Berkshire Hathaway’s Problems Don’t Stop at Coronavirus

Fiduciary Management, Inc recently released its Q1 2020 Investor Letter, a copy of which you can download below. The FMI Large Cap Fund posted a return of -23.0% for the quarter, underperforming its benchmark, the S&P 500 Index which returned -19.60% in the same quarter. You should check out Fiduciary Management’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash. There weren’t a lot of funds who could deliver these kinds of returns without shorting the market or using aggressive put options.

In the said letter, Fiduciary Management highlighted a few stocks and Berkshire Hathaway Inc. (NYSE:BRK.B) is one of them. Berkshire Hathaway is a multinational conglomerate holding company. Year-to-date, BRK.B stock lost 25.0% and on May 14th it had a closing price of $170.93. Its market cap is of $412.5 billion. Here is what Fiduciary Management said:

“Berkshire Hathaway is a diversified holding company engaged in insurance, rail transportation, utilities and energy, manufacturing, services, retail and finance. Chairman and CEO Warren Buffett has assembled a collection of industry-leading companies that utilize the advantage of large, permanent capital to drive superior returns (Berkshire has compounded at a 20% rate, versus 10% in the S&P 500 since 1965). In 2019, Berkshire generated $254 billion in revenues and $24 billion in net operating earnings. The largest contributors to Berkshire’s pre-tax earnings were: Insurance (26%), Manufacturing, Service and Retail (33%) and BNSF (22%). Insurance, Finance and Utilities cumulatively account for 45% of after-tax income. The company’s track record in underwriting in its Property & Casualty Insurance business is excellent, with underwriting profits in 16 out of the past 17 years and $28 billion in underwriting gains during this time frame. The shares have sold off meaningfully in the COVID-19 crisis and are at one of the widest discounts to intrinsic value in a long time. Buffett likes to use “look through earnings” to approximate the economic earnings of Berkshire Hathaway. If we apply a modest mid-teen multiple to these earnings, we get more than the current stock price. This does not give any value to the $129 billion in insurance float that Berkshire has on its books. The stock is trading at book value and the company has historically repurchased stock at 1.2 times book value or lower. We would be surprised if Buffett wasn’t repurchasing Berkshire stock aggressively and/or preparing to make a significant acquisition. With Buffett nearing 90 years old, some investors worry about Berkshire’s future. The company is decentralized; we are not concerned about the operating companies. We think the sum-of-the-parts valuation is far in excess of the current enterprise value.”

However, don’t write off  Berkshire Hathaway yet as it has a huge amount of cash right now which can be used to go on an acquisition spree-check out here for details.

Disclosure: None. This article is originally published at Insider Monkey.