Berkshire Hathaway Nears Record Stock Levels: A Buy Despite High P/B Ratio?

Berkshire Hathaway Inc. (BRK-A:NYSE) Nears Record Stock Levels

Berkshire Hathaway Inc. (BRK-A:NYSE) is currently experiencing a surge in its stock price, nearing record levels, which has sparked a debate among investors about the right time to sell. Despite concerns over its high price-to-book (P/B) ratio, which stands significantly above the speculative "Buffett price" of 1.2x, an analysis from Seeking Alpha suggests that Berkshire Hathaway remains a compelling buy. This recommendation is based on the argument that the P/B ratio no longer serves as an accurate measure of the company's value due to its diversified revenue streams and robust organic operations.

The company's financial performance in the recent quarter supports this view. Berkshire Hathaway reported a remarkable revenue growth of 47.21%, showcasing the strength and diversity of its business operations. Although there was a decrease in gross profit growth by 45.14%, the company's net income growth surged by an impressive 394.31%. This indicates that despite facing some challenges, Berkshire Hathaway has managed to significantly increase its profitability. Furthermore, the slight decrease in operating income growth by 6.26% is overshadowed by the positive growth in both free cash flow and operating cash flow, at 3.90% and 5.35% respectively, highlighting the company's efficient cash management and operational effectiveness.

The analysis from Seeking Alpha also points out that Berkshire Hathaway's valuation should not solely rely on the P/B ratio, especially considering the company's evolution beyond just an insurance company. The largest revenue contributor in 2023 was the manufacturing sector, followed by significant earnings from the McLand Company, Service and Retailing, and its insurance business, among others. This diversification is further evidenced by the company's quarterly performance, with asset growth increasing by 4.91% and both book value per share and debt growing by 7.15% and 7.04% respectively. These figures indicate a balanced approach to leveraging and shareholder value enhancement, supporting the argument for maintaining a buy rating on the stock.

Moreover, the article highlights that the book value used to calculate the P/B ratio is a moving target, influenced by various factors including the overall equity market's performance and earnings from bond positions and dividends from equity holdings. Despite an updated P/B ratio estimate of around 1.5x, this is not considered excessively high compared to historical levels. The company's diversified status and strong performance in the equity markets are seen as positive factors, outweighing risks such as macroeconomic uncertainties and challenges related to the insurance business.

In light of these considerations, despite the near-record stock price and elevated P/B ratio, Berkshire Hathaway is viewed as trading at a more reasonable valuation multiple than the overall market. The company's diversified business model and strategic growth initiatives are key factors that support the argument for looking beyond the P/B ratio when evaluating Berkshire Hathaway's worth.