Berkshire Hathaway Inc. (BRK.B) is scheduled to report its fourth-quarter and full-year results on February 22. Wall Street expects the company to post higher earnings and revenue over the prior-year quarter. In this piece, I have discussed why it could be wise to wait for a better entry point in the stock now, despite the expected rise in earnings and revenue.
For the fourth quarter, BRK.B’s EPS and revenue are expected to increase 24% and 3.2% year-over-year to $3.79 and $80.68 billion, respectively. The company has a stellar earnings history, having beaten the consensus EPS estimate in three of the trailing four quarters.
During the third quarter, BRK.B’s operating earnings rose 40.6% year-over-year to $10.76 billion. The conglomerate took advantage of the surging bond yields during the third quarter by buying short-term Treasury bills yielding at least 5%. It owned $126.40 billion worth of such investments at the end of the third quarter, compared to $93 billion in the prior year quarter.
During the fourth quarter, Warren E. Buffett converted 1,600 A shares into 2,400,000 B shares to give these B shares to four family foundations: 1,500,000 shares to The Susan Thompson Buffett Foundation and 300,000 shares to each of The Sherwood Foundation, The Howard G. Buffett Foundation and NoVo Foundation.
According to BRK.B’s 13-F filing for the fourth quarter, the company sold off nearly 10 million shares or almost $2 billion of Apple Inc. (AAPL). It made significant trims to its HP Inc. (HPQ) and Paramount Global (PARA) holdings. The Omaha-based company sold off the majority of its position in HPQ, reducing its holdings by nearly 80 million shares. It now holds about 22.85 million shares of HPQ.
Similarly, the company trimmed its PARA holding by 32% or nearly 30.41 million shares in the fourth quarter. BRK.B now holds about 63.32 million shares in the company. The Warren Buffett-led firm completely exited its positions in Markel Corp, D.R. Horton, Inc. (DHI), Globe Life Inc. (GL), and StoneCo Ltd. (STNE).
On the other hand, BRK.B added to its existing positions in Chevron Corporation (CVX), Occidental Petroleum Corporation (OXY), and Sirius XM Holdings Inc. (SIRI). Compared to the third quarter, BRK.B’s holdings in energy giants CVX and OXY went up. CVX’s holding went up by 14% or approximately 15.85 million shares, and by 9% or nearly 19.59 million shares in OXY. SIRI saw the most significant addition in the fourth quarter, with its holding rising by a whopping 316% or almost 30.56 million shares.
Notably, BRK.B obtained permission from the U.S. Securities and Exchange Commission to temporarily keep one or more of its holdings confidential for the second straight quarter. The company is known to make such a request when it's making a considerably bigger investment. In the third quarter report, it hinted that the confidential investment might involve a bank, finance company, or insurer.
BRK.B’s stock has gained 25.4% over the past nine months and 31.7% over the past year to close the last trading session at $405.99.
Here’s what you might want to consider ahead of its upcoming earnings release:
Mixed Fundamentals
BRK.B’s total revenues for the third quarter ended September 30, 2023, increased 21.2% year-over-year to $93.21 billion. Its insurance premiums earned rose 13.9% year-over-year to $21.36 billion.
On the other hand, the company’s net loss attributable to BRK.B’s shareholders widened 356.3% year-over-year to $12.77 billion. Its comprehensive loss attributable to BRK.B shareholders widened 270.4% year-over-year to $12.80 billion. Its net loss per average equivalent Class B share widened 363% year-over-year to $5.88.
Favorable Analyst Estimates
Analysts expect BRK.B’s EPS and revenue for fiscal 2023 to increase 24.4% and 4.1% year-over-year to $17.39 and $314.42 billion, respectively. Its EPS and revenue for fiscal 2024 are expected to increase 5.8% and 5.6% year-over-year to $18.40 and $331.99 billion, respectively.
Stretched Valuation
On the other hand, in terms of forward non-GAAP P/E, BRK.B’s 23.35x is 121.5% higher than the 10.54x industry average. Likewise, its 2.80x forward Price/Sales is 12.2% higher than the 2.50x industry average. Its 1.65x forward Price/Book is 60.4% higher than the 1.03x industry average.
Mixed Profitability
In terms of the trailing-12-month Return on Common Equity, BRK.B’s 15.63% is 46.2% higher than the 10.69% industry average. Likewise, its 31.46% trailing-12-month EBITDA margin is 51.9% higher than the industry average of 20.71%. Furthermore, the stock’s 5.23% trailing-12-month Capex/Sales is 155.9% higher than the industry average of 2.04%.
On the other hand, BRK.B’s 27.99% trailing-12-month gross profit margin is 52.7% lower than the 59.11% industry average. Likewise, its 21.95% trailing-12-month net income margin is 6.5% lower than the 23.47% industry average.
POWR Ratings Reflect Uncertainty
BRK.B has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. BRK.B has a D grade for Value, consistent with its stretched valuation. It has a B grade for Sentiment, which is in sync with its favorable analyst estimates.
BRK.B has a 0.88 beta, justifying its B grade for Stability.
BRK.B is ranked #49 out of 54 stocks in the Insurance – Property & Casualty industry. Click here to access BRK.B’s Growth, Momentum, and Quality ratings.
Bottom Line
Investors closely watch BRK.B’s results and disclosures on its portfolio as they often try to replicate the immense success of the company by copying their market moves. The company is expected to report an increase in revenue and earnings during the fourth quarter. However, all eyes will be on the mysterious new addition to its portfolio, which could be revealed when it releases its annual report on February 24.
Although Wall Street expects the company’s earnings to continue growing, the stock is currently trading at an expensive valuation. Therefore, it could be wise to wait for a better entry point in BRK.B.
How Does Berkshire Hathaway Inc. (BRK.B) Stack Up Against Its Peers?
BRK.B has an overall POWR Rating of C, equating to a Neutral rating. You may check out these A (Strong Buy) or B (Buy)-rated stocks within the Insurance – Property & Casualty industry: Mercury General Corporation (MCY), Universal Insurance Holdings, Inc. (UVE), and The Allstate Corporation (ALL). For exploring more Buy-rated Insurance – Property & Casualty stocks, click here.
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BRK.B shares were trading at $409.61 per share on Tuesday morning, up $3.62 (+0.89%). Year-to-date, BRK.B has gained 14.85%, versus a 4.34% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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