Berkshire Hathaway-B (BRK.B-NYSE)

[Pages:7]February 27, 2015

Berkshire Hathaway-B

Current Recommendation

Prior Recommendation Date of Last Change

OUTPERFORM

Neutral 03/05/2014

Current Price (02/26/15) Target Price

$148.34 $178.00

SUMMARY DATA

52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

$152.67 $113.70

29.46 0.52

3,348,781

2,464 $365,509

2.84 32 11

Annual Cash Dividend Dividend Yield (%)

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

$0.00 0.00

9.7 9.4 N/A

P/E using TTM EPS

21.5

P/E using 2015 Estimate

20.5

P/E using 2016 Estimate

18.3

Zacks Rank *: Short Term 1 3 months outlook

3 - Hold

* Definition / Disclosure on last page

? 2014 Zacks Investment Research, All Rights reserved.

(BRK.B-NYSE)

SUMMARY

Berkshire Hathaway, a conglomerate housing several businesses from ice-cream to insurance, has been trending strongly on a host of favorable factors. A lower catastrophe year has helped its insurance segment margin and a recovering economy has fueled demand for goods carried by rails thus leading to higher earnings in its railroad operations. Segments such as Manufacturing, Service and Retailing, and Finance and Financial Products also registering earnings growth thanks to an improving economy. A huge cash hoard along with the investment acumen of Warren Buffett is another distinctive feature of the company. A solid balance sheet, adequate liquidity and a consistent trend of growing book value are its added positives. We thus maintain our Outperform recommendation on the stock. The company is scheduled to release fourth-quarter earnings on Feb 28, 2015. The Zacks Consensus Estimate of $1.80 per share translates into a 17.6% year-over-year gain.

Risk Level *

Type of Stock Industry Zacks Industry Rank *

Low,

Large-Value Ins-Prop&Caslty

44 out of 267

ZACKS CONSENSUS ESTIMATES

Revenue Estimates

(In millions of $)

Q1

Q2

(Mar)

(Jun)

2013 2014 2015 2016

43,867 A 45,453 A

44,693 A 49,762 A

Q3 (Sep)

46,541 A 51,199 A

Q4 (Dec)

47,049 A 50,978 E

Year (Dec)

182,150 A 197,392 E 212,569 E 227,779 E

Earnings Per Share Estimates

(EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1

Q2

Q3

Q4

Year

(Mar)

(Jun)

(Sep)

(Dec)

(Dec)

2013 2014 2015 2016

$1.98 A $1.43 A

$1.84 A $1.75 A

$1.49 A $1.91 A

$1.53 A $1.80 E

$6.84 A $6.89 E $7.25 E $8.10 E

Projected EPS Growth - Next 5 Years %

7



111 North Canal Street, Chicago IL 60606

OVERVIEW

Founded in 1889, Berkshire Hathaway is an Omaha, NE-based holding company, which owns 70 operating units ranging from insurance, rail roads, utilities, manufacturing services, retail and home building. The company has four major operating sectors Insurance, Regulated Utility Business, Manufacture, Service & Retailing Operations and Finance & Financial Products.

The Insurance group includes:

GEICO, Government Employees Insurance Company primarily writes private passenger automobile insurance, offering coverage to insureds in all 50 states and the District of Columbia.

General Re conducts reinsurance business, offering property and casualty, life and health coverage to clients worldwide. Property and casualty reinsurance is written in North America on a direct basis through General Reinsurance Corporation, and internationally through Cologne Re (based in Germany) and other wholly owned affiliates.

Berkshire Hathaway Reinsurance Group (BHRG) underwrites excess-of-loss reinsurance and quota-share coverage for insurers and reinsurers worldwide.

Berkshire Hathaway Primary Group (BHPG) consists of a wide variety of independently managed insurance businesses that principally write liability coverage for commercial accounts.

The Regulated Utility Business includes:

MidAmerican, the regulated electric and gas utility in which it holds 89.5% interest.

BNSF operations, which provide railways services through Burlington Northern Santa Fe Corp. This company was acquired in February 2010.

The Manufacturing, Service & Retailing Operations includes:

Manufacturing Acme Building Brands, Benjamin Moore, H.H. Brown Shoe Group, CTB, Fechheimer Brothers, Forest River, Fruit of the Loom, Garan, ISCAR, Johns Manville, Justin Brands, Larson-Juhl, MiTek, Russell, Scott Fetzer, Vanity Fair, Richline Group and Albecca.

Service Buffalo News, Business Wire, FlightSafety, International Dairy Queen, Pampered Chef, and NetJets.

