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Berkshire Hathaway (BRK.B) Stock May Be 34% Undervalued Following Strong Q2 Results

Simply Wall St · 1d ago

Berkshire Hathaway has delivered a powerful multi year run, which puts fresh focus on a simple question for today’s buyers: Is the current price adequately backed by the returns the conglomerate earns on the capital it deploys across its insurance, infrastructure and equity portfolios?

  • Berkshire Hathaway has returned 82.8% over the past 5 years, which puts real weight on whether that share price journey lines up with the returns the company is generating on its capital base.
  • Recent headlines around record revenues, higher operating earnings, resumed buybacks and a very large cash pile suggest management may have more flexibility in how it allocates capital, which can influence the returns the business produces on each incremental dollar invested.
  • What if you looked at Berkshire Hathaway through its earnings instead? See what Berkshire Hathaway's 13.0x 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 make today’s market valuation look well grounded.

If you are weighing Berkshire Hathaway against other options that focus on quality fundamentals, a focused stock screen such as solid balance sheet and fundamentals stocks screener (25 results) can be a useful second starting point for research.

Is Berkshire Hathaway a Bargain on Excess Returns?

The Excess Returns model assesses how effectively Berkshire Hathaway turns its equity base into profit above its own cost of capital. Berkshire Hathaway is modeled with a Book Value of $522,225.90 per share and a Stable EPS of $65,244.04 per share, with that earnings figure linked to the median return on equity from the past 5 years. Against a Cost of Equity of $41,116.03 per share, the implied Excess Return of $24,128.01 per share suggests the analysis assumes the group earns more on its capital than investors require for bearing its risk.

An Average Return on Equity of 11.91% and a Stable Book Value projection of $547,710.90 per share from two analyst estimates underpin why the Excess Returns model currently places Berkshire Hathaway's estimated intrinsic value substantially above the traded share price of $520.59. Because the recent report of record revenues, higher operating earnings and resumed buybacks points to active capital deployment on top of an already large equity base, the market price still sits below what this framework implies for longer run earnings power. 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 pick up where the Berkshire Hathaway valuation puzzle leaves off. They spell out the specific assumptions on growth, margins and earnings that would need to hold for the stock to be worth much more or less than today's price, and sit on Simply Wall St's Community page. Instead of a single ratio or model output, Narratives describe the future that figure relies on so you can monitor whether reality is tracking that path.

A written, number driven narrative on Berkshire Hathaway helps you pin down whether record revenues, higher operating earnings, resumed buybacks and a record cash balance plausibly support the current price over time. It sets out specific assumptions on how effectively that cash, investment portfolio and operating base might be used from here, so you can later compare those expectations with the actual results that follow.

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

One more side of Berkshire Hathaway worth understanding

Valuation only tells part of the Berkshire Hathaway story, because recent research also highlights specific risk checks that could change how you think about the business once you see them. Take a closer look at 1 major warning sign before settling on a valuation.

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.