple.
Why Berkshire Hathaway? Well, it was a deliberate choice to pick this company because, from a value investing perspective and as a value company, we believe it’s looking more promising and that we’re almost there as far as the question of whether you’ll buy into it goes.
So, those are the basics of the company, or, in other words, the first things we look at when we’re researching a company and considering an investment. From here, let’s move on to the first of the four big values; circle of competence.
Circle of Competence
Here, you’ll need to consider whether Berkshire Hathaway or any other stock falls within your circle of competence, and if it isn’t, you’ll need to figure out what you need to know to really understand your potential investment.
So, you’ll need to decide whether the company is something you would be willing to learn about. It’s important to keep in mind, though, that your circle of competence isn’t necessarily something you’re qualified or certified in. So, while it could be something within your expertise, it could also be something you’re interested in or that you’re capable of understanding?
This also means that the circle of competence for every person will be different. For us, Berkshire Hathaway is an interesting company, not only because of its success but also because we’ve been following Warren Buffet and Charlie Munger because they’re some of the most popular value investors.
When they, therefore, talk about value investing, their investing philosophies, and their strategies for growth and profitability, it inevitably draws one to the company. Then, when digging further, we look at the company in more detail, its subsidiaries, and related companies, it’s all pretty interesting, especially considering that most of us use their products regularly.
Ultimately, it’s for this reason that the circle of competence made sense for us. Now that we’ve established that the company falls within our circle of competence, let’s move on to the moat.
Moat is an interesting aspect because looking at Berkshire Hathaway doesn’t involve only looking at one company. It encompasses many different companies from wholly-owned subsidiaries to other major companies in which it has significant holdings. You can almost think of it as having a generalized moat.
However, one of its most significant capabilities and moats is its sheer ability to influence our society and the capital it has. For instance, when you consider that it has billions of dollars to invest, it has a big advantage in that it can make investments that not many other companies can.
A prime example of this is its purchase of railroad company Burlington Northern Santa Fe Company for $44 billion. There are not many companies that can compete with this, which, ultimately, means this in itself is a moat, because they don’t have much competition and they’re able to dominate the market.
And it’s not only this, but also its investments in other companies that show that it focuses on expansion and growth. So, for Berkshire Hathaway, it’s not only about having a moat but also about protecting it through cautious and deliberate steps to ensure growth and allow it to keep up with the times.
Ultimately, this satisfies our requirements when looking at a moat. So, let’s move on to the next aspect of Berkshire Hathaway we should consider – management.
Berkshire Hathaway is known for its control and leadership by Warren Buffett who serves as chairman and chief executive and by Charlie Munger who serves as vice-chairman. However, Buffett recently announced that his successor is likely going to be Greg Abel, a Canadian businessman.
Abel has been at the company for several years and is currently the vice-chairman of all its non-insurance operations. As a result, he has a pretty strong track record of being a good leader. No one can say for certain what the effect will be if he steps into the chairman’s shoes, but the fact that Buffett and Munger place their confidence in him is reassuring.
If one then looks at the board of directors, it includes well-known businesspeople like Howard Buffett, Buffet’s son, and Bill Gates from Microsoft, amongst others. For us, there are only two drawbacks when it comes to the board. The first is that the CEO of the company is also the chairman of the board of directors. This, ultimately, means that the CEO has the largest voting power on the board.
Until now this hasn’t been a problem because Buffett is a great individual that makes good decisions but if this structure is going to change, we’ll have to look at what effect this will have. Another drawback is that there are only three women on the board of directors so we would have loved to see a bit more representation and diversification
Now that we’ve looked at three of our four big values, we come to the price, which is probably one of the major reasons we picked Berkshire Hathaway as a stock dissection. This is simply because, at the time of writing, its price was about $285 a share. So, when you do the math, you get an intrinsic value of the company with all its holdings of about $226 a share.
That means that, according to this calculation, it’s only about $60 overvalued. When we then consider the margin of safety price which is calculated as 50% of the stock’s intrinsic value, we’re at about $113. Although some investors religiously stick to the 50% margin of safety price calculation, to us it’s more like 20%.
Now, this obviously depends on how much we love the company and how much we believe in it, but 20% is generally what we’ll look at. So, based on this calculation we’re sitting somewhere in the low two-hundreds, high hundreds as a price we’d be willing to pay for this stock.
Where you come in in this range is very individual and will depend on how much you like the company, how much you believe in it its management, and its future direction. Here Berkshire Hathaway is strong, and it shows us a pretty strong trend for growth. In fact, it’s been outperforming the S&P 500 this year and it’s up by about 23% in 2021 alone.
Also, when you look at the financials, its earnings grew and its earnings per share have increased. Ultimately, Berkshire Hathaway is a solid company with good management and sound fundamentals, which should all be considered when figuring out what price you’ll pay for the stock. At the very least, this stock should definitely be included in your watchlist at this stage.
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