Retailing Ben Fridge Jeweler, Borsheim s, Helzberg Diamond Shops, Jordan s Furniture, Nebraska Furniture Mart, See s Candies, Star Furniture, R.C. Willey and TTI Inc.,

Others Marmon Group, McLane Company and Shaw Industries

The Finance & Financial Products includes:

Hathaway Credit Corporation and Clayton Homes, the country s leading producer of modular and manufactured homes, which provides consumer lending.

XTRA and CORT, which provides transportation equipment and furniture leasing.

BH Finance, which is primarily engaged in proprietary investing strategies.

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Operating decisions of various Berkshire businesses are made by the managers of the business units. Investment decisions and all other capital allocation decisions are made by Warren E. Buffett, (chairman) in consultation with Charles T. Munger (vice chairman).

Berkshire also has stock investments in American Express Co., BYD Co., Coca-Cola Co., ConocoPhilips, Johnson & Johnson, Kraft Foods Inc., POSCO, The Procter & Gamble Co., Sanofi-Aventis, Tesco plc., U.S. Bancorp, Wal-Mart Stores Inc. and Wells Fargo Co.

REASONS TO BUY

Berkshire s property and casualty insurance business has been the engine behind its growth. The company s insurance business maintains capital strength at exceptionally high levels. This strength differentiates Berkshire s insurance companies from its competitors. All of the company s major insurance subsidiaries are rated AA+ by Standard & Poor s and nearly all are currently rated A++ (superior) by A.M. Best, on the grounds of strong financial condition and a history of favorable operating performance. Its insurance business has been able to generate huge float (money held between) which has been effectively used by Warren Buffett to make profitable investments. Given the company s sound underwriting practices, we believe the companies will continue to generate significant float in the future.

Berkshire s economically sensitive non-insurance businesses utilities and energy, and manufacturing, service and retail are performing favorably after suffering substantial earnings decline in the recent past due to economic weakness. The utilities and energy business has brought growth with increased revenue contributions from Burlington Northern SantaFe Corp. (BNSF), the railway which was acquired in Feb 2010. Revenues from BNSF have contributed majorly to the company s top line, since then. Buffett argues that railroads represent the future and are bound to improve with growth in population and GDP. He expects railroad to increase Berkshire s earnings substantially. Also, demand for utilities is expected to be strong in the future and drive earnings growth. Total revenue for manufacturing, service and retail has been increasing for the past many quarters, reflecting improved results across most of the units attributable to better economic conditions and higher consumer demand.

Berkshire s Finance and Financial Products segment is also performing well after suffering from a soft housing market in the recent past. We expect improving trends in this business segment given that the housing market is gradually recovering.

Warren Buffett s unique skills have created tremendous value for shareholders over the last 49 years (that is, since the present management took over), book value has grown from $19 to $134,973, a compounded rate of 19.7% annually. Book value growth, which has been significant, is expected to get a pretty solid boost with the turn of the economy, further gains from the value of the derivatives positions, and continued positive contribution from earnings growth in the insurance operations.

RISKS

The remarkable success of Berkshire Hathaway is attributable to Warren Buffett and Charles Munger. Though Buffett has put in place a succession plan and has chosen a successor, the name of the to-be CEO kept under wraps. Therefore, there is an air of uncertainty regarding the performance of the company under a new CEO. In our view, it is unlikely that any new management of this conglomerate will be able to sustain Buffett and Munger s long-term market outperformance.

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Though Berkshire s other operating segments are doing well, we expect Finance and Financial Products to remain somewhat weak, given the surplus of traditional single family homes which are up for sale and continue to affect results.

Berkshire s earnings are subject to volatility given its exposure to catastrophes. The company s insurance underwriting results have often suffered from high cat loss. Going forward, we believe that the timing and magnitude of catastrophe and large individual losses will continue to produce significant volatility in its property and casualty underwriting results.

RECENT NEWS

Berkshire Hathaway Buys Charter Brokerage, Invests in Restaurant Dec 12, 2014

Berkshire Hathaway Inc. (BRK.A) (BRK.B) announced to acquire Charter Brokerage, which provides logistics to the petroleum and chemical industries. The buyout will be made from private equity firm Arsenal Capital. The purchase price of the deal was not disclosed.

Berkshire Hathaway Expands Insurance Business in Asia Dec 8, 2014

Berkshire Hathaway Inc. (BRK.A) (BRK.B) has received a license to operate as a non-life insurer in Singapore. Berkshire Hathaway s U.S. commercial insurance business - Berkshire Hathaway Specialty Insurance established last year, will operate in Singapore.

Berkshire Hathaway to Swap Holdings in P&G for Duracell Nov 13, 2014

The company announced his plans of buying the battery unit Duracell of Procter & Gamble Co. The deal valued at $4.7 billion will see a stock swap wherein the equity investments in the stock of P&G will be exchanged for its one of its operating business. P&G will capitalize Duracell with $1.7 billion in cash before the closure of the deal and therefore net cost to Berkshire Hathaway will be $3 billion. The deal is slated to close in second half of next year pending regulatory approvals.

