Berkshire Hathaway Inc. (BRK.A) (BRK

Berkshire Hathaway Inc. (BRK.A) (BRK.B)

Updated May 6th, 2019 by Eli Inkrot

Key Metrics

Current Price:

$212

Fair Value Price: $254

% Fair Value:

83%

Dividend Yield:

0.0%

Dividend Risk Score: N/A

5 Year CAGR Estimate: 5 Year Growth Estimate: 5 Year Valuation Multiple Estimate: 5 Year Price Target Retirement Suitability Score:

8.7% 5.0% 3.7% $324 N/A

Volatility Percentile: 10.6%

Momentum Percentile: 56.6%

Growth Percentile:

36.2%

Valuation Percentile: 80.1%

Total Return Percentile: 46.9%

Overview & Current Events

Berkshire Hathaway traces its roots all the way back to 1839 as a textile manufacturer. Warren Buffett began acquiring its stock in 1962, eventually taking control of the company. Since that time Buffett and Vice Chairman Charlie Munger have turned the business into one of the largest companies in the world. Berkshire can be thought of in five parts: wholly-owned insurance subsidiaries like GEICO, General Re and Berkshire Reinsurance, wholly-owned non-insurance subsidiaries like Dairy Queen, BNSF Railway, Duracell, Fruit of the Loom, NetJets, Precision Cast Parts and See's Candies, shared control businesses like Kraft Heinz and Pilot Flying J, marketable publicly traded securities including significant stakes in companies like American Express, Apple, Bank of America, Coca-Cola and Wells Fargo, and finally the company's cash position which sat at $112 billion at the end of 2018. The $521 billion market cap company trades under two classes, an `A' share and a `B' share, which is pegged at 1/1,500th of an A share.

On May 4th, 2019 Berkshire released Q1 2019 results for the period ending March 31st, 2019. Net earnings totaled $21.66 billion against a $1.14 billion loss in Q1 2018. However, there is an exceptionally important caveat here: beginning in 2018, mark-to-market gains and losses, even if not yet realized, must be run through the income statement whereas previously the unrealized portion was only reflected in shareholder equity ? a large change given Berkshire's very large portfolio of publicly traded securities. On an operating basis Berkshire posted $5.56 billion ($2.26 per share) in earnings in Q1 2019 against $5.29 billion ($2.14) in the prior year period.

Growth on a Per-Share Basis

Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2024

EPS $3.46 $5.29 $4.14 $5.24 $7.89 $8.06 $9.77 $9.77 $6.43 $10.05 $10.50 $13.40

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Shares 2,327 2,472 2,476 2,465 2,454 2,464 2,465 2,466 2,467 2,467 2,450 2,400

Note that previously Warren Buffett had suggested that book value provided a reasonable, albeit imperfect, measure of Berkshire's value over time. As such, we had been using this metric as a valuation yardstick for the security. However, as of the most recent annual report, Buffett said that it was now time to abandon that practice. He laid out three reasons why: 1) Berkshire is morphing from an entity whose assets are concentrated in marketable stocks to one whose major value resides in operating businesses, 2) while equity holdings are held at market value, operating companies are held at a historical basis far below their current value and 3) it is likely that Berkshire will be a significant repurchaser of its shares, with transactions taking place over book value but below their estimate of intrinsic value, which would increase intrinsic value but decreases book value over time; furthering the mismatch.

Given this stance, we have reverted to looking at operating earnings-per-share, excluding the impact of equity gyrations. With the scores of operating businesses under Berkshire's umbrella spanning the economy, along with a model of retaining all earnings coupled with a significant cash hoard that can fund future growth, we have projected mid-single digit improvement of 5% annually on the bottom line. This is weighed against the massive size of Berkshire.

Disclosure: This analyst has no position in the security discussed in this research report, and no plans to initiate one in the next 72 hours.

Berkshire Hathaway Inc. (BRK.A) (BRK.B)

Updated May 6th, 2019 by Eli Inkrot

Valuation Analysis

Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Now 2024

Avg. P/E 18.1 14.8 19.0 15.9 14.0 16.2 14.3 14.7 27.2 20.3 20.2 24.2

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Given its complex structure, here is how we think about Berkshire's valuation. The company is comprised of five main types of assets, highlighted in the overview above. We combine three of those parts ? insurance subsidiaries, noninsurance subsidiaries and shared control businesses ? as one valuation component. This portion of the business provided operating earnings of $24.8 billion last year or $10.05 per share. If you apply a conservative valuation of 14 times earnings, which incorporates both the idea of solid profitability mixed with some difficulty growing at the current size, compared to our 2019 estimate of $10.50, you reach ~$147 per share. Next are the marketable investments, including American Express, Apple, Bank of America, Coca-Cola, Wells Fargo and many more, which are independent from the operating businesses. Those investments had a market value of $192 billion at the end of Q1 2019. If the entire portfolio was liquidated, the tax owed would total about $18.7, bringing the value down to $173 billion or so. On a per share basis that works out to roughly ~$70. Last is Berkshire's cash position which totaled ~$110 billion, plus another ~$20 billion in fixed-income instruments. Buffett has indicated that $20 billion is "untouchable" to guard against extreme calamities. The remainder is not required to operate the business and will aid in future growth via buying wholly-owned or partially owned businesses or repurchasing stock. For our purposes we ignore the fixed-income assets and take out an additional $20 billion to get to ~$90 billion or roughly ~$37 per share in available cash. Collectively these three components add up to a fair value estimate of ~$254 per share.

