Berkshire Hathaway (BRK.B) Could Be 36% Undervalued As It Puts Cash To Work

Why Berkshire Hathaway Is Putting Its Cash Pile To Work

Berkshire Hathaway (BRK.B) has started deploying part of its reported US$397b cash reserve, directing fresh capital into Alphabet, Delta Air Lines and Macy's, while also completing US$4.5b of share repurchases.

For context, Berkshire Hathaway's share price has eased about 3% over the past month but is still up around 5% on a 90 day basis, while the 1 year total shareholder return of roughly 3% and 5 year total shareholder return of about 83% point to steadier long term compounding and suggest the recent buying spree is being weighed against an already well regarded track record.

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The share price is up over 80% across five years, yet still trades below both analyst targets and internal fair value estimates. Where does a reasonable anchor for Berkshire Hathaway actually sit within that range?

Price-to-Earnings of 12.6x: Is It Justified For Berkshire Hathaway?

Berkshire Hathaway trades on a P/E of 12.6x, which screens as inexpensive against both peers and the wider diversified financial sector based on current earnings.

The P/E ratio compares the share price to the last twelve months of profit per share. For a broad conglomerate like Berkshire Hathaway, with insurance, rail, energy, manufacturing and retail operations, this yardstick distills a complex earnings base into a single number that investors can compare more easily.

That 12.6x multiple is described as good value in several ways. It sits well below the peer average of 23.8x and is also lower than the US diversified financial industry average of 17.4x, which suggests the market is paying a lower price for each dollar of Berkshire Hathaway earnings. Relative to an estimated fair P/E of 16.2x, there is also a gap that the market could move toward if sentiment or earnings quality stay supportive.

For readers who want to see how that fair multiple is derived and how it links to fundamentals across the sector, Explore the SWS fair ratio for Berkshire Hathaway

Result: Price-to-Earnings of 12.6x (UNDERVALUED)

Still, the Berkshire Hathaway story can be dented by insurance underwriting volatility and any sharp mark to market swings in its sizeable investment portfolio.

Find out about the key risks to this Berkshire Hathaway narrative.

Another View On Berkshire Hathaway's Value

The P/E of 12.6x paints Berkshire Hathaway as inexpensive, yet the SWS DCF model points to a fair value of $787.71 per share versus the current $506.03. That implies the shares trade at roughly a 36% discount. If both signals lean cheap, what is the market worried about?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Berkshire Hathaway for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 49 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

If this Berkshire Hathaway picture feels mixed to you, move fast, review both sides of the story and weigh the 3 key rewards and 1 important warning sign.

Looking For More Investment Ideas Beyond Berkshire Hathaway?

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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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