Berkshire Hathaway Insurance, Energy Units Aid Q3 Earnings Nov 8, 2014

Berkshire Hathaway Inc. reported third-quarter 2014 operating earnings of $1.91 per share, way ahead of the Zacks Consensus Estimate of $1.70. Earnings also compare favorably with $1.49 per share reported in the year-ago quarter.

Earnings growth came primarily from the insurance business which benefited from higher underwriting income on the absence of catastrophic claims and from the energy business, which benefited from last year s acquisition of NV Energy in Nevada. Other segments at Manufacturing, Service and Retailing and Finance and Financial products also contributed to earnings growth albeit at a lesser degree.

Total revenue came in at $51.2 billion, up 15.2% year over year. The increase was driven by broadbased growth across all the operating segments, with the greatest contributor being insurance.

Total cost and expense of $44.4 billion increased 13.5% year over year.

Segment Results

Insurance Group revenues increased 32.1% year over year to $13.7 billion, primarily led by more than more than a twofold rise in premium from Berkshire Hathaway Reinsurance Group, followed by higher

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contributions from Berkshire Hathaway Primary Group, GEICO and General Re. The company s insurance segment has been the biggest generator of float, which has been customarily used by Warren Buffett to make investments.

These investments which come in the form of equity as well as acquisitions have made the company a conglomerate of over 80 big and small subsidiaries. Income from the segment before taxes increased 43.6% year over year to $1.9 billion thanks to the absence of any major catastrophe during the quarter.

Railroad, Utilities and Energy operating revenues increased 18.7% year over year to $10.7 billion. Of the total segment revenue, more than half came from Burlington Northern Santa Fe, the railroad company, which was acquired in Feb 2010. Income from the segment before taxes increased 26.3% year over year to $2.7 billion, led by the 79% increase in operating earnings from Berkshire Hathaway Energy Company.

Total revenue at Manufacturing, Service and Retailing which includes McLane, Iscar and Lubrizol increased 7.0% year over year to $25.2 billion. Income from the segment before taxes increased 10.2% year over year to $1.8 billion led by higher contribution from manufacturing and other businesses.

Revenues from Finance & Financial Products which includes Clayton Homes (manufactured housing and finance), CORT Business Services (furniture rental), Marmon (rail car and other transportation equipment manufacturing, repair, and leasing) and XTRA (over-the-road trailer leasing) increased 7.5% year over year to $1.7 billion.

Financial Position

Consolidated shareholders equity at Sep 30, 2014 was $237.5 billion, reflecting an increase of 7.0% since Dec 31, 2013. Consolidated cash approximated $62.4 billion at quarter end, up 29.5% since the Dec 31, 2013 level.

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VALUATION

Berkshire currently trades at 20.5x our 2014 earnings estimate, which is at a 34% premium to the industry average. On a price-to-book basis, the shares trade at 1.5x, at 15.4% premium to the industry average. The valuation on a price-to-book basis looks stretched, given that the trailing 12-month ROE is lower than the industry average.

Our six-month target price of $178.00 per share equates to about 24.6x our earnings estimate for 2014. This target price implies an expected total return of 20.0% over that period. This is consistent with our Outperform recommendation on the stock.

Key Indicators

Berkshire Hathaway Inc. (BRK.B)

Industry Average S&P 500

P/E F1

20.5

P/E F2

18.3

15.3 13.7 16.8 15.7

Est. 5-Yr EPS Gr%

8.4

9.0 10.7

P/CF (TTM)

16.9

12.3 15.3

P/E (TTM)

21.5

P/E 5-Yr

High (TTM)

23.2

P/E 5-Yr Low (TTM)

12.5

17.3 67.1

8.0

18.5 19.4 12.0

Berkshire Hathaway Inc. (BRK.A)

N/A N/A

7.0 16.9 23.9

Tokio Marine Holdings Inc. (TKOMY)

12.2 N/A

18.0 11.6 22.2

TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow

Berkshire Hathaway

P/B Last Qtr.

P/B 5-Yr High

P/B 5-Yr Low

ROE (TTM)

D/E Last Qtr.

Div Yield Last Qtr.

Inc. (BRK.B)

1.5

1.5

1.1

7.0

0.0

0.0

24.3 12.5

20.0

7.1

EV/EBITDA (TTM)

8.0

Industry Average

1.3

1.3

1.3

9.5

0.3

1.5

7.0

S&P 500

5.3

9.8

3.2

25.5

N/A

2.1

N/A

DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of BRK.B. Zacks EPS and revenue forecasts are not consensus forecasts. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1000 companies covered: Outperform- 13.8%, Neutral- 78.9%, Underperform 6.7%. Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 217 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 217. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In

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determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

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