Safety, Quality, Competitive Advantage, & Recession Resiliency

Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2024

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Berkshire's competitive advantage has been Warren Buffett and Charlie Munger for over 50 years. However, even without these two the business will still possess a significant advantage in the dozens of wholly-owned businesses spanning the economy, along with the other two legs of the company. While size makes growth difficult, the diversified set of assets also allows capital to flow toward promising areas. Moreover, without a dividend payment, funds are allowed to compound internally and add to the safety of firm.

Final Thoughts & Recommendation

Shares are up 4% since our last update. Berkshire Hathaway has an exceptional collection of assets. We believe the current valuation looks compelling when you look at the assets collectively, netting out to the expectation of an 8.7% total return driven by 5% growth and 3.7% valuation tailwind. We believe the security is a strong hold at current prices.

Total Return Breakdown by Year

50% 0%

-50%

32.2% 2013

Berkshire Hathaway (BRK.B): Total Return Decomposition

26.6%

23.4%

21.6%

3.0%

8.7%

2014

-12.1% 2015 Total Return

2016

2017

2018 Sure Analysis Estimates

Dividend Return Price Change

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Disclosure: This analyst has no position in the security discussed in this research report, and no plans to initiate one in the next 72 hours.

Berkshire Hathaway Inc. (BRK.A) (BRK.B)

Year Revenue ($B)

SG&A Exp. D&A Exp. Net Profit Net Margin Free Cash Flow Income Tax

2009 112.49 8117

N/A 8055 7.2% 10909 3538

Updated May 6th, 2019 by Eli Inkrot

Income Statement Metrics

2010 2011 2012 2013 2014 136.19 143.69 162.46 182.15 194.70 7704 8670 11870 13282 13721 4279 5492 6154 6508 7370 12967 10254 14824 19476 19872 9.5% 7.1% 9.1% 10.7% 10.2% 11915 12285 11175 16617 16825 5607 4568 6924 8951 7935

2015 210.94 15309 7779 24083 11.4% 15409 10532

2016 223.42 17973 8901 24074 10.8% 19693 9240

2017 242.06 19189 9188 44940 18.6% 34020 -21.5B

2018 225.38 18238 9779 4021 1.8% 22863 -321

Year Total Assets ($B) Cash & Equivalents Acc. Receivable Goodwill/Int. ($B) Total Liab. ($B)

LT Debt ($B) Total Equity ($B)

D/E Ratio

2009 297.12 30558

N/A 33.97 161.33 37.91 131.10 0.29

2010 372.23 38227

N/A 49.01 209.30 58.57 157.32 0.37

Balance Sheet Metrics

2011 2012 2013 2014 392.65 427.45 484.93 525.87 37299 46992 48186 63269 19012 21753 20280 21852 53.21 64.52 66.19 70.62 223.69 235.86 260.45 282.84 60.38 62.74 72.22 79.89 164.85 187.65 221.89 240.17 0.37 0.33 0.33 0.33

2015 552.26 71730 23303 72.51 293.63 84.29 255.55 0.33

2016 620.85 28048 27097 113.57 335.43 101.64 282.07 0.36

2017 702.10 31583 25928 114.44 350.14 102.59 348.30 0.29

2018 707.79 30361 27741 113.17 355.29 97.49 348.70 0.28

Profitability & Per Share Metrics

Year

2009 2010 2011 2012 2013 2014 2015

Return on Assets 2.9% 3.9% 2.7% 3.6% 4.3% 3.9% 4.5%

Return on Equity 6.7% 9.0% 6.4% 8.4% 9.5% 8.6% 9.7%

ROIC

5.0% 6.6% 4.5% 6.1% 7.1% 6.4% 7.2%

Shares Out.

2,327 2,472 2,476 2,465 2,454 2,464 2,465

Revenue/Share 47.86 54.95 57.48 64.93 73.14 78.19 84.73

FCF/Share

4.64 4.81 4.91 4.47 6.67 6.76 6.19

Note: All figures in millions of U.S. Dollars unless per share or indicated otherwise.

2016 4.1% 9.0% 6.6% 2,466 89.70 7.91

2017 6.8% 14.3% 10.7% 2,467 97.14 13.65

2018 0.6% 1.2% 0.9% 2,467 90.49 9.18

Disclaimer

Nothing presented herein is, or is intended to constitute, specific investment advice. Nothing in this research report should be construed as a recommendation to follow any investment strategy or allocation. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. While Sure Dividend has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third-party information presented herein. No guarantee of investment performance is being provided and no inference to the contrary should be made. There is a risk of loss from an investment in marketable securities. Past performance is not a guarantee of future performance.

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