Berkshire Hathaway (BRK.B) Stock Looks Reasonable Despite A 77% Five Year Run

Berkshire Hathaway is stepping into a new era of leadership just as investors are asking a familiar question about the stock. After a strong multi year run, the issue is whether the current share price is still aligned with the returns the conglomerate earns on its capital.

• Over the past 5 years, Berkshire Hathaway has returned around 76.9%, which puts real pressure on the valuation case to be backed by the returns the group can keep generating on the money it invests.
• With Warren Buffett now chairman emeritus, Howard Buffett as chair and Greg Abel running operations and capital allocation, the market is effectively reassessing how this leadership handover may affect future reinvestment decisions, cash deployment and therefore the level of returns Berkshire Hathaway can continue to earn on its large capital base.
• Prefer to judge Berkshire Hathaway on earnings? See what Berkshire Hathaway's 12.5x P/E says about the price.

The issue now is whether the returns Berkshire Hathaway earns on its capital are strong and durable enough to justify where the stock trades today.

If you want a yardstick for Berkshire Hathaway's capital returns story, it can help to compare it with other companies screened for 28 high quality undervalued stocks.

Does Berkshire Hathaway Look Undervalued on Excess Returns?

The Excess Returns model looks at how effectively Berkshire Hathaway turns its large equity base into profits above what shareholders require. On this view, the key question is whether the return on that capital justifies today’s share price of $500.50.

Berkshire Hathaway carries a very large book value of $522,225.90 per share and an estimated stable book value of $547,710.90 per share, based on future book value estimates from two analysts. The model uses an average return on equity of 11.91%, which translates into a stable EPS estimate of $65,244.04 per share, comfortably above the model’s cost of equity of $40,923.08 per share and leaving an excess return of $24,320.97 per share.

The Excess Returns projections put Berkshire Hathaway's estimated intrinsic value substantially above the current share price. Warren Buffett’s shift to chairman emeritus, with Howard Buffett and Greg Abel taking on clearer leadership roles, helps explain why the market is revisiting what level of excess returns this capital allocation machine can sustain over time. Find out what Berkshire Hathaway could be worth using our Excess Returns estimate.

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

Simply Wall St Narratives for Berkshire Hathaway pick up where the valuation puzzle leaves off and explain which paths for future growth, profitability and earnings would need to occur for the stock to be worth meaningfully more or less than today. Each narrative links its number to a clear view on where Berkshire Hathaway's expansion, margins and key risks might go next, giving you something specific to track on the Community page as new information arrives.

A clear, number driven Narrative on Berkshire Hathaway is especially useful now because it pins down what investors expect from the post Warren Buffett leadership team, including Howard Buffett and Greg Abel, and turns those expectations into explicit assumptions on returns and capital deployment that can be checked against future results. With that written view in place, you have a consistent reference point for judging whether developments like the succession transition and the use of Berkshire Hathaway's large cash reserves are actually lining up with the performance you had in mind.

Share your own Narrative for Berkshire Hathaway and set out the assumptions behind your valuation.

One more Berkshire Hathaway check that sits beside the share price

The last missing piece is who is steering Berkshire Hathaway now and how their pay is structured, because incentives shape every capital decision the group will make next. 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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