Berkshire Hathaway (BRK.A) Stock Could Be Below Fair Value After Its 79% Run

Berkshire Hathaway has delivered a 78.8% share price gain over the past 5 years, and the question now is whether that long run is still supported by the returns the group earns on the capital it controls. A major leadership handover and fresh headlines around key subsidiaries mean investors are looking at the stock less as a Warren Buffett story and more as a test of how efficiently the conglomerate can keep compounding its own money.

• The 78.8% return over 5 years puts a lot of faith in Berkshire Hathaway’s ability to keep earning solid returns on a very large capital base, which makes the quality and durability of those returns the central issue.
• Warren Buffett’s move to chairman emeritus while Howard Buffett becomes chair and Greg Abel continues to run operations can reshape how quickly and where capital is deployed inside the group, which matters for how much profit Berkshire can earn on every dollar it retains and reinvests.
• If you'd rather focus on earnings, this one's for you. See what Berkshire Hathaway's 12.5x P/E says about the price.

The issue now is whether Berkshire Hathaway’s current share price is fully justified by the returns it earns on its capital across its mix of insurers, industrial assets and financial investments.

If you want to explore how companies generate returns on their capital across a broader range of opportunities, start by scanning our screener containing 17 high quality undiscovered gems.

Is Berkshire Hathaway a Bargain on Excess Returns?

The Excess Returns model looks at how much profit Berkshire Hathaway can generate over and above the return shareholders typically require on its equity. Berkshire Hathaway shows a book value of $522,225.90 per share and a stable EPS estimate of $65,244.04 per share, which implies that past profitability on equity has been strong enough to support a sizeable earnings base without relying on dividends. With an average return on equity of 11.91% and a per share cost of equity of $40,959.42, the model estimates an excess return of $24,284.62 per share and a stable book value of $547,710.90 per share based on analyst expectations.

Those excess returns are what drive the model’s view that estimated intrinsic value sits substantially above the current share price of $752,180.01. Warren Buffett stepping back to chairman emeritus, while Howard Buffett and Greg Abel formalise the succession, helps explain why some investors may question how repeatable those excess returns are, even as the model suggests the underlying economics of Berkshire Hathaway remain robust at the current price. Find out what Berkshire Hathaway could be worth using our Excess Returns estimate.

The Berkshire Hathaway Narrative: What Would Justify Today's Price?

Narratives pick up where Berkshire Hathaway's valuation puzzle leaves off and spell out what would need to happen to future growth, margins and earnings for the stock to look meaningfully cheaper or more expensive than today. Each storyline sits on Simply Wall St's Community page and sets out the assumptions behind its own view of fair value, so you can later compare those expectations with the results Berkshire Hathaway actually reports.

One of the top community narratives on Berkshire Hathaway: 20% undervalued

"Berkshire Hathaway's combination of financial strength, disciplined investment approach, and strong leadership makes it a compelling investment option..."

Discover why this Narrative puts Berkshire Hathaway at 20% undervalued.

Berkshire Hathaway’s valuation still hinges on one unresolved piece

Price, earnings and book value only go so far if you do not know who is steering Berkshire Hathaway and how their incentives line up with your own. See who runs Berkshire Hathaway and how they are paid